SMEs worry about fraud, but digital cross-border payments grow due to pandemic-driven online commerce surge.
Challenges include manual errors, varying verification, and cyber threats in cross-border transactions.
Countering fraud entails standardized protocols, robust verification, and advanced cybersecurity measures like AI and APIs.
Approximately 45% of SMEs fear that they might become victims of fraud when using digital cross-border payments, as reported by Mastercard. However, despite this, digital cross-border payments continue to rise, especially in the South African market. According to data from McKinsey & Co., online commerce grew roughly 40% during COVID-19 as everyone made the move to conduct more business and purchase goods online. This shows a need for a deeper understanding of cross-border payment fraud and adopting the best practices to keep your business safe. This article shines a light on any security risks with cross-border payments and ways to combat fraud, as well as how innovative fintech solutions can support businesses and keep them safe and secure as they grow.
In today's rapidly evolving global financial landscape, the growth of cross-border transactions has been astronomical. According to the Boston Consulting Group (2020), cross-border payments reached a staggering $1.5 trillion in 2019, accounting for 20% of global payments revenue. As businesses and individuals continue to expand their reach, the demand for efficient and secure cross-border payment systems has become increasingly crucial. However, the complex nature of these transactions also presents an array of security risks and opportunities for fraud.
Security Risks in Cross-Border Payments
1. Lack of Standardisation
According to a study by McKinsey & Co., approximately 60% of cross-border payment processes involve manual intervention, increasing the number of touchpoints as well as the risk of human error and fraud. One of the key challenges in cross-border payments is the lack of standardisation across different jurisdictions. Payment systems vary significantly in terms of their regulatory frameworks, messaging formats, and processing protocols.
This fragmented landscape can create vulnerabilities in the payment chain, allowing fraudsters to exploit discrepancies between different systems. For example, the standards set for Canada may vary with China, or Nigeria, so global businesses who engage in multiple countries and currencies could leave themselves at risk.
2. Inadequate Customer Due Diligence
Customer due diligence (CDD) is a crucial element of any payment system, but it becomes increasingly challenging in the context of cross-border transactions. The varying quality of CDD measures in different countries can lead to inconsistent verification processes and, ultimately, the possibility of fraudulent transactions slipping through the cracks.
The United Nations Office on Drugs and Crime (UNODC) estimates that the amount of money laundered globally each year is between 2% and 5% of global GDP, underscoring the dire need for robust CDD practices. It’s imperative to partner with a payments provider that ensures thorough customer due diligence to protect your business.
3. Cybersecurity Threats
Cybersecurity risks remain a global concern, and cross-border payment systems are by no means exempt from this threat. As transactions travel across multiple systems and networks, their susceptibility to cyberattacks increases. The infamous SWIFT attacks in 2016 highlighted the potential for sophisticated cybercriminals to exploit vulnerabilities in cross-border payment systems, leading to substantial financial losses.
Best Practices for Protecting Against Cross-Border Payment Fraud
1. Adopt Robust Standards
To address the issue of standardisation, it is essential for financial institutions to adopt robust international payment standards, such as ISO 20022. This messaging standard streamlines payment communication and promotes interoperability among different systems, overall reducing the risk of fraud.
2. Implement Enhanced Due Diligence
For effective CDD, financial institutions must implement a risk-based approach, which involves conducting enhanced due diligence for high-risk customers or transactions. This may include verifying the customer's identity and source of funds, monitoring their transaction patterns, and collaborating with other institutions to share information on potential threats.
3. Strengthen Cybersecurity Measures
Cybersecurity must be a top priority for all parties involved in cross-border payments. This entails adopting a multi-layered security approach that incorporates encryption, secure authentication methods, and real-time transaction monitoring. Financial institutions should also regularly review their systems for vulnerabilities and invest in employee training to promote a culture of cybersecurity awareness.
4. Collaborate with Regulatory Authorities
Financial institutions must work closely with regulatory authorities to ensure compliance with relevant laws and regulations, such as the Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) frameworks. Cooperation with regulatory bodies enables institutions to stay abreast of emerging threats and best practices in payment security.
5. Leverage Technology
Technological advancements can play a pivotal role in mitigating fraud risks in cross-border payments. Machine learning and artificial intelligence can be utilised to detect anomalous transaction patterns and flag potential fraud in real-time. Additionally, an API that's part of a cross-border payments platform can streamline and automate processes, reducing manual intervention and human error. By integrating with various systems, an API can provide seamless data exchange, improving the speed, efficiency, and traceability of transactions. Furthermore, a robust API can bolster security measures by offering customizable permission levels, encryption, and secure authentication protocols, ensuring that sensitive information is protected throughout the entire payment process.
Securing cross-border payments is a multifaceted challenge that must be coupled with a comprehensive and proactive approach. Ola Oyetayo, Chief Executive Officer at Verto says that businesses should partner with a secure global payments provider to support them with the complexities of sending and receiving funds, whether it be from a local partner, or customer on the other side of the world. “We hold the highest international standards for security and compliance to give our customers peace of mind, as well as being regulated by the FCA.”
It’s imperative for industry stakeholders to recognise that payment security is not a static goal, but an ongoing process that requires continuous evaluation and adaptation to the changing landscape. “In addition, fostering a culture of transparency, cooperation, and shared responsibility among all parties involved in cross-border payments is vital to collectively safeguard the global financial system” Ola says.
By adopting standardised payment protocols, robust due diligence measures, strengthened cybersecurity practices, collaborating with regulatory authorities, and leveraging cutting-edge technology, local businesses can effectively mitigate the risk of fraud in cross-border transactions.
About Verto
Verto is a global financial technology firm that enables businesses of all sizes to access
enterprise grade cross-border payments, FX and banking solutions via our advanced
platform or API. Businesses can accept payments and send payouts globally in one single
platform. Verto seamlessly connects any business, anywhere.
For more information visit www.vertofx.com
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