Peer to peer payment services have become mainstream consumer financial tools in the 20 years since PayPal debuted. Fraud, however, is “common and everywhere,” according to a banking industry consultant interviewed by the New York Times.[1] The Times story focused on Zelle, the five-year-old system owned by Bank of America, Truist (the 2019 combination of BB&T and Sun Trust banks), Capital One, JP Morgan Chase, PNC, U.S. Bank and Wells Fargo. $490 billion changed hands last year via Zelle, compared to $230 billion via Venmo, the next biggest P-to-P operator. 1,200 U.S. banks offer Zelle to their customers including three of the four trillion-dollar institutions that together control 70% of U.S. bank deposits.

Sen. Elizabeth Warren recently made headlines when she released a report showing fraudulent transactions over Zelle growing significantly while banks reimbursed customers for their losses only about 10% of the time.[2] Industry trade groups say Warren’s claims are exaggerated. Data released by several participating banks, including PNC, do show the number and dollar value of fraudulent Zelle transactions are growing in sync with P-to-P service growth. Most banks the Senate Banking Committee surveyed refused to release data on fraudulent transactions affecting their customers.

One aspect of the problem is consumers expect to be protected from P-to-P losses because in other electronic financial transactions (EFT) they always have been protected. Federal law since the 1960s limits consumer losses on credit cards transactions to $50. The amount of the limit has never changed. If it was indexed for inflation, it would be $500 today. Debit cards do not enjoy that legal protection; but banks often reimburse debit card customers who promptly report theft of either their cards or account funds. Like debit card transactions, P-to-P transactions are governed by Regulation E, which was written in the 1970s, long before the Internet enabled EFT on a grand scale.

From a consumer’s point of view, the weakness of Regulation E is it only protects them against “unauthorized” funds transfers. When consumers send money via P-to-P systems in response to fraud artists’ inducements, banks take the position the consumers “authorized” the transactions and so must bear the loss.

Shifting the loss to banks, as Sen. Warren would do, creates moral hazard, giving consumers no incentive to act cautiously and inviting even bigger fraud losses. Banks’ operating costs would swell, leading the industry to shift the costs to customers one way or another.

Until Congress, regulatory agencies and the industry work together to protect P-to-P users against fraud, consumers must exercise self-help. How?

1. Pay Cash or Use a Credit Card. Cash is old school, but it works as well as it ever did. The legal protections governing credit cards make them consumers’ best bet for EFT . Banks promote debt cards and P-to-P systems instead for two reasons. First, consumers using them do not get the “float”—the use of the bank’s money from the transaction date until the next monthly credit card bill is paid, assuming the account is paid in full every billing cycle. Second, credit cards issuance is dominated by the biggest players, VISA, Mastercard and a handful of big banks. Those parties charge small and mid-sized banks licensing and other fees for using the big players’ systems.

2. Create a Dedicated, Low-Balance P-to-P Transaction Account and Use it Sparingly. P-to-P transactions are a convenience, not a necessity. If you cannot resist using P-to-P payments, keep a small amount of money in an account you only use for such payments, e.g., $500 or $1,000. Because banks often impose fees on accounts with low balances, consider placing the P-to-P account at a credit union, where low balance fees are rare.

3. Treat Account Information Like Cash. Do not share any information about any of your accounts, including mobile phone numbers, with parties to P-to-P transactions. There is no good reason to do so. Do not provide information to people who telephone or email you claiming to be from fraud protection units of financial institutions. Often those calls are criminal gambits to know your account information to steal your money.

4. Keep Banking and Securities Accounts Separate. Since Bank One and Merrill Lynch pioneered the CMA account in the 1980s, linked banking and securities accounts have been convenient, useful and commonplace. If you make or accept P-to-P payments, segregate your securities holdings in accounts that have no connection to your bank accounts.

5. Know Your Rights are Limited. P-to-P company Venmo’s standard terms and conditions are 16,000 words of legal and technical writing. That is two hours of concentrated work for a person reading 133 words a minute. Most people do not have knowledge sufficient to understand what the contracts mean. So they click “I agree” and keep moving. You need to recognize the contracts strip you of most legal rights you otherwise have to make claims against the service providers.

6. Monitor Transactions. Banks, for a fee, offer business customers so-called positive-pay and reverse-positive-pay services that match checks written against checks presented for payment as a protection against check fraud. Some banks offer these services to consumers for their checking accounts. At some point, similar services are likely to be offered for P-to-P customers. Until then, users should scrutinize each P-to-P transaction, including considering any aspects of it that seem even the slightest bit unusual.

7. Be Distrustful. For fraud to succeed, the victim must trust the perpetrator. Fraud requires a story line. The story line must be plausible. And it must be acted out convincingly. The victim is seduced to believe the story and act as the perpetrator desires. Healthy skepticism and common sense are defenses. Use them.

8. Build and Sustain Personal Relationships. Most people who work in banking want to help their customers. Today though, the nation’s largest banks are relentlessly depersonalizing customer interactions to increase profits. That is a good reason to patronize community banks. “Look for the helpers,” said Mr. Rogers, the children’s television impresario. In the P-to-P banking world, the wisdom of his advice grows every day.

[1] https://www.nytimes.com/2022/03/06/business/payments-fraud-zelle-banks.html

[2] https://www.warren.senate.gov/oversight/reports/new-report-by-senator-warren-zelle-facilitating-fraud-based-on-internal-data-from-big-banks