As the scam epidemic rages on and more Australians lose their hard-earned savings to fraudsters there are renewed calls for the big banks to step up compensation for victims.

It’s already happening in the UK, where victims of scams are entitled to bank compensation.

In Australia, banks only refund customers an incredibly small portion of the $2.7 billion being lost to scams annually, many of which involve victims sending money from their bank accounts.

Experts said bank compensation comes with upsides and downsides, with a need to balance the role of banks in preventing scams with education to help individuals avoid fraud.

University of Melbourne Professor Jeannie Paterson said that most scams aren’t actually a failure of bank systems, but instead result from customers being duped by fraudsters.

These are so-called “push pay” scams, where fraudsters convince people to send money.

“The issue, generally, is not somebody who has confused the bank, but somebody who has tricked their customers into sending payments,” Paterson said.

“At the moment, the bank’s legal obligation is to follow the customer’s direction and make the payment.”

Incentivising banks to act

Paterson explained this creates a tension, because there is a need to ensure customers can use their money as they see fit to pay things like bills or other purchases, even at short notice.

But there is also a view that banks should protect the money customers deposit with them, which has led to jurisdictions like the UK introducing a compensation scheme for victims.

Dimitrios Salampasis, a senior lecturer in emerging technologies and FinTech at Swinburne University, said that requiring banks to pay compensation would encourage them to take action.

“Banks taking on the responsibility of reimbursing scam victims will push for further investments in fraud detection and prevention technologies,” he said.

“The internalisation of the cost of scams will result in banks having a vested interest in pre-empting fraudulent activities and being more.”

Moral hazard for customers?

But such a move would also come with potential downsides, he said, including risk of a moral hazard arising where customers could become more complacent about protecting themselves.

“Customers could become (at least at the beginning) more complacent, leading to an increased volume of fraud attempts,” Salampasis explained.

“Furthermore, banks could group customers in different and pre-determined risk profiles that could easily lead to denial of service and accelerated financial exclusion.”

Paterson said the question of bank compensation is a difficult balancing act because there is ultimately a need for customers to protect themselves.

That’s something that has been recognised in the UK, where customers who fail to heed bank warnings could be left ineligible for reimbursement under their scheme.

Other potential downsides include the possibility that banks could slow innocuous payments in a world where they’re on the hook for compo, or even pass on the costs of reimbursing scam victims to their broader customer base, Paterson explained.

“Banks could slow right down and wait up to three days to clear some payments,” Paterson said.

Salampasis said the fight against scams ultimately needs to be multi-faceted, with advanced technologies now available to banks to help them curb rising rates of fraud.

“Artificial intelligence, machine learning and behavioural analytics can analyse patterns, identify and flag in real time suspicious activities including unusual transactions, and recognise signs of phishing attempts,” he said.

Education and regulation key

But customer education is still a huge part of the solution, because ultimately Australians are the ones in the driver’s seat when it comes to moving money from their bank accounts to fraudsters.

“Customer education becomes pivotal in helping them recognise and avoid scams, while continuously reinforcing the need for personal accountability, vigilance and moral obligation of being good customers,” Salampasis said.

Paterson said that updated regulations around preventing scams on banks and other players, including telco giants and social media platforms, will ultimately be needed to stem the tide.

“It’s about how we design the intervention – do we say banks must do these specific things, or in a general sense take specific care, or do we say you have to compensate people?” Paterson said.