Benefits for beneficiaries: a defense of CoP
In response to recent criticisms of CoP, Tom Hay argues that despite problems with implementation, the mechanism that underlies irrevocable Faster Payments is a real benefit to businesses.
In a recent opinion piece, Robert Lyddon complains at length about the UK’s proposed Confirmation of Payee (CoP) service. In the article, he claims that “CoP is a sticking plaster over an entrenched vulnerability within the Faster Payments system”. I’d like to take issue with that assertion.
The so-called vulnerability he is referring to is the fact that Faster Payments are irrevocable; in other words, once a payer has initiated a payment, they cannot subsequently decide to cancel, revoke or reverse the payment.
This is a natural consequence of the mechanism underlying Faster Payments – when the beneficiary bank receives the payment, they credit the beneficiary immediately, and the payment is put into settlement. The beneficiary bank cannot subsequently remove those funds from the beneficiary’s account without the permission of the beneficiary.
Exactly the same rule applies to Bacs credits – the payer cannot cancel or recall them once they have been credited to the beneficiary. The only difference is that in Faster Payments the process happens in seconds, whereas Bacs takes days. Authorised Push Payment fraud applies to any type of push payment, be it Faster Payments, Bacs – or indeed, CHAPS.
The irrevocability of Faster Payments is a positive and desirable feature
The irrevocability of Faster Payments is a positive and desirable feature. If it were not the case, it would not be safe for merchants to accept Faster Payments, because the payment could be revoked as soon as the buyer received the goods or services.
The idea of Confirmation of Payee is to reduce the risk of payers making payments to incorrect beneficiaries – a laudable aim, even though the implementation has run into practical and legal difficulties, never mind the bureaucratic manoeuvring described in Lyddon’s article.
Even if CoP were implemented successfully, problems would still occur. That’s why most modern Instant Payment systems support a Recall message. For example, the EPC Rulebook for SCT Inst allows the payer’s bank to Recall a SCT Inst payment in case of duplicate sending, technical problems resulting in erroneous SCT Inst Transaction(s), and fraudulent originated SCT Inst Instruction. The bank must satisfy themselves that the payment is genuinely subject to one of those conditions.
When the beneficiary bank receives such a Recall request, if there are sufficient funds on the payment account and the funds are not yet transferred back by the beneficiary, the beneficiary bank may, depending on the legislation in its country and/or contractual agreement with the beneficiary:
- Generate an immediate positive answer by debiting the payment account
- Decide whether it is necessary to ask the beneficiary for debit authorisation
- Be obliged to get the beneficiary’s authorization to debit its payment account
Providing such a structured mechanism for resolution of APP fraud and other post-settlement problems is a fundamental requirement for modern Instant Payment systems, and I assume this will be a feature of the New Payments Architecture when that is implemented.