Despite advances in anti-fraud technology, scams remain a major problem for the energy industry, as criminals continue to exploit vulnerabilities present within the current system.
According to the latest data from U.K. Power, the total cost of energy fraud to both suppliers and customers amounts to around £500 million every year. However, a number of U.K. fintechs are in the process of developing solutions through open banking which they predict have the potential to boost the sector in coming years by reducing fraud and improving payments security for energy providers.
Fraud tends to occur most often when providers take on new customers through fraudulent sign-ups, and through chargebacks. While the friction associated with more stringent verification procedures tends to be unpopular with genuine consumers, open banking offers the potential to circumvent such issues through different payment mechanisms and data-driven approaches.
“Stopping fraud is always about balance,” said Duncan Barrigan, chief product officer at GoCardless, a fintech working on open banking solutions for energy suppliers. “Sign-up checks usually have a negative impact on conversion, so it’s important that merchants and payment providers avoid the urge to use blanket verifications.”
Barrigan predicts that open banking Account Information Services will increasingly be used as a tool to check suspicious sign-ups. This would allow merchants to request customer authorization to view information such as current balance and transaction history, to check they actually have access to the registered account.
An additional method of increasing security is for providers to take initial payments through Payment Initiation Services, whereby customers authorize them to access their account and initiate the transfer of funds on their behalf in real time. This reduces the risk of fraudulent chargebacks or indemnity claims from consumers further down the line through the BACS or SEPA direct debit schemes.
GoCardless is also working on enabling suppliers to use Payment Initiation Services for real time top-up payments, in instances where customers have fallen behind their payment schedule and the company requires instant certainty about the success of the payment. Right now these payments are typically made through card networks, but by using open banking, merchants could avoid processing fees.
“Open banking PISP payments can certainly reduce card payment fees, and we believe can be significantly cheaper in the energy sector,” said Nick Raper, head of U.K. at Nuapay, a direct debit service provider that is looking to combine its existing services with open banking payments. “They also have added benefits of providing real-time funds to the supplier, and being more secure than card payments. With open banking payments, user information or credentials are never made available or transferred to the merchant, so there is no risk of data breaches to worry about.”
Another common security challenge for companies throughout the utility space is in identifying and managing financially vulnerable customers. Customers in financial difficulties are at risk of failed payments charges, which can accentuate their predicament, while energy providers can accumulate bad debt and expend significant time on these cases.
GoCardless and Nuapay are working on designing potential solutions under the open banking framework, through Variable Recurring Payments (VRP). This could ultimately supplant direct debit — currently the main method of collecting recurring energy payments — in many situations.
“Through VRP, merchants will be able to reduce the risk of ‘unpaids’ which currently occur within the direct debit system, as they will be identifying in real time whether there are sufficient funds in the customer’s account to process the payments,” said Raper. “One of the challenges with direct debit is that a merchant initiates a payment today but it isn’t processed against the customer’s account for two days. At which point they may not have sufficient funds to complete the transaction, and then the merchant won’t be notified of this for another two days. In short, they don’t find out until four days later whether the payment has been successful or not, but with VRP, this would all be done in real time.”
While discussions are still ongoing between regulators, banks and fintechs before such solutions are widely available across the energy sector, GoCardless has been involved in many of the initial trials and predicts that it has great potential both in the near future and over the coming decade.
“The big near-term opportunities for open banking in energy are to use Account Information to tackle fraud, and Payment Services to improve the experience for those making top-ups and prepayments,” said Barrigan. “In the long term it's possible VRP and open banking could effectively replace direct debit in many situations. GoCardless collected the very first live transaction under VRP, and we've been working with open banking to design how the new system would work."
