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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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January 17, 2023

Consumer Research Finds an Association between BNPL and Overdrafts

In our 2021 and 2022 blogging about buy now, pay later (BNPL), we have told an on-the-one-hand, on-the-other-hand story.

On the one hand:

  • Interest-free loans are a bargain that help consumers spread out the costs of large-dollar purchases.
  • BNPL is a low-cost substitute for credit card debt.
  • Consumers without credit cards or without a credit history can borrow to smooth out ups and downs in income.

On the other hand:

  • BNPL encourages consumers to make purchases they may not be able to afford in the long run.
  • BNPL inspires consumers to buy more than they otherwise might.
  • Consumers may incur late fees, and their credit rating may be affected.

Two papers, each analyzing large data sets of consumer transactions, add to this weighing up by finding a relationship between use of BNPL and incurring overdraft fees. These papers compare pools of consumers who have used BNPL to pools of consumers with similar characteristics who have not used BNPL.

Both papers find that total spending increases after an individual starts using BNPL.

Neither paper can establish, however, which comes first: the choice to use BNPL or the tendency to overdraft. As deHaan and coauthors write, "the results cannot differentiate between a causal effect of BNPL versus consumers experiencing a coinciding shock (e.g., a layoff) that causes both BNPL adoption and declines in financial health."

For a pay-in-four purchase, payments are made at the time of purchase and then automatically over the next six weeks. The CFPB has reported Adobe PDF file formatOff-site link that nine in 10 BNPL payments are made with a debit card. Automatic debit payments imply that the harmful effects and the full costs of BNPL can occur at not only the BNPL lender but also at the customer's financial institution, where overdrafting could occur. This makes it difficult for those effects to be fully quantified. These findings on overdrafting pose a challenge for consumer protection and consumer education.

These papers add to our understanding of consumer finance and consumer decision-making. I encourage you to read them.

December 5, 2022

The Battle over Consumer Liability for eP2P

Criminals like to use electronic person-to-person/peer-to-peer (eP2P) payments services to execute scams because of the speed and finality with which they can receive their ill-gotten funds. Unfortunately, this very speed and finality can leave victims with no money and often no way to get it back. I posted a few months ago about some litigation brought by consumers against financial institutions (FI) in situations where consumers voluntarily sent funds to scammers using an eP2P service. When the consumers later realized they had been taken, they sought reimbursement from their financial institutions under the liability protections provided under Regulation E. However, because the consumers initiated the funds transfers themselves, these instances did not meet the definition of being unauthorized and were therefore not eligible for reimbursement. I suggested, from my layperson's perspective, that the definition of an "unauthorized transaction" in Reg E was quite definitive in covering only transactions initiated by unauthorized third parties.

Senator Elizabeth Warren (D-MA) released a report Adobe PDF file formatOff-site link last October calling on the Consumer Financial Protection Bureau (CFPB) to "clarify and strengthen" Reg E with regard to the eP2P service offered by Zelle. Although the report focuses on Zelle, other eP2P services such as PayPal/Venmo and Cash App are also used in such scams, as I mentioned at the beginning.

In response to the report and as a follow-up to an earlier meeting with the CFPB, the American Bankers Association (ABA) released a letter Adobe PDF file formatOff-site link on October 27 to CFPB director Rohit Chopra refuting Senator Warren's claims. The letter points out that "fraud is de minimis relative to the transaction volume, with 99.9 percent of the 5 billion Zelle transactions processed in the past 5 years without issue." The ABA letter cites the numerous steps that Zelle and its participating FIs have taken to educate customers and implement safeguards to protect customers against potential scams.

And in the latest development, a recent Wall Street Journal articleOff-site link reported that the Zelle owners were in discussions to develop a reimbursement plan for scam victims. Under the plan, which would apply to all FIs participating in the Zelle network, if it's determined that the customer was tricked into sending funds, the receiving FI would reimburse the initiating FI, which would then reimburse the customer. A major challenge in this process will be like what the United Kingdom's Contingent Reimbursement Model is facing: finding a way to consistently determine whether a reasonable person would be tricked.

One concern is that such a voluntary reimbursement policy could lead to "first-party fraud," whereby the customer claims to be a victim of a scam but is actually colluding with the recipient of the funds. We will continue to closely monitor and report on developments in this issue.

October 17, 2022

Webinars Address ATM Crimes, Financial Exploitation

ATM attacks don't generally appear in the news, despite their growing threat. As we've written before, these attacks can be both cyber and physical, and the physical attacks can be against both machine and the personnel servicing the machine. Another disturbing crime that may not appear enough in the headlines is the financial exploitation of senior adults. Two upcoming events in our Talk About Payments webinar series will give you the opportunity to learn more about these issues from the experts. The first, on November 3, covers ATM attacks. The second webinar takes place the following week, on November 10, and addresses the exploitation of seniors and community-based approaches to help mitigate vulnerabilities. More details about these webinars, as well as registration links, are below. We hope you will join us for both events.

