Online payment theft responsibility. It's complicated.

Last year, consumers and small businesses used the free peer to peer online payment platform called Zelle, to complete $806B worth of transactions.  In 2023, three billion Zelle payments equated to $100 million of transaction activity....per hour.  

The Zelle platform owners are seven of our nation's largest banks. Those banks and over 2000 smaller banks and credit unions -- make Zelle available to customers for simple, instant, fund transfers.  Unfortunately, there are countless bad actors preying on unsuspecting payers.  

freepik image

Consumer watchdog groups, the Consumer Financial Protection Bureau (CFPB) and politicians like Elizabeth Warren, Sherrod Brown and Maxine Waters have targeted Zelle's operator, Early Warning Services, LLC (EWS) and large bank owners of the platform, for consumer losses due to fraud.  

On December 20th, the CFPB announced it was suing EWS and the three largest banks that own Zelle for insufficient fraud detection, prevention measures and victim support.  Their press release alleges that the defendant banks have been "...allowing repeat offenders to hop between banks."  

Banks and credit unions, law enforcement, the press, our judicial system, industry trade groups, technology backbone companies and state and federal agencies dedicated to apprehending and prosecuting financial criminals are all powerful stakeholders with a role to play.  

No single party is responsible for "allowing" criminal activity to go unchecked.  

Moreover, millions of individuals attracted to the convenience of online payment technology could dent victimization levels by using extra caution before sending money to an unknown counterparty.  Unfortunately, much of this thinking gets lost within the 'Big Bad Banks' hype.

Scale of the Problem?  Which problem?

The CFPB claims that the cumulative amount of Zelle-related fraud losses by consumers since 2017 is $870 million.  EWS disputes that figure and notes that some claims turn out to be legitimate payments and other anomalous cases (like claims made by actual fraudsters trying to exploit the system) inflate the CFPB statistic.  

Accurate or not, if the CFPB's cumulative figure of $870 million in losses is averaged over a seven year period and then rounded up, $125 million becomes the mean average of Zelle-related fraud losses, per year.  That's a lot of money, but the amount of peer to peer payment theft from Zelle transactions is small in comparison to other forms of financial crime in the US.  

Consider pandemic-relief which now cumulatively has surpassed over $200B in fraudulent payments, or money laundering which the Treasury Department estimates at over $300B per year. Insurance fraud also amounts to over $300B per year.  

What about the actual frequency of transaction problems experienced by Zelle users?  Zelle maintains that less than one tenth of one percent of payments are reported as scams -- over 99.9% are not.  

Platforms like Venmo, Chime and Zelle are used to transfer funds after one makes a disbursement electronically and irretrievably to someone they've trusted.  Who should pay damages when fraud occurs, isn't always clear.  

Singled Out For Negligence

Articles like this one by CNN foist more attention on banks than criminals with pointed reminders like this one: "The big banks that run Zelle in particular “rarely” reimburse customers duped by scammers...".  

If I physically mail a donation check to a fake charity and discover I've been scammed; should I expect reimbursement from my bank and the US postal service that transported my payment?  There's a disproportionate amount of political and media attention on the big banks regarding online payment fraud because:  

1. Large financial institutions are easy to blame and doing so won't cost Pols many votes.  Hauling large bank CEOs before a congressional committee makes great television.  Zealous bank scapegoating also happened after the Great Recession, as I wrote in this space 14 years ago.  The more prevalent crime categories mentioned above, are only obscure and ugly reminders of the times we live in until we're robbed as individuals -- like a victim of payment fraud.  That's when we get loud, call law enforcement, file complaints, alert reporters, contact our Congressman and so on.  

2. While financial crimes like insurance fraud, fraudulent relief payments and the like are much larger in scale and impact law-abiding society as a whole, the victimized group of those crimes is one huge, diffuse body called the American public.  Americans as a whole typically don't demand reform in Washington until they're catalyzed by seismic developments like 9/11, the Great Recession, a 100 year pandemic, or a tidal wave of illegal migration.  There is no such macro event affecting a critical mass to mobilize voters about online payment fraud. Yet, high profile lawsuits and Capitol Hill hearings keep the media buzzing about the issue anyway. 

