Peer-to-peer (P2P) payments have become increasingly popular over the last few years, and banking customers demand the ease of these services. Unfortunately, however, instant payments are also ripe for fraud, and when someone becomes a victim of fraud, they often blame their bank even if they are personally at fault.
Historically, these services have not offered refunds for fraud, but Zelle, the country’s largest instant payment processor, is in the process of changing its policy. The proposed policy would require banks that receive fraudulent transfers to send the funds back to the originating banks so they can reimburse their customers. Consistent with the existing policy, customers who send money to the wrong account by mistake such as by making a typo would not be eligible for reimbursement.
At the time of writing, these policies have not been finalized, but the conversation around the changes presents a lot of food for thought for financial institutions navigating the fraud landscape.
1. Protection Against New Account Fraud
If you’re the recipient bank, this could end up being costly, particularly in situations where the fraud isn’t discovered until after the account holder has taken the funds out of their account. Unfortunately, the defining feature of these payments is that the funds are credited automatically, so you can’t delay processing to get around the risk.
However, there are other steps you can take to minimize your risk. In particular, you need to focus on reducing new account fraud. Generally, the banking customers that initiate these frauds open recipient accounts for the purpose of perpetuating the fraud. If you’re able to stop them when they apply for a new account, you minimize your risks.
2. Reputation Management
Zelle and the 1,800 banks that use the service have experienced some reputational damage due to the media coverage around payment fraud. These services have also been under fire by politicians — according to Elizabeth Warren, P2P fraud reimbursement rates range from 14 to 82%. Even if the rates are on the high end, this means that a significant number of customers never get their money back.
This type of attention has the potential to ruin the reputation of these services and the banks that use them. The new policy is a direct response to the potential reputation damage. Whether your bank uses P2P services or not, this underscores the importance of paying attention to your reputation in the media or in your community and making changes as necessary, even if the changes aren’t legally mandated.
Right now, banks have a range of different reimbursement policies for fraudulent Zelle payments. To protect its own brand image, the company wants to standardize the rules. Financial institutions should all take a page from this playbook and ensure that they offer standardized, predictable fraud reimbursement policies for their customers.
Additionally, Early Warning, the owner of Zelle, says it collaborates with financial institutions on creating reimbursement rules. Collaboration can also be key when it comes to fraud reduction and mitigation. Ideally, you should be proactive about looking for ways to share information about fraudster profiles with other banks, while maintaining compliance with data protection and privacy requirements.
5. Customer-Facing Education
To reduce the risk of fraud on its network, Zelle has spent a lot of time educating its users. This is critical for any entity that wants to reduce the risk of fraud. A lot of bank fraud occurs due to social engineering. Rather than hacking into an account or stealing check blanks, the fraudster convinces the victim to send them money or share sensitive details.
If you educate your customers about these risks, you can reduce the amount of fraud that happens at your financial institution. You can educate customers with signage in branches, newsletters, and emails, but you should find ways to warn your customers about the risk of fraud before they initiate a transaction.
For example, when someone pulls up Zelle on their banking app, they often see a warning that tells them to be very suspicious about people pressuring them to send money with Zelle.
6. Evolving Security Measures
Zelle isn’t just revising its reimbursement policies. The payment service is also actively looking for ways to reduce the risk of fraud for its users. In particular, Zelle is currently exploring the use of QR codes. The recipient would open the app to reveal a QR code, and then, the sender would scan the code to send a payment. This is much more precise than typing in someone’s name or phone number.
Zelle doesn’t have to do this. The company processes more than double the number of payments as Venmo, the second most popular P2P service, and according to Early Warning, 99.5% of all Zelle payments are completely safe. However, in spite of high market share and low fraud rates, the company continues to look for ways to better serve its customers.
To be successful, you need to constantly innovate. You need to constantly look for ways to improve security and service at your financial institution.
7. Policies That Keep Up With the Times
Fraud management, like almost any other business practice, cannot be a static endeavor. To thrive, your financial institution must evolve to meet changing consumer demands, but of course, you must do so in a way that limits your risk as much as possible.
Not participating in these types of programs is not an option if you want to keep your customers happy. Zelle, for example, processes $1 million in payments every minute, and recently, Amazon added Venmo as a payment option. In other words, your banking customers expect these types of services, but they also want their money to be as safe as possible.
Is your financial institution thinking about these issues? Are you fighting fraud across all stages of the customer journey and not just at the transactional level? Are you working to protect your reputation? Are you collaborating with other financial institutions and being proactive about educating your customers? Are you constantly evolving to improve your services and your anti-fraud strategies? If not, it’s time for a change.
We can help. At SQN Banking Systems, we help our clients assess their current fraud management policies and look for areas where they need additional help. Ready to evolve with the times and give your customers the protection they need and want? Then, contact us today, and let’s make sure your bank is on the right track.