Data Dive: Expanding Efforts — Good, Bad And Unpredictable

Variety, we are told, is the spice of life — and it is important to always try new things. Sometimes this is very good advice, and it has forced a number of people out of a rut. But, of course, “a change will do you good” has also been the start of many ill-advised haircuts, as not all changes are created equal.

This week was a big one for trying new things in the payments and commerce sector — some new and exciting, others experimental and their validity still up in the air, and others that are likely to be bad news for consumers. So, what was good change, bad change and a toss-up?

The Good: Zelle Eyes SMBs

The peer-to-peer (P2P) payments app, Zelle, is contemplating an expansion beyond enabling payments between family and friends. According to Bloomberg, citing people familiar with the situation, Zelle is in the process of enhancing its risk assessment tools in effort to make it safe for people to pay small businesses via the app. There is no set release date for the new functionality, according to reports. The move, when and if it does launch, is seen as another challenge to PayPal-owned Venmo, which already offers SMB payments as a standard feature — and card networks more generally.

Zelle currently allows businesses to disburse payments to consumers, having handled 100 million transactions in the second quarter for a total of $28 billion, noted Bloomberg. However, Zelle doesn’t offer the risk protection it would need to make payments to businesses.

According to projections by eMarketer, Zelle will officially overtake Venmo by size as of this year, growing by 73 percent to 27.4 million users in the U.S. — more than Venmo’s 22.9 million users. eMarketer also projects that P2P payment use will increase 30 percent in 2018, encompassing about 40 percent of U.S. smartphone users, or about 82.5 million people. Overall, eMarketer forecasts that the transaction volume of P2P payments will increase by 37 percent in 2018 to reach just over $167 billion this year.

The Bad: When Experts Predict The “Big Hack”

It would be better for us all if hackers would perhaps try new things — poetry, hiking, whittling … really anything other than robbing others of data or money. That doesn’t seem to be happening. That is not to say, though, that hackers are not trying new things — they are. They’re always thinking about new and exciting ways to attack digital systems.

If the Federal Bureau of Investigation (FBI) is right, a whole other bad idea is about to be unleashed upon our collective bank accounts. According to a newly issued warning to banks, cybercriminals are gearing up to launch a choreographed global scam, known as the “ATM cashout.” The idea is that the bad guys will hack a bank or payment card processor to clone cards, which they can use to withdraw money from ATMs around the globe. Krebs on Security cited a confidential alert that the FBI sent to banks late last week, saying that millions of dollars can be stolen in only a few hours.

“The FBI has obtained unspecified reporting, indicating cybercriminals are planning to conduct a global Automated Teller Machine (ATM) cash-out scheme in the coming days, likely associated with an unknown card issuer breach and commonly referred to as an ‘unlimited operation,’” the letter read, according to the report.

The attack works by using malware to seize control of a bank or card processor — sweeping up customers’ bank card data, then using it to exploit network access and create cards so that funds may be taken from ATMs.

“Historic compromises have included small to medium-[sized] financial institutions [FIs], likely due to less robust implementation of cybersecurity controls, budgets or third-party vendor vulnerabilities. The FBI expects the ubiquity of this activity to continue or possibly increase in the near future,” the FBI said in the alert, according to Krebs.

What’s more, the FBI said the hackers can change bank account balances and security measures to make unlimited amounts of money accessible at the time, so they can quickly steal large amounts of cash.

The FBI recommended several steps to hopefully head off such an attack. Banks were told to implement a “separation of duties or dual authentication procedures for account balance, or withdrawal increases above” a certain amount. The FBI also recommends putting in place application white-listing to block malware from being executed, as well as monitoring, auditing and limiting “administrator and business critical accounts, with the authority to modify the account attributes.”

The Unknown: FIs Take On Bad Credit Borrowers

FinTech firms are going after what is considered the last — and riskiest — financial frontier: the low-credit borrower.

According to data released by Competiscan, LendUp Global and Fair Square Financial are among the FinTech startups going after borrowers with less-than-stellar credit, sending out about 35 million credit card offers in the mail within the first six months of 2018. That is a five-fold increase from the 7 million mailed out during the same time frame a year ago.

For FinTech firms, making loans to subprime borrowers can be a lucrative business — the credit cards typically have interest rates of around 20 percent, which is notably higher than the average credit card interest rate of 14.1 percent. They also have lower costs because subprime-facing products generally do not include costly run reward programs.

Plus, the segment has powerful industry support from players like The Orogen Group, an investment firm headed up by former Citigroup CEO Vikram Pandit. In May, it invested $100 million in Fair Square, which provides cards to borrowers who don’t have the best credit scores.

However, the rewards in the segment are stitched in with its risks — the reason higher interest rates and paltry rewards are common in this segment is because the customers are, statistically speaking, those most likely to default on a credit card. As a result, banks have been slowing the growth in their subprime customer base. Autonomous Research found that subprime credit card balances at seven big banks in the U.S. increased 3 percent during the first six months of this year, down from a 13 percent increase a year ago, while Capital One subprime balances represented 32 percent of its credit card balances in the first half of 2018, down from 36 percent in the first six months of 2017.

FinTech firms are there to fill in the gap — the question will be whether they can do it and stay in business.

What did we learn this week? It’s probably best to keep one’s eyes open these days — for opportunities, for changes in the credit market, or just to make sure one’s bank balance is what it should be.