Consumer Education

Sometimes lawmakers and regulators don't make distinctions between victims of sophisticated criminal schemes exploiting weak controls at legitimate entities, versus cases of unfortunate or even reckless consumer choices.  There's clearly a need for more consumer education, so individuals can protect themselves with added knowledge.  

The American Bankers Association has an educational toolset to help customers recognize scams and fraud risks called, "Banks Never Ask That".  Enhanced public education efforts like that one won't completely eradicate the problem, but they reduce the amount of opportunity fraudsters currently enjoy when consumers heed best practices.  Perhaps the CFPB, for its part, could also devote more resources to its public education programs.  

Summary

Payment theft harms innocent people whether a victim succumbs to a scam over the phone, in person, or a bogus website.  Who should pay for enterprise-wide "remedies" and individual damages, isn't always clear.  Unfortunately, political grandstanding often displaces thoughtful policy debates about constructive measures to combat complicated problems like online payment fraud.  

In cases after customer-facing bank employees behave indifferently (or worse) to fraud victims -- those employees and/or their supervisors ought to be disciplined or fired, but even those actions won't reveal systemic vulnerabilities, or mitigate future frauds and lousy service is not tantamount to fraud complicity.  

Stronger multi party action on the root problem will help Americans suffer fewer losses from online payment fraud.  Multi party action means common goals collectively pursued by all powerful stakeholders involved to: a) lock up more cyber criminals with application of stiffer sentences b) increase consumer fraud awareness throughout our financial ecosystem and c) stop the circular firing squad in public and turn their sights on the bad guys.  

Nobody said any of this will be easy. 

The Net Promoter Score (NPS) is superficial

Check out my latest  post on LinkedIn if you are interested in the common question designed to tell an organization something useful about customer satisfaction and loyalty.  

"On a scale from 0 to 10, how likely are you to reccomend us to a friend or colleague?"

Aside from leading marketers to easy conclusions, singular use of the NPS question is annoying to me.  For some of us, it's simply not the question we want to answer, nor do we want our views confined to a Likert Scale for marketing purposes.  

I suspect some NPS devotees just don't want to deal with unstructured data.  Perhaps more marketing heads will require their surveymonkeys to leverage AI and mine that data that tells them so much more than a checkbox.

Image by upklyak on Freepik

Reviewing products and services online

Who doesn't read consumer reviews on the Internet?  I take them seriously when making purchase decisions and while drafting them.

Many of my reactions as a consumer come in oral rather than written form.  For example, a couple of months ago I left a voice message for a service manager about outstanding service I received from one of his auto technicians.  Last month, I spoke directly with the restaurant chef to compliment his dish, after telling his manager about it.

In essence, the majority of my reactions as a consumer -- whether published online, or spoken, are positive.  This past week was abnormal in that I published two reviews of healthcare professionals: one an Orthodontist (positive) and the other an Optometrist (negative).  

The hyperlink to the Orthodontist will take you to the website associated with this business that dispenses superb care and service; in my view.  I issued a glowing, albeit brief, "5 star" , Google review for them.  

The hyperlink to the Optometrist, will take you to a one star review I wrote on Yelp, which reveals my poor experience.

Note to the gentleman in the Philippines emailing me about online safety and a shared desire to root out fake reviews: thanks for your messages, but I haven't been able to confirm your identity and your website is not functional.

(Image above by freepik)

   

Hashbrowns and physics

By George Webb Corporation - http://www.georgewebb.com







1. For three consecutive mornings, I've happily eaten breakfast at George Webb, a Wisconsin chain of some 30+ counter and booth style restaurants which first opened for business in 1948.  I've been enjoying them -- and particularly their cheese hash browns -- since the Seventies.  However, I'm ordering their free water as my beverage for the foreseeable future.  I recognize the ill effects of inflation, but $3.30 for their small size glass of institutional orange juice?  Ridiculous.  

