My advice to banks looking to build in-house dispute management systems this year? Stop trying to solve this on your own. This isn't your core business. Dispute management is our core business, our software will solve this for you.
Payments, Fraud Management, & Consumer Expectations
Quavo Fraud & Disputes co-founders Joe McLean and David Chmielewski met with Growth Marketing Manager Jennifer Marshall to discuss their outlook on financial fraud trends and consumer expectations in 2023, specifically the challenges facing financial institutions to deliver innovative, secure payment solutions regardless of regulatory requirements.
New Fraud, Old Payment Methods
Joe: What we have seen in the market is that check fraud has gone up significantly. Which is crazy, right? Because who’s using checks? Banks stopped paying as much attention to checks because they were dealing with cards and trying to get card fraud under control. I don’t want to say nobody was minding the store, but that’s what happened. Fraudsters figured it out. Kind like Catch Me if You Can. Right? We saw fraudsters pull off large scale check fraud. And it was significant last year.
Fraud is an ever-evolving game between banks and fraudsters seeing what they can tackle next. With regards to these new payment types, fraudsters are certainly looking at RTP and Zelle®, but they’re not ignoring traditional transactions, like ACH. We see a good amount of ACH fraud still out there.
David: On the product side, we want to ensure we are reducing account holder friction as much as possible. For ACH, the process is cumbersome for consumers. We dug deeper into that and poured over the laws, NACHA regs, etc. to develop solutions where issuers don’t need a signature. We’ve got to shorten the timeframes; we’ve got to make it easy for consumers to get through the process.
Joe: What we have seen in the market is that check fraud has gone up significantly. Which is crazy, right? Because who’s using checks? Banks stopped paying as much attention to checks because they were dealing with cards and trying to get card fraud under control. I don’t want to say nobody was minding the store, but that’s what happened. Fraudsters figured it out. Kind like Catch Me if You Can. Right? We saw fraudsters pull off large scale check fraud. And it was significant last year.
Fraud is an ever-evolving game between banks and fraudsters seeing what they can tackle next. With regards to these new payment types, fraudsters are certainly looking at RTP and Zelle®, but they’re not ignoring traditional transactions, like ACH. We see a good amount of ACH fraud still out there.
How do banks cut fraud off at the pass? Even if they don’t and fraud gets through the door, which it’s always going to, how can banks recover? That’s the work we’re doing in the back end and with recovery. Dave and team have some really cool things lined up this year for ACH, specifically on automating more of the process to get that money back from the original bank, as quickly as possible. The risk with these new transaction types and with prepaid is that when the money’s gone, it’s gone. That’s not always true with ACH. The money is still there for a few days and it’s easier to recover it. There’s an opportunity to get that money back by automating the process, which is certainly a place where we come into play.
David: On the product side, we want to ensure we are reducing account holder friction as much as possible. For ACH, the process is cumbersome for consumers. For card transactions, if you’re a victim of fraud, you call your bank up and say, “I don’t recognize these transactions”. Then you’re pretty much done. They take the investigation from there and let you know what happened.
For ACH there are rules about how much time account holders have to report fraud, then they often have to sign things…Who wants to print things out or use DocuSign? A lot of institutions require signatures for ACH claims, but do they actually need one?
We dug deeper into that and poured over the laws, NACHA regs, etc. to develop solutions where issuers don’t need a signature. If we already know who the person is. If we’ve got a recording of them. If we’ve told them that they can only file a claim if they’re a signer on the account, then we’ve figured it out. So that’s an exciting change because as I mentioned, banks are increasing friction on some of these processes. Our goal is to reduce that as much as possible when the transaction already occurred. We’ve got to shorten the timeframes; we’ve got to make it easy for consumers to get through the process.
Determining true fraud versus first party fraud is top of mind for us. Our software houses the data needed for answers to questions like, “Who is the person that’s reporting this? What kind of history do they have? Do we have reason to believe their story?” If a bank stands to lose $10,000, they need to do a little research – they’re required to do that research. What information can we put at their disposal to help them get to the truth of the matter as quickly as possible.
The recession will hit banks on two fronts, they will have to reduce their workforce at the same time they experience a significant rise in first party fraud. Quavo's software solves with data, knowledge, and automation.
