Getting real about the consequences of faster payments

In my neighborhood in Baltimore you can occasionally see the remnants of a bygone era. The sidewalks are dotted with waist-high iron posts topped by horse-head ornaments. A century and a half ago, people would hitch their horses to rings attached to the sculptures. Somewhat less glamorously, many stoops still feature iron boot scrapers for removing the refuse those same horses would leave behind. 

Technological advancements have always come with trade-offs. The automobile rendered horses — and by extension, horse hitches and boot scrapers — largely irrelevant. With cars, people can get where they're going faster, and I can only assume they have done wonders for the smell. But the trade-offs include a dramatic increase in auto fatalities, increased noise pollution and, of course, climate change. 

This is a roundabout way of saying that solutions to problems often bring with them new and unforeseen problems — the fleas come with the dog. This is readily apparent with the proliferation of faster peer-to-peer payments platforms and the commensurate proliferation of fraud and claims of fraud on those platforms, including, but not limited to, the bank-owned payments platform Zelle.

Bloomberg News

Sen. Elizabeth Warren, D-Mass., has made something of a personal brand out of highlighting the instances of fraud on Zelle and banks' apparent lethargy in resolving those claims. Consumer Financial Protection Bureau Director Rohit Chopra — a Warren protege — has likewise highlighted the levels of fraud on P2P payments networks and is working to develop rules to curb it.

This is a real problem that lawmakers and regulators are rightly focused on, and it should be stopped. Fraud and scams tend to target the most vulnerable and those with the least capacity to withstand such theft. It's really as simple as that — theft is bad and public officials should make it as hard to successfully accomplish as possible. 

But, as I've said before, when we use the word "fraud" we have to be a little more precise. When someone steals your login credentials or otherwise makes an unauthorized transfer or payment, that's one thing — hackers gonna hack. When someone perhaps is bamboozled into making a payment they might not be aware they're making, that gets a little trickier. And if a scammer can rip off a customer, a customer likewise can rip off their bank by claiming fraud when there is none.

What is currently missing from this discussion is the lack of independently verifiable data about how much of which kinds of fraud are currently prevalent on each of these P2P platforms. Right now we have a report from Sen. Warren's office based on voluntarily reported data from some of the largest banks — a well-intentioned effort perhaps, but not the kind of rigorous apples-to-apples comparison one could expect from bank regulators or a neutral third party like the Congressional Research Office or Government Accountability Office. 

Elizabeth Warren sharpens attack against Zelle system

From there, regulators could put in place rules of the road for minimizing the potential harm from payments scams and perhaps enhance banks' coordination with law enforcement to catch criminals. But here again there are certain limitations to what technology can accomplish. Zelle and Venmo and other P2P apps have gone a long way to minimize "fat finger" errors by requiring two-factor authentication and instituting other safeguards. And one of the advantages of having a supercomputer in your pocket is that it collects lots of data about who is accessing an account when and from where. That information can help differentiate potential fraud by a scammer against a customer from potential fraud by a customer against his or her bank.

But the feature of faster payments is also a bug — when the money's gone, more often than not it's gone. Incidentally, this is also one of the defining features of decentralized finance and blockchain technology — there's no player in the middle verifying that transactions are kosher. You just have to trust the blockchain to be final and permanent.

This matter of building consumer awareness that P2P networks are like playing with live ammo will be increasingly relevant as the Federal Reserve develops its own real-time payments network, FedNow. The promise of this faster payment settlement network is that people won't have to wait around for days to get their paychecks or pay their rent, and that's a big leap forward. But it also means that regulators, lawmakers and the public need to grapple with the fact that faster payments means faster and more permanent transfers of money from one pocket to another — and bad actors are always going to try to put their hand in your pocket.