As scams become more complex and losses become greater, the question around who bears the financial burden — consumers or financial institutions — takes on greater importance for regulatory bodies, financial institutions, and individuals
In the world of high-profile financial scams, the responsibility is typically placed on the consumer as they are the ones initiating payment. As victims who willingly sent funds, albeit under false pretenses, in an authorized push payment (APP) transaction, consumers may face financial loss as banks may claim they’re not responsible.
Financial institutions are financially responsible for fraud, such as unauthorized transactions or identity theft, and they must have robust security measures in place to detect and prevent such fraud. If a bank fails to safeguard against such activities, it may be held liable for the losses. However, banks have historically refused to pay for certain kinds of fraud, especially in cases in which consumers authorized payments, even if those consumers were deceived.
For instance, the United States Senate’s Permanent Subcommittee on Investigations, a part of the Senate Committee on Homeland Security and Governmental Affairs, has been examining fraud- and scam-related cases that have been taking place within the Zelle network. Zelle — operated by Early Warning Services, is owned by seven of the largest US banks including JPMorgan Chase, Bank of America, and Wells Fargo — was the subject of a subcommittee hearing in July about the hundreds of millions of dollars lost to fraud at Zelle and the organization’s previous resistance to reimbursing victims. Several of those giving testimony included Cameron Fowler, CEO of Early Warning Services, who stated the company has warned customers about scams; and several executives from some of the owner banks who asserted they were collaborating with law enforcement to combat scams, that Zelle had taken steps to provide safeguards against fraud, and that owners could have better considered unintended consequences in the process.
Banks have historically refused to pay for certain kinds of fraud, especially in cases in which consumers authorized payments, even if those consumers were deceived.
These banks aren’t alone — most financial institutions claim the responsibility for fraud and financial losses falls on the consumer because the transfers were conducted voluntarily and that there is a risk of compensating for first-party fraud. In 2021 alone, Zelle users lost approximately $440 million to various types of fraud. To combat this, Zelle has implemented new tools to flag risky transfers, which has reduced the number of fraud cases on the platform.
However, this news may come too late to some consumers who authorized fraudulent payments or those who ignore the red flags. Despite the implementation of systems and tools to flag irregular transfer activity, customers may still voluntarily transfer money even when warned by a bank representative of potential fraud. Consumers are expected to exercise due diligence and may be liable for negligence unless considered vulnerable individuals.
Working together to combat financial fraud
Customers need to understand that they are their own accounts’ first line of defense. While it is the bank’s responsibility to protect assets, it is also important for customers to protect themselves.
Addressing scam-induced fraud losses requires a cooperative effort between consumers, financial institutions and regulators. For example, consumers need to stay informed about the latest scam techniques and recognize potential fraud. This involves understanding common red flags, such as unsolicited requests for personal information, urgent demands for payment, or communication from unfamiliar sources.
Consumers also should exercise caution when conducting financial transactions. This includes verifying the authenticity of requests for payments or information, using secure and verified channels for transactions, and regularly monitoring bank statements for any unauthorized activities. By being attentive and cautious, consumers can reduce their risk of falling victim to scams.
Financial institutions should develop and implement supportive policies that assist and reimburse fraud victims… including offering clear guidelines on the steps consumers should take if they fall victim to fraud.
On the financial institutions’ side, they must continuously invest in advanced technologies to proactively detect and prevent fraudulent activities. Financial institutions also should implement robust security measures, such as multi-factor authentication, encryption, and secure access controls to better help protect consumer accounts and sensitive information from unauthorized access and fraud.
Finally, financial institutions should develop and implement supportive policies that assist and reimburse fraud victims. This includes offering clear guidelines on the steps consumers should take if they fall victim to fraud and ensuring a swift and fair resolution process.
Of course, government banking regulators play a role as well. By clearly defining the responsibilities of consumers and financial institutions, regulators can offer guidance to help delineate the boundaries of liability and ensure that both parties understand their roles in preventing and addressing fraud. Regulatory bodies also can monitor compliance with established standards and take enforcement actions against institutions that fail to meet their obligations. This helps maintain trust in the financial system and ensures that institutions are held accountable for their part in fraud prevention.
Key Elements of the UK’s Approach
One financial regulator has already begun to address this situation. The United Kingdom’s Payment Services Regulator (PSR) has implemented a comprehensive reimbursement policy aimed at protecting consumers and ensuring accountability among financial institutions. By examining the UK’s approach, the US can adopt and adapt effective strategies to mitigate APP fraud and enhance consumer protection.
As part of its solution, the PSR established mandatory reimbursement rules that require banks to reimburse victims of APP fraud. This policy ensures that consumers are not left to bear the financial burden of scams and that banks are held accountable for facilitating secure transactions.
The UK’s policy also outlines specific responsibilities for consumers to help prevent fraud. These include following warnings from banks, reporting fraud promptly, sharing necessary information, and allowing banks to report fraud to the police. And special provisions are made for vulnerable customers, exempting them from certain standards and ensuring they do not have to pay claim excesses if their vulnerability contributed to the fraud. This ensures fair treatment and protection for those who may be more susceptible to scams.
Further, the UK’s approach includes robust monitoring and compliance measures, with Pay.UK overseeing banks’ adherence to reimbursement rules and reporting findings to the PSR, ensuring transparency and accountability in the financial system.
Conclusion
The rise of AI-enabled scams presents challenges for both consumers and financial institutions, especially around APP fraud. While financial institutions must continuously invest in advanced technologies and implement robust security measures to detect and prevent fraud, consumers must also exercise caution and due diligence in their financial transactions. Regulatory bodies also play a crucial role in defining responsibilities and enforcing accountability to protect consumers and maintain trust in the financial system.
A collaborative effort between consumers, financial institutions, and regulators is essential to address scam-induced fraud losses and ensure a secure financial environment for all.
