FUMBLE! Zelle's Fraud Fix Pushes Potential Partners Away

Plus: Will a holiday spending loan turn to coal in the new year?

Dec 17, 2022

Even as bank-to-bank payment system Zelle faces competition from newer peer-to-peer payment systems, the company is struggling to develop a fraud response that will allow it to expand its customer base.

Frankly, Zelle needs to assure customers that they won’t be liable for fraud while also protecting banks from the risks of fraudulent transactions.

News reports have highlighted the lack of fraud protections in Zelle, and Congress has been taking notice.

Now, American Banker reports that Zelle is rolling out a fraud protection solution — but its one that leaves banks on the hook for cash.

While that’s a risk big banks may be willing to take in order to keep their customers, community banks may struggle to absorb that risk.

As AB notes:

Reports that Zelle is in talks with banks to standardize refund practices for certain types of fraud come after a handful of high-profile class actions were filed earlier this year involving consumers who lost money in Zelle scams, along with the possibility that regulators could take action if the banking industry doesn’t solve the problem.
But thousands of smaller banks still on the fence about adopting Zelle are likely to be even more turned off now by the prospect of reimbursing consumers for potentially steep losses from user-initiated scams.

Two Key Takeaways

Use caution when using Zelle — the fraud protection is not yet where it needs to be.
Even when Zelle does deploy fraud protection, it may mean the payment service is NOT available at smaller banks or community banks.

There are other peer-to-peer payment solutions that do offer a better level of fraud protection. While these may lack the convenience of Zelle — which is easy to use in a banking app — they do provide somewhat better risk reduction measures.

It’s also noteworthy that a new system — FedNow — developed by the Federal Reserve may be coming online soon. It’s not yet clear what protections this system will have against fraud.

eight assorted-color Christmas bauble lot — Photo by Sincerely Media on Unsplash

Holiday Spending Brings Joy to the Creditors, Leaves Coal Waiting for the New Year

A recently released survey shows that roughly half of Americans are taking on new short-term debt this holiday season in order to finance gift giving.

The survey, by DebtHammer, reported:

About 50% of shoppers are planning to take on new short-term debt this year during the Christmas season to cover their extra costs and getting through the season is taking a toll on emotional health.

Spending is again expected to hit new highs, meaning shoppers will be taking on billions in short-term debt.

DebtHammer’s survey also notes that Buy Now, Pay Later is a popular option:

13% plan to use “Buy Now Pay Later” plans, which require paying an item in four (or sometimes more) installments. Another 8% are planning to use payday loans or title loans, and 7% will use personal loans.

While getting one Buy Now, Pay Later loan can be a way to ease holiday spending stress, consumers often find problems when they take on multiple short-term loans.

Additionally, some consumers will use a cash advance app like Dave.

Borrowers should certainly beware of the friendly cartoon bear that is Dave’s mascot.

One story from the L.A. Times takes a deep dive into the Dave app, explaining just how bad the fees associated with these short-term cash advances can be.

Here’s how the Times broke down the fees associated with a loan from Dave:

Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.

With interest rates from 122% to 547%, it’s no wonder holiday debt now is likely to turn into a very stressful start to 2023.