American Banker Executive Summary
This year has seen a seismic shift in the way consumers pay for goods and services. As innovations in technology have led to more, and easier, ways to pay, the COVID-19 pandemic has supercharged consumers’ adoption of digital payment methods. They’re moving away from cash and toward more convenient—and more hygienic—options such as contactless cards and mobile wallets. And both consumers and businesses are moving toward “faster payments,” an emerging breed of digital payments that occur near instantaneously, whether through a peer-to-peer payment service or another platform.
A recent study by Arizent Research and the brands PaymentsSource and American Banker, sponsored by Guidehouse, shows that as a result of COVID-19, nearly one in three consumers have changed their primary method of making payments, citing issues such as convenience and safety. And adoption of peer-to-peer payment services such as Venmo, Square Cash and PayPal have increased, with 37% of consumers reporting more usage of these platforms.
The push toward digital payments is expanding the world of financial services beyond traditional institutions such as banks. Indeed, technology firms are some of the biggest players in today’s payments scene and are delivering disruptive innovations that consumers and merchants alike are embracing. Of course, new innovations may pose challenges as more users adopt them and bad actors look to exploit their weaknesses. These risk scenarios have already started to play out across the payments ecosystem, according to Guidehouse payments experts Alma Angotti and Jonathan Shiery. “Once you make things easier for consumers, you also make them easier for fraudsters,” says Angotti, Global Legislative and Regulatory Risk Leader at Guidehouse.
Regulators and compliance experts are racing to keep up with the proliferation of digital payments methods, including “faster payments” such as peer-to-peer services. While consumers embrace the speed and convenience of these payment methods, it’s precisely those elements that make them so appealing to scammers, according to Angotti.
For instance, some payments platforms promise immediate transfers. This is a popular feature for consumers paying friends for concert tickets or a cab ride, but can turn into a financial issue if the money mistakenly goes to the wrong recipient—or, worse, a scam artist. Then there’s little that generally can be done to recover those funds, which is a big loophole fraudsters use to exploit users of these platforms. “In many cases, that money is gone, and you can’t get it back,” says Angotti.
Regulators are hoping to close such loopholes through legislation and other rulemaking avenues. One proposal would lower the current $3,000 threshold required by financial institutions and payments companies to attach identifying information to payments. In this case, payments of as little as $250 could be required to include information on both the sender and recipient.
Meanwhile, industry organizations such as the Faster Payments Council are working to educate consumers about the differences between these types of payments and more traditional payment methods. Payments through banking institutions—whether via credit cards or other means—may provide consumers with strong safeguards, from fraud liability protection to purchase protection in case an item is damaged or stolen. Meanwhile, peer to-peer platforms often lack those consumer protections. If, for example, an individual uses a credit card to buy concert tickets, the card issuer might be able to recoup the cost of a fraudulent transaction. However, with a newer, faster payment method, the individual may not be able to get those funds back in a mistaken or fraudulent transaction. “Consumers may be used to being able to reverse certain types of transactions,” says Shiery, Director of Financial Services at Guidehouse. “But here you can’t.”
Education is key to mitigating fraud potential for both companies and consumers. For consumers, this means understanding the need to be more careful using these faster payments platforms. Actions such as double-checking that the transaction is going to the intended recipient and that recipients are legitimate can help avoid payment errors and reduce the chance of fraud.
Companies should learn how best to verify and authenticate users, which starts with having strong know-your-customer (KYC) processes in place when accounts are opened. “You really need to make sure the customer is who they say they are,” says Angotti. Personal identification such as PINs and passwords are also useful, but can be exploited by increasingly sophisticated hackers. What’s more, complacency by users may lead to weak passwords that are vulnerable to risk.
Angotti notes that many companies are opting for stronger authentication measures, such as one payment platform that requires users to submit videos showing themselves holding an ID card. Other platforms rely on biometric authorizations that provide much more protection than traditional authentication methods such as passwords or PINs. One financial institution authenticates users through voice identification. “In this case, my voice is my password,” says Angotti.
Another strategy is to draw information from other databases to confirm personal details— say, the make and model of a vehicle an individual owned or the institution that holds his or her mortgage—that only the user would know.
KYC and other authentication processes typically are set up at the beginning of the user’s relationship with an institution or platform. Combatting fraud also requires ongoing monitoring: Cutting-edge technologies such as artificial intelligence and machine learning can be powerful tools for detecting and mitigating fraud on an ongoing basis. They can analyze users’ behaviors to identify activities that raise red flags, such as identifying transactions that suddenly originate in a far-flung locale. Of course, these technologies are typically only as effective as they data and models they rely on.
The COVID-19 pandemic has made it clear that faster payments are no longer a differentiator for financial institutions. Consumers increasingly expect these services, and financial institutions should realize that offering them is a prerequisite to competing in the global payments market. Now, it’s up to financial institutions and their fintech partners to optimize their risk and compliance management programs to educate their consumers and manage issues such as fraud, regulatory compliance and privacy. To that end, banks and other organizations should acknowledge that introducing even the most creative payments technologies can carry risks.
“A lot of these payment tech companies are very agile and innovative, but they may not have experience working in a banking environment,” says Shiery. “That’s why banks need to do a lot of due diligence with the companies they partner with.”
That careful scrutiny can pay considerable dividends, helping to ensure that consumers continue to embrace not only these payment methods, but also the next generation of payments innovations.
Once you make things easier for consumers, you also make them easier for fraudsters.”
Alma Angotti, Partner & Global Legislative and Regulatory Risk Lead