Attacking Banks For P2P Scams Is A Non Sequitur In Search Of A Fix

As wealth grows, so grow efforts to separate those who possess wealth from it. Reports in recent years indicate that, among other things, thieves have gone so far as to steal personal letters from mailboxes, only to “wash” them with ink-removing chemicals followed by a rewrite of the check to a new payee for a larger amount. That’s the bad news.

The good news is that the profit-motivated continue to develop ways that improve customer service all the while deterring acts like the one described above. Banking and financial services loom large here.

Innovators inside and outside of banking have developed all manner of services that allow individuals to make payments and transfer cash without the use of checks, or the U.S. Postal Service. Readers are doubtless familiar with Zelle, Paypal, Venmo, Square, and numerous other businesses intent on streamlining the speed of cash transfers and payments, and in ways that work around those with intent to steal. Problem solved? Yes and no.

While electronic payments and transfers are quite a bit safer than they used to be, there remains the forever problem of individuals devising ways to separate those with wealth from it. Unfortunately, federal legislators are trying to put banks on the hook for this forever problem.

Consider legislative efforts on the national level to update the Electronic Funds Transfer Act. The update would require banks that utilize services like Zelle to reimburse users victimized by scams while using it.

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For background, criminals have taken their scams to Zelle and other peer-to-peer (P2P) payment services whereby they dupe users into transferring cash to them. It’s an unfortunate development to say the least, but also one that banks are working actively to mitigate. Which is why the proposed update to the Electronic Funds Transfer Act is so dispiriting.

Nowadays, and before anyone using the various P2P services can actually transfer funds, they’re presented with all manner of “prompts.” These prompts exist to make users think hard before sending money. The prompts save users from acts of carelessness, excessive trust, confusion, or all three. Importantly, banks didn’t require legislation to come up with ways to protect customers from scams. What’s good for the customer is good for the business serving the customer. When it comes to protecting customers, and customer funds in particular, legislation is superfluous.

The problem is that the proposed update to the Electronic Funds Transfer Act would run roughshod over bank efforts to make use of Zelle as safe as possible for the user. Think about it. If by legislative decree users of P2P platforms suddenly enjoy indemnity from their own carelessness, trusting ways or confusion, why should they bother to contemplate those weaknesses ahead of clicking send?

Furthermore, if some other is always going to be the entity expected to pay for errant transfers of money, won’t the incentive for electronic scams grow? It speaks to the serious danger that comes with the Act’s update: it won’t make banking safer, rather it will penalize banks for costly efforts gone to in order to make banking safer.

Ultimately, the call for an update of the Electronic Funds Transfer Act amounts to a big non sequitur in search of a fix. That it would imperil, not protect individual wealth, indicates that it’s worse than a non sequitur, as is so often the case with legislation.