Regulation is Coming
Joe: What’s tricky about these newer transaction types is, unlike card where you have Visa and Mastercard who issue mandates as well as determine liability, this is like the Wild West. Who decides who is liable? I don’t know how this plays out, or if the government will step in and sort of mediate that in the way that networks do on the card side. At some point, if there are no rules, consumers will start walking away from some of this technology. Fraud is only going to get worse. People aren’t going to want to use their money and send somebody money for a transaction when there’s no guarantee that they receive whatever goods they’re supposed to get. : What’s tricky about these newer transaction types is, unlike card where you have Visa and Mastercard who issue mandates as well as determine liability, this is like the Wild West. Who decides who is liable?
I don’t know how this plays out, or if the government will step in and sort of mediate that in the way that networks do on the card side. At some point, if there are no rules, consumers will start walking away from some of this technology. Fraud is only going to get worse. People aren’t going to want to use their money and send somebody money for a transaction when there’s no guarantee that they receive whatever goods they’re supposed to get. A lot of this P2P stuff is just that, people shipping money to their buddy for a pizza. If there’s an expectation that these new transaction types are going to grow to be a more useful global tool for retail, there must be rules so consumers feel secure.
It’s the same way I feel about crypto. If there are no rules about who’s liable when things go wrong, people won’t use it. People aren’t okay with just giving their money away without any assurances that they’ll receive whatever goods or service they’re expecting to.
Jenn: Now we’re seeing these P2P platforms playing with crypto…
David: Yeah, let’s double down on the risky transactions, right? I mean, all over the news we saw issues with fraud in the actual crypto exchange. You’re not going to see that in the banking industry, because it’s so heavily regulated, but there’s a pendulum effect. People run away from banks because they don’t want big brother watching them. So they conduct these new transactions, lose a bunch of money, and then they want regulation. You’ll see people asking for regulation. Visa and Mastercard are kind of like this. They’re this thing, this network that like merchants don’t necessarily like because they have to pay them. Banks don’t necessarily like them because they have to pay them. But consumers kind of like Visa and Mastercard because of the system that protects them.
The value of a network is far less interesting these days. There’s computers and networks everywhere. I’m surrounded by 700 networks right now. But the other value Visa and Mastercard offered was the security of the transaction and dispute resolution afterwards. For new payment types, what happens after the transaction, if something went wrong? Visa and Mastercard have a very clear answer for that. They even show up with money. They show up with money that comes from the merchant and the bank, neither of whom are super thrilled about it, but the process is in place and there’s a way to recover that money to where it ultimately should go.
Is there an opportunity or mechanism like the Visa and Mastercard network, but for Venmo, PayPal, Zelle, RTP, and all that? Like NACHA for ACH, which does a serviceable job. But yes, consumers will demand to be protected or they won’t use it.
Jenn: These P2P platforms are also offering “debit” cards…
Joe: It’s funny…I remember being at Money 2020 in 2021 and all the crypto folks were saying, “We’re not regulated and we don’t have to worry about Reg E and Reg Z.” But when I was talking to the CEO of a crypto company looking to offer debit cards using prepaid cards, I told him, “Now it’s a card and you’re subject to Reg E.” And he was like, “But I’m a crypto company.” The fact is, regulators don’t care if it started off as crypto if it ends with issuing a card.
We’re right back where we started. With card rails. David and I have joked about this before. All this money movement stuff…I get it, you want to give somebody money quickly, but that’s all that it’s ever going to be good for. They’re never going to solve this problem of large retail purchasing because it’s not protected.
The End of a Payments Love Affair?
Jenn: Do you think the rush to innovate payments over the past, say, five years is partially responsible for the failure of so many fintechs recently? Even if indirectly?
Joe: For typical card transactions, you now have your phone or your watch. You can go anywhere, or you can go online, but within seconds you can exchange money for goods, with a level of consumer protection assured. How do you get better than that? What’s better than being able to buy anything in the world from anywhere in the world in like sub one second. At some point we may have to accept that payment technology is kind of as good as it gets.
David: Telepathy is the next thing, I guess.
Joe: Right. That’s where like I struggle with all these new transaction types. Outside of just sending money to another human (instantly). It’s just a pure money exchange. I struggle to see where this goes beyond here…Someone can Venmo me money and I can go spend it with a Venmo card and that is a useful tool. But for large scale retail, they’re still going to use the card on, say, Mastercard rails. Now if somebody could come along and make that process, that network process cheaper…
Maybe that’s the next evolution? I mean, the banks and merchants pay price for Visa and Mastercard, especially in the dispute world where banks and merchants are paying for chargebacks, and not an insignificant amount of money…Maybe somebody comes along as a less expensive alternative to Visa and Mastercard for these newer transaction types. Several have tried, all have failed…or been purchased.
