Newer payment platforms promising fast and convenient peer to peer (P2P) money transfers have exploded in recent years. But with these technological advances, fraudulent schemes have also exploded, and consumers have suffered.
Payment fraud includes both unauthorized transfers that the consumer does not initiate — as in the case of a hack — and fraudulently induced transfers that the consumer initiates based on misrepresentations by a bad actor. Under federal law, consumers are clearly protected from unauthorized transfers, but banks and payment apps have taken the position that consumers have no protection from fraudulently induced transfers. That must change.
The P2P fraud explosion has drawn the attention of Congress, federal regulators and the media. Reports now indicate that Zelle is working on rules to reimburse defrauded consumers and shift liability to the fraudster's bank in some situations. This sensible approach is a start, but ultimately the law must be clarified so consumers are fully protected no matter which P2P service they use. Clear, uniform protections will also level the playing field between payment systems that keep fraud to low levels and those that don't.
When consumers are not forced to bear the devastating burden of fraud that occurs through faster payment systems, everyone benefits. First, P2P services will benefit by building consumer confidence; it is not a great user experience for a consumer to be paralyzed by fear before clicking "send," knowing no one will help if something goes wrong. Credit card protections helped the nascent credit card industry expand into widespread use and protecting P2P payments will do the same.
Second, shifting the liability from the individual consumer to the payment system will spread the costs and, more importantly, create more incentives and more effective tools to keep fraud out in the first place. Putting the onus of fraud prevention on consumer disclosures and warnings is old-fashioned. It is much more effective to harness the power of fintech and ever-improving innovations to prevent, spot and remedy fraud. All payment systems should identify red flags, investigate claims of fraud, quickly freeze and seize fraudulently obtained funds when possible and track activity on both the front (sending) and the back (receiving) ends.
On the sending end, payment systems have an important role to play in preventing consumers from being deceived by fraudsters. Having more responsibility to address fraud will ensure that providers implement the most effective prevention tools aimed at consumers, such as in-app messages and speed bumps.
But the most overlooked place to prevent fraud is through the accounts that fraudsters use to receive fraudulent payments. If financial institutions are required to reimburse consumers for the harm faster payment systems allow fraudulent actors to commit, they will devote equal efforts to preventing fraudsters from opening or using accounts unlawfully to receive consumers' money, catching stolen funds before the fraudster can transfer them out of a receiving account.
Financial institutions already have know-your-customer (KYC) and anti-money laundering (AML) responsibilities to screen customers opening new accounts and to monitor accounts to ensure fraud and other illicit activities do not occur. They can utilize technology to analyze data, track patterns and screen for fraud much more easily than a consumer can. If payment system rules held institutions that receive fraudulent payments liable for serving fraudsters and money mules, those institutions would do more to ensure their customers are not misusing and abusing accounts and payment systems. Fintechs are developing new solutions every day and can help smaller institutions comply with their KYC and AML obligations.
In open faster payment platforms like Zelle, participating banks can share information with other participants on the payment platform to prevent fraud. Faster payment platforms like Venmo, PayPal and CashApp that hold both the sending and receiving accounts have an even greater ability to monitor accounts, to ensure that their platforms are not used to commit fraud and to reimburse consumers when fraudulently induced transactions do occur.
It is crucial that every payment system be required to protect and compensate defrauded consumers. Otherwise, consumers will be confused, and financial institutions and criminals will migrate to faster payment systems that impose fewer obligations on participants. Strong consumer protections will encourage the use of technology to prevent fraud in the first place and enable all consumers to embrace the full promise of faster payments.