John Maddente photo

2. I'm guessing few of my seven readers are familiar with Luckbox magazine.  Its stated focus on "Life, Money, Probability" is geared toward Traders and other professional investors.  I do not belong to that group, but a copy of this magazine at an airport lounge with its snappy graphics and offbeat topics, drew me in.  

The latest issue has an interesting article on the high stakes fight to preserve, or slowly kill, AM radio.  The piece reminds readers that AM radio remains relevant to 82 million American listeners and also government officials that rely upon it as a medium for public emergency alerts.  What's more, AM radio defenders in Congress are remarkably bipartisan.  

I close with a friendly jab at the Luckbox editor of this article.  

Dear Madam or Sir, Re: the copy of "Night Radio" --  I believe your columnist intended to cite the laws of physics not "psychics".   Your oversight reminds me of a M*A*S*H episode whereupon Col. Potter exclaims, "We order rectal thermometers, we get spark plugs. Both useful articles, but hardly interchangeable."

Private mortgage underwriting can benefit America

Image by rawpixel.com on Freepik

“Isn't this what got us in trouble in the first place?” 

That was the first reader comment following a CNN/Money web article concerning a recent shift by government sponsored entities (GSEs) who buy most mortgages from lenders, to accept down payments as low as 3%. The previous minimum was 5%.  

In an era when banks are forced to hold more capital, the GSEs which became insolvent during the financial crisis and received one of the largest bailouts in American history, have cut the minimum down payment for home buyers.

This policy change enacted by the Federal Housing Finance Agency (FHFA) which regulates the GSEs and by extension, influences trillions of dollars in mortgage exposure to American taxpayers, is worrisome.  Defenders of the FHFA actions point out that the change still protects taxpayers by requiring private mortgage insurance (PMI) and it applies only to issuance of fixed rate loans. 

Fixed rate requirement

Fixed rate notes help borrowers to service their debt predictably which in turn helps to manage taxpayer exposure.  Many will recall that waves of defaults occurred in 2007-2008 after in-over-their-heads borrowers experienced mortgage payment increases from adjustable rate loans that reset to higher interest rates.  

Private mortgage insurance requirement

The PMI component offers less comfort to critics.  PMI is by design reactive -- it kicks in after default.  

President Obama recently directed the Federal Housing Authority (FHA) to decrease premiums it collects for FHA mortgage insurance. (The FHA is an agency of the federal government that insures private loans issued for new and existing homes).  

Like the GSEs, the FHA mortgage insurance fund required a taxpayer-funded lifeline in 2013 after unprecedented default volumes.  The stated intention behind all of these moves is to lower the cost of a conventional mortgage for lower income home buyers. According to HUD, these lower mortgage insurance premium rates (alone) will add 250,000 new first-time home buyers. Should we celebrate new first-time buyers, or new qualified first-time buyers?  

The debate
We continue creation of bubbles inflated by some noble intentions and lots of ignoble politics.  I'm dismayed when people still prefer to blame The Great Recession completely on the banks.  Those voices ignore two indispensable enabling factors -- federal government housing policy and monetary policy.  Without state-sponsored encouragement to make loans to anyone with a pulse, there would not have been enough lower credit quality loans to securitize at the volumes we witnessed.

Private sector alternatives

Private sector partnerships can help mitigate publicly-backstopped asset bubbles in the subprime housing markets.  Such programs, which are beginning to take hold in the Twin Cities and elsewhere around the country -- prove that public-private partnerships can work when funded by entities and accredited investors risking their own money.  Such partnerships might help moderate the huge spigot of taxpayer-sponsored mortgage credit and mortgage insurance programs that the Left continues to embrace, without sufficient taxpayer safeguards.

And the debate goes on...