Senate Hearing Spotlights Rifts, Risks on Push Payment Fraud

On Capitol Hill, by now the cast of characters — and the flash points — are familiar.

The CEOs of the nation’s largest banks have, in a continuing series of appearances before House and Senate Committees, discussed their business models and in some cases have defended those same business models.

On Thursday  (Sept. 22), in the second day of hearings the week, CEOs of six of the largest financial institutions (FIs) appeared before the Senate Committee on Banking, Housing and Urban Affairs to testify on industry oversight, one day after many of those same execs appeared before the House committee on financial services.

While testimony from the six CEOs Thursday touched on everything from social to political issues, there was some focus on payments. Specifically: Testimony keyed in on push payments and the liabilities tied to authorized versus unauthorized transactions.

At issue is the growing trend where peer-to-peer (P2P) scams cost consumers as much as $6.1 billion in 2021, as noted in this space and reported by the Federal Trade Commission (FTC), up from $3.4 billion the previous year. Through the first quarter of 2022, the losses top $1.7 billion.  The extant regulations, specifically Reg E, are clear: If a consumer authorizes the transfer, the FI has no liability — meaning the bank is not obligated to refund the money to the consumer.

Focusing on Liability

Liability – and even just how prevalent P2P fraud itself might be – came up during Thursday’s Senate hearing.

Sen. Elizabeth Warren of Massachusetts contended that the CEOs had not “answered any of the questions” on queries sent by the Committee this past summer on fraudulent Zelle transactions.

“Is this because you don’t keep track?” she asked, “or is it because you do keep track and you exactly how many fraudulent transactions have been reported, and you want to keep that report a secret?”

JPMorgan CEO Jamie Dimon responded that in reference to fraud, and specifically on authorized transactions, “we have an enormous amount of systems to stop [those transactions], and the amount of fraud, relatively, is very small for this free of charge service.” Dimon stated during the hearing that “anything that’s unauthorized…[JPMorgan] covers.”

PNC Financial Services Bill Demchak said the fraud rates related to scams and fraud equated to a few basis points (“as you define it,” retorted Warren).

“Total disputes are six basis points,” countered Demchak, who added later that Zelle is but one of the P2P networks operating, and where the others have “15x the number of disputes coming into our company that we have no ability to have insight into.” And Demchak’s testimony stated “monthly reporting from the first half of 2022 indicates that less than 0.027% of total Zelle transactions performed by PNC customers were disputed as unauthorized.” By way of contrast, per the testimony, the PNC customer dispute rate for unauthorized transactions on Cash App and PayPal was more than 1,280% and 210%, respectively, above the Zelle rate.

Continued Embrace by Consumers

During his own testimony, and in further evidence of consumer embrace of push payments, Bank of America CEO Brian Moynihan noted that during 2021, the number of clients who are active Zelle users — both consumers and small businesses — increased 23% to 15.8 million. These users sent and received $231 billion in payments over the course of the year, a 64% increase over 2020.

In joint research done between PYMNTS and Featurespace, smaller FIs also saw the highest rates of increased rates of fraud among peer-to-peer (P2P) options, where  56% reported increased fraud attacks using Venmo in the past year, 51% reported increases using Zelle, 48% saw increases using PayPal.  The same research found that 64% of banks intend to improve their communication with customers, and 46% will increase or initiate the use of advanced technologies to boost their crime-fighting efforts.

As for the P2P liabilities:  During the Thursday hearing, Sen. Warren asked if banks would be prepared (by a show of hands) to make good all consumers’ reports of P2P fraud, whether transactions were/are authorized or not. None of the execs raised their hands, indicating that there is still adherence on their part that there is still consumer-level liability/responsibility for these transactions, especially when directly initiated by those individuals.

In a recent interview with Karen Webster, Ingo Money CEO Drew Edwards said that “there’s still a bit of education that needs to be administered in the banking industry to keep reminding consumers of their liability.”

As it exists now, the P2P model might be likened to a “sender beware” model, but the prompts, he said, clearly state the risks of the irrevocable nature of the payments and that senders should check (and re-check) the recipient’s information before hitting “send.” He noted during the conversation that banks can use technology to make “sender beware” prompts more robust, including alerting someone about to make a P2P transaction on a mobile phone that the receiver is not in their contacts.

Technology also makes it harder for individuals to mask where they were, what they bought, and whether they were on recognized mobile devices — creating, in effect, an audit trail.