Real-Time Payments Vulnerable to Chargebacks and Fraud
For the longest time, going cashless was easy for all but the simplest transactions. Every place of business was ready and willing to scan a payment card to take your money, but if you owed a friend $7 for coffee, you'd have to find an ATM (and hope they had change for a twenty) or find your checkbook. Who didn't love carrying a $7 check around in their purse or wallet for weeks, never quite remembering to deposit it?
Then along came services like Venmo that allowed individuals to make cheap, instantaneous electronic payments, person to person. With a few taps, you could transfer money from your bank account to theirs. While third-party services may have led the way in gaining widespread consumer acceptance, banks and credit unions soon started offering their own instant payment services for their customers to use. According to data compiled by the financial services firm FIS, the number of real time payment services has quadrupled in the last five years, growing by 35% in the past year alone.
Instant payment services have revolutionized going out with friends and splitting the tab, and of course its implications for commercial payments and other transactions are significant as well. Instant payment apps give the payer control over the timing, amount, and recipient of their payments, a reversal of the usual commercial scenario where the payee takes the card, provides the transaction information, and initiates the transfer of funds.
Shifting this locus of control, however, does not necessarily mean that real time payment systems will reduce the evergreen problem of disputes and chargebacks. On the contrary, the lack of a consistent and standardized system for dealing with disputes, chargebacks, and transaction fraud in the real time payment space has the potential to seriously damage consumer and merchant confidence in this emerging technology.
Real Time Disputes
Consumers love real time payment services—especially when it doesn't cost them anything. There has been significant market pressure on banks and credit unions to offer this service to their customers, as they can provide free transfers between members and undercut the costs incurred by third-party providers. The result has been a huge number of real time payment services rushed to market without any real regulations or infrastructure in place to deal with disputes or fraudulent transactions.
By their nature, real time payment systems have no centralized authority or two disputing parties to appeal to—there's no card network setting the rules that all parties must agree to follow. Banks and providers can set their own rules, but they have no authority to compel the other party's financial institution to cooperate in the event of a dispute.
Some platforms do have mechanisms in place for handling disputes, but they're doing so on their own volition, with no guarantee of fair or consistent standards. Customers love the convenience of real time payments, but they love the convenience of fast, low-barrier chargebacks, too, and it won't take long at all for consumer goodwill toward a real time payment platform to curdle after an unsatisfactory or frustrating experience with a problematic transaction.
For example, let's say you find somebody selling concert tickets on social media and pay them $50 with your credit union's instant payment service. Later, at the venue, the box office tells you the tickets are fake. This would be a relatively simple chargeback scenario if you'd paid with a credit card, but in this situation, there's nothing to compel the fraudster's financial institution to hear your complaint or do anything about it.
In The Fed We Trust?
There's going to be a new player making a big splash in the real time payments scene soon: the Federal Reserve Board. They're introducing a new 24/7 payment and settlement service, FedNow, to support real time payment systems. The idea is to provide round the clock support and service for greater liquidity and faster payment settlements.
For consumers, the backing of the Federal Reserve Board should provide greater confidence in the safety and stability of real time payment systems, but it does not automatically follow that fair and comprehensive dispute resolution mechanisms will be included. Without a robust system for handling disputes, fraud, and chargebacks in an equitable way, the Feds could be setting themselves up for a considerable consumer backlash.
Even if consumers, banks, and the Fed all turn a blind eye to vulnerabilities in the FedNow system and its affiliates, one group assuredly will not: fraudsters. They will stress-test every potential flaw in the system as soon as it goes live, and consumers must have a way to submit questionable transactions to an objective review process. Without this, we can expect banks to look out for their own customers first, leaving us with a system in which convenience comes at the expense of fairness and consistency. This kind of system won't last long, and the ones who will profit the most from it are the fraudsters.
As a merchant, it might seem nice to imagine a payment scheme in which chargebacks don't exist, but it's important for merchants to have their voices heard in any discussions about how the Fed or private financial institutions will address the question of disputes and chargebacks in the real time payments sphere. The more consumers get comfortable using instant payment services, the more pressure there will be on merchants to accept these forms of payment.
It's usually advisable to give your customers whatever payment options will make them more willing to buy from you, but you should always tread lightly when it comes to new and untested technologies. Take it as a given that the fraudsters already know where the technological and regulatory vulnerabilities are.