November 3: ATM Attacks and Defenses
Because many financial institutions have closed or reduced the operating hours of many of their banking offices since the start of the pandemic, customer withdrawals of cash from ATMs have increased significantly. Unfortunately, the criminal element has shifted some resources to attacking ATMs and the personnel servicing them, including those who make currency deliveries. More than half of all ATM attacks in the United States involve thefts of the ATMs themselves, according to ATM Security Association data. The growth in dispenser jackpotting is also troubling. Because the methods of ATM crime can vary from city to city and month to month, it is critical that that ATM operators stay informed about current trends.

A panel of ATM experts join moderator David Tente, executive director of the ATM Industry Association, in discussing trends in cyber and physical attacks against ATM terminals and service personnel along with measures that can mitigate the risks. The panelists are:

  • Brenda Born, supervisory special agent, Federal Bureau of Investigation
  • Brad Moody, executive vice president of operations, Lowers & Associates
  • John Toneatto, vice president of security and investigations, Loomis

The webinar takes place on November 3 from 1 to 2 p.m. (ET). To participate in the free webinar, please registerOff-site link.

November 10: Financial Exploitation of Aging Adults
Did you know that more than 10,000 US adults turn 65 every day, and that many of them will be victims of financial fraud? Elder financial exploitation is a growing problem, according to the National Council on AgingOff-site link, which estimates financial losses of at least $36.5 billion dollars a year. With the rapidly aging population, we must identify and protect elderly citizens exposed to financial exploitation risks.

In the November 10 episode of our Talk About Payments webinar series, Drs. Thomas Blomberg and Julie Brancale, criminologists from Florida State University, describe the current research, theory, and policy responses associated with this growing social problem. They also address the patterns and variations of financial exploitation of older adults and discuss why some older adults may be more or less vulnerable than others. The presentation concludes with a discussion of areas in need of additional research and policy attention. Scarlett Heinbuch, a payments risk expert at the Atlanta Fed, moderates the discussion.

The webinar takes place on November 10 from 1 to 2 p.m. (ET). To participate in the free webinar, please registerOff-site link.

We encourage financial institutions, retailers, payments processors, law enforcement officials, academics, and other payments system stakeholders to join us for these informative webinars. You will be able to submit questions during the webinar. Please let your colleagues know about these webinars!

August 22, 2022

Not-So-Common Scams Result in Large Losses

We often write in this blog about the scams that criminals seem to favor at the time and describe defenses that targeted individuals or companies can use to thwart these scams. The most popular continues to be the broad category of advance fee scams. I thought it would be helpful to review two other types of financial scams that are not so frequent but that can result in large losses for victims.

Cashier's check fraud
A genuine cashier's check is a direct obligation of the bank that sells it. In a more innocent time, cashier's checks were viewed "as good as gold." Regulation CCOff-site link generally requires a bank to make the funds of a deposited cashier's check available the next business day, but a fraudulent cashier's check could take several days or weeks to be returned to the bank of first deposit.

Criminals use this time gap to their advantage. In some cases, the check is for the exact amount of the item being purchased, and the criminal departs with the goods. For remote purchases, the criminal may send the seller a cashier's check for an amount in excess of the purchase price: $1,500 instead of $1,000, for example. Then the criminal claims the amount was a mistake and asks the seller to send the merchandise as well as refund the overpayment. When the fraudulent check is returned, the seller is out not only the merchandise but also cold hard cash.

Fraudulent cashier checks can be very difficult to spot given the advanced technology of printers and graphics software. Here is some fraud prevention advice:

  • Accept a cashier's check only from someone you know or trust.
  • Never accept a cashier's check with an amount higher than the purchase price.
  • Consider using an escrow service instead of a cashier's check, where the goods are held by a trusted third party until the payment funds are fully verified.
  • Be aware of the difference between when funds from a cashier's check become available versus when the check finally clears.

You can find more information about cashier's check fraud on the website of the Federal Deposit Insurance CorporationOff-site link (FDIC).

High-yield investment fraud
In this type of scam, a fictitious financial institution or company, often located outside the United States, offers a risk-free, guaranteed return on a savings or investment instrument that is substantially above the market rate. The scammer claims to be able to achieve these returns by using sophisticated trading techniques involving "prime bank" financial instruments in foreign markets. Often, there is a promise that the funds are insured by a country's financial oversight agency or by the World Bank, a claim supported by certificates that look legitimate.

These scammers target their victims through advertisements in national and financial publications. They may also solicit victims with executive phishing attacks that have obtained contact information of high-net-worth individuals. The criminals assert that the victim will be part of an exclusive group and therefore should not discuss the investment with others, sometimes even requesting execution of nondisclosure agreements.

My prevention tip for this scam is to follow the old adage that "if it's too good to be true, it probably is."

If there are other financial scams that you think we should address, please let us know by leaving a comment.