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Modulr glossary

Safeguarding of Funds

Safeguarding of funds is a regulatory requirement in the UK that mandates financial institutions protect customer funds in case of systemic failure or the insolvency of an EMI. This involves securely holding customer funds separate from the EMI’s own assets and ensuring that should insolvency occur, the entirety of the customer’s funds can be returned, and the administrative process funded until completion. EMIs must, therefore, protect 102.5% of client funds. Typically this regulatory requirement is fulfilled by funds being held in designated Client Money Accounts at authorised credit institutions at top tier financial institutions, or the Bank of England. Technically, insurance is an alternative form of safeguarding, but is almost never implemented within significant EMIs. Safeguarding by EMIs is in contrast to the banking world’s Financial Services Compensation Scheme (FSCS), which provides consumers protection of their bank deposits up to a maximum of £85,000, or £170,000 for a joint account, in the event of a bank failure. Modulr is proud to exhibit best practice in safeguarding and its details how and why Modulr safeguards customer funds.

Applications

E-commerce:

Reduces fraud in online card payments by verifying the cardholder's identity

Banking and fintech:

Helps issuers and payment providers comply with Strong Customer Authentication (SCA) requirements.

Advantages

  • Enhanced security: Reduces unauthorised transactions by verifying that the genuine account holder is authorising the payment
  • Fraud prevention: Helps reduce chargebacks related to fraud.

Challenges

  • User Experience: Additional authentication steps can cause friction and increase checkout abandonment
  • Implementation complexity: Requires integration with card schemes and issuer systems.

Related Terms

OTP Compliance Strong Customer Authentication PSD2
Item created by Modulr, Updated on
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