PYMNTS Intelligence: How Fraud Damages P2P Payment Organizations

Fraud is a constant worry for companies of all types, driven by the sheer variety of different fraud methods that bad actors deploy. Man-in-the-middle attacks, social engineering, account takeovers and botnets are just some of the thousands of different types of fraud that keep CEOs up at night — and the bad actors’ techniques are only growing more sophisticated by the day.

The damage fraud can cause is not limited to companies’ finances and data; it can also impact their reputations. This month, PYMNTS examines the economic and reputational harms fraud can wreak on peer-to-peer (P2P) applications and how technological solutions can keep fraud to a minimum.

P2P Fraud Costs More Than Stolen Funds

A report filed by United States Sen. Elizabeth Warren of Massachusetts — based on data from four different banks partnered with P2P payment app Zelle — found that losses to P2P payment fraud hit $255 million in 2022. These funds were lost due to more than 192,000 cases of scams and represented a massive increase from the $90 million in fraud reported in 2020.

Banks reimbursed customers in just 3,500 of these payment fraud cases, the report further found, and only 47% of the funds were returned even when they were withdrawn without customer authorization. This not only forced millions of customers to eat their losses, it also could cost the banks involved much more in the long run than if they had simply compensated the victims.

This is because customers are far less likely to do business with an organization with a reputation for fraud. Studies have found that every dollar lost to fraud ultimately costs companies $3.75, thanks in part to customers switching to competitors after being victimized by fraud on their platforms. If victims then warn their peers against using the entities involved, the potential opportunity cost in lost business is all but incalculable.

Regulation and Technology Critical to Limiting P2P Fraud’s Impact

The U.S. is exploring several options to tackle this fraud and protect consumers. Lawmakers are urging the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency to examine the reimbursement and anti-money laundering policies of P2P networks and impose penalties on companies that do not adequately protect consumers.

Individual businesses need to take the initiative to protect their customers and avoid potential regulatory penalties. Many payment processors have already improved their fraud prevention capabilities, with 50% increasing their use of real-time fraud decisioning and alerts, 40% investing in artificial intelligence and machine learning, and 30% improving their customer authentication methods. While fraud will likely never be eliminated, steps such as these go a long way toward protecting customers.