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Teaching my son about banks, payments & fraud


Gene Neyer, member of the InstaPay Advisory Board, recently tried to use the example of Zelle users in the US to educate his son on the techniques of scammers and the importance of a bank account, but it ended up being an education for Gene instead.

I recently brought the fact that Zelle users are finding out the hard way “there is no fraud protection”  on the bank-backed Venmo alternative, as reported by TechCrunch, with my 19-year-old son as a way of educating him about the techniques of scammers, peer-to-peer (P2P) payment methods and how to be financially aware.

I shouldn’t have bothered – he was already aware. Indeed, he then he asked me a question: Why should he move to Zelle (which is what I originally asked him, since I do not use Venmo), when all his friends are on Venmo already? Zelle provides no incremental value to him – as far as he can see.  The fact that Venmo has a linked account and there are chargebacks if he has insufficient funds in his account to send a payment are too much minutia to him.

I was going to tell him that it is important to have an account in order to establish a credit history, which is one of the main selling points for the bank-backed Zelle. But he already has accounts at two banks – Venmo is just a better “cash dispenser” for him than either ATM (a distant second) or Zelle (not even in play, as he still cannot connect his CapitalOne 360 account to it). And all three of the options have the same characteristics when it comes to fraud –i.e. “sender beware”.

Instead of convincing my son to look again at banks, I instead found myself questioning the received wisdom that a bank account is central to establishing a credit history – since my daughter has a credit card not tied to a bank account in any way.

The conversion reminded me once again to think through the Bill Gates’ quote that: Banking is necessary, banks are not”.

What’s the point of a bank account?
It used to be that bank accounts provided clear value – they were protected from theft or default; they paid interest (or were at least free); they provided ubiquitous reach (even if only by having checks exchanged for cash at the counter).

We are now at the point where the value of having a bank account has eroded – just look at the “deposit displacement” that is currently going on, as reported by Financial Brand, where $45 billion is stored in Health Saving Accounts (HSAs); $2.2bn in Venmo wallets; $2bn in Starbucks’ loyalty scheme and so on. This may seem trivial compared with the $17 trillion held in US bank deposits, but it is money that otherwise would have been in a bank account. AT Kearney estimates that assets held in automated financial technology (FinTech) enabled robo-advisor wealth management and investment tools will reach $2.2trn by 2020 and half of this money will come from bank deposits, so the trend is clear.

Banks need to fight for their future and their role in P2P and faster real-time payment (RTP) schemes with effective front-end data-centric tools. They may want to consider offering risk mitigation services too, such as insurance for high risk accounts or payments so they can draw users attention to the protection that is, or isn’t, on offer for a transaction or an infrastructure. I make a number of recommendations to this end at the conclusion of this article.

Fraud on the rise in US
Trust in the safety of a bank account is under attack, just as alternative payment and other service providers are proliferating, so there is cyber-security and education work to be done by banks too in the fight against fraud and to retain customers. According to Javelin Research there were 16.7 million US fraud victims last year, costing them $16.8bn.

  • Account takeover tripled over the past year, reaching a four-year high, with total losses for this one segment reaching $5.1bn, a 120% increase from 2016. It continues to be one of the most challenging fraud types for consumers with victims of fraudulent access to bank accounts paying an average of $290 in out-of-pocket costs and spending 16 hours on average to resolve the issue.
  • Fraudsters are getting more sophisticated in their attacks, using more complex and difficult to detect monetization schemes. One and a half million victims of existing account fraud had an intermediary account opened in their name first. This is 200% greater than the previous high.

So, if the central benefit of Zelle is frictionless access to accounts – they are both right there in the banking app – it becomes a less compelling proposition as the centricity of the bank account declines in the US.

The experience of registering with Zelle and using it could also be better. Which is why after trying to get Zelle to work in the end I just got the Venmo app and transferred $22 to my son.

The conclusion is inescapable – as the value propositions that banks developed in the 19th and 20th century become available outside of the traditional banking system (e.g. we start to trust FinTechs as much as we trust our bank to keep, move and manage our money), it is incumbent on the industry to move forward. In the first instance, this brings us back the issue of fraud and what banks can to do to prevent it and leverage protection against it to their own ends. I’ve a few recommendations:

  1. Since banks offer multiple ways of accessing accounts it is high time to stop defining user experience (UX) based on the technical characteristics of underlying mechanisms. For instance, automated clearing house (ACH) payments are revocable, so we can just pull the money from your account, while RTP is irrevocable, so you cannot get the money back. Banks have already demonstrated that they understand the value of consistency across media when they went to zero liability on both debit and credit cards (even though credit cards technically have $50 customer liability on it), so they should be able to demonstrate consistency about payment methods. It is no easy task to develop transparent, logical and end-user friendly policies across different payment types with very different attributes and margins that also make business sense for banks. Nonetheless, as non-banks and FinTechs inexorably move towards simplifying UX, banks need to keep pace and expand the programs that work.
  2. Beyond the base/common level of capabilities and disclosures, there are lots of ways that banks can create a better customer experience around risk mitigation. Banks have the information to quantify fraud risk (when the account was opened, transaction history, etc). How about offering insurance if the receiver account is “high risk” – the same way as airlines offer flight insurance? How about the option of “receiver (seller) pays insurance” to allow small businesses to develop their customer base by removing this friction point for the buyer? How about offering a double signature escrow as another option at 50% of the price of insurance – so the seller can determine his own value for immediate funds? There is lots of room for innovators to raise the bar for the benefit of the industry and its customers.

Now is the time for the industry to mobilize, fight fraud and act together in the common interest of customers. That is the highest form of service and of self-interest.


Author: Neil Ainger
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