So-Called Friendly Fraud on P2P Payment Systems Has Caught the Attention of the CFPB

The issue of consumer losses to fraud on peer-to-peer payment apps is about to get hotter as the Consumer Financial Protection Bureau is reportedly preparing a probe of the matter. The bureau’s action will likely include new requirements for banks to reimburse consumers victimized in cases where they sent cash after being tricked by fraudsters, The Wall Street Journal reported Wednesday, quoting people familiar with the matter.

An informed source contacted by Digital Transactions News indicates the agency may issue within the next two weeks a so-called advisory opinion requiring banks to launch investigations of alleged P2P fraud cases. It could also urge expansion of an existing regulation to include cases where a transfer was authorized by a scammed user.

Responding to a query from Digital Transactions News, the CFPB issued this statement: “Reports and consumer complaints of payments scams have risen sharply, and financial fraud can be devastating for victims. The CFPB is working to prevent further harm, including by ensuring that financial institutions are living up to their investigation and error-resolution obligations.”

The CFPB’s involvement follows concerns expressed last week by a group of eight Democratic U.S. Senators who sent letters to the seven major financial institutions that own Early Warning Services LLC, the operator of the Zelle P2P network. The letters express concern about fraud losses and demand information about how the banks are handling fraud cases. The letters require a response by Aug. 8.

“Protecting consumers is one of our top priorities. As a network, we constantly adapt consumer protection measures to address the dynamic and evolving nature of deceptive activities fraudsters employ,” a spokesperson for Early Warning told Digital Transactions News on Wednesday in response to questions regarding news of a CFPB probe into P2P fraud.

The CFPB’s guidance is still under consideration and its particulars could change, the WSJ reported. But its requirements could extend beyond bank-owned systems like Zelle and apply to popular nonbank services such as Venmo, owned by PayPal Holdings Inc. PayPal did not immediately respond to questions from Digital Transactions News.

The central concern expressed by the U.S. Senators in their letter has to do with cases in which a fraudster tricks a consumer into sending money to an account the fraudster controls. Such scams, often referred to as “friendly fraud,” are on the rise along with the increasing popularity of P2P transfers. P2P payments usage saw soaring popularity in particular after the onset of the pandemic.

Banks are required by a rule called Regulation E in the Electronic Funds Transfer Act to reimburse consumers for so-called unauthorized funds movement, but the regulation doesn’t contemplate cases where consumers authorize the transfers as a result of fraudulent inducement.

PayPal reported earlier that its P2P volume in the first quarter rose 6% year-over-year to $89 billion, accounting for 28% of its total payment volume. The company includes P2P activity from Venmo but also PayPal and Xoom. Venmo volume alone grew 12%, to $58 billion. The service’s three-year compound annual growth rate was 40%.

Zelle reported in February its volume totaled $490 billion last year, a 59% increase over 2020, on 1.8 billion transactions, up 49%.