Fraud prevention is becoming both more important and more complex as the industry moves to put more control over payments into the hands of the end consumer. If a scammer hacks a consumer’s phone and uses payment information or accounts to make purchases or move money, there’s no question the consumer should not be on the hook for those losses. But, what if a scammer fools a consumer into voluntarily sending them either that same payment information or money directly? That’s a much less cut-and-dry case, and the gray area it represents could soon cause major headaches for banks as regulators weigh the possibility of making them liable for a much wider set of P2P fraud than they currently are.

The P2P space is particularly susceptible to fraud, and its main weakness is also its primary strength as a payment product: speed. Now, with the possibility of significantly inflated liability on the horizon, it’s more important than ever to find ways to lock out P2P payment fraud. But, in a space where consumers have so much control over how and where they send money and interact with payments technology, stamping out fraud may be easier said than done. 


Why P2P Fraud Poses Such a Huge Problem for Banks

Today, a bank’s responsibility to refund a client in cases of fraud is governed by Regulation E of the Electronic Fund Transfer Act of 1978. Simply put, Regulation E says a refund is due if the transaction was unauthorized, and defines an “unauthorized transaction” as one that wasn’t initiated by the customer. 

The question plaguing the industry today is what happens when a transaction initiated by a consumer later turns out to be fraud – an all too common occurrence with current P2P payments technology. 

Banks think the answer is clear: if the user voluntarily sends money or provides account access to a scammer, the bank has absolutely no control over that, and, regardless of the false pretenses, the transaction is clearly authorized. The opposite side of the argument being advanced by the Consumer Financial Protection Bureau and some lawmakers is that the EFTA was written at a time when no one could’ve foreseen current payments technology, and with payments fraud running rampant, the definition of an unauthorized transaction needs to be amended to ensure consumers aren’t hung out to dry when certain types of fraud occur. 

The stakes are high for banks and, as Rob Hunter, deputy general counsel for The Clearing House, recently told American Banker, increases in bank liability would unquestionably hurt the end consumer. “A service that today is free and has significant benefits to consumers is going to have to be something that the banks will charge for, the speed will have to be slower, and certain folks are not going to be able to use it.” 


What User Security Means for P2P Payments Adoption

In their pre-pandemic survey Expectations and Experiences: Consumer Payments, global payments giant Fiserv found that the strongest predictors of a person’s willingness to engage with P2P payments were perceived security and familiarity. While existing users loved the convenience P2P payments offered, onboarding new users was largely a matter of convincing them it was safe.

Unfortunately, a staggering 15% of P2P users experience some type of fraud according to LendingTree. That isn’t a number that’s likely to instill confidence in the average user. And while the same LendingTree survey found that 84% of consumers have tried a P2P payments service, turning one-time or occasional users into regular users requires the industry to do better. Part of that likely entails clearing up the legal gray area around P2P fraud liability, but new measures to reduce the number of instances of fraud should clearly be a top priority in a space where almost one in seven users currently falls victim to a scam. 


Promoting P2P Fraud Prevention in an Increasingly Risky Space

In some ways, peer-to-peer transfers are like the wild west of the modern payments industry. Unlike traditional electronic payments where merchants have been thoroughly vetted, P2P users are given the ability to send money to effectively anyone, anywhere, with no due diligence involved at any point. That unique paradigm opens the space up to two major problems: first, users are not being educated properly on how the risks of P2P payments differ from debit or credit cards, and second, existing fraud detection tools aren’t good enough for a model with such a heightened risk of fraud. 

Educating Consumers to Take Fraud Prevention Into Their Own Hands

Unquestionably the most important step to reducing P2P fraud is educating customers – especially customers not considered digitally native who may be less clear on the risks involved with P2P payments than the average millennial or Gen Z consumer. 

The key point to drive home is that, at least as of now, making a P2P payment isn’t just an alternative to debit or credit, and sending money to anyone that isn’t a close friend or family member requires significantly heightened vigilance. If a user isn’t extremely familiar with the person they’re sending money to, a P2P payment might not be an appropriate choice. 

Build Better Real-Time Fraud Prevention Layers Into P2P Systems

The primary draws of P2P payments are their convenience and speed. But any payment that occurs carries a higher level of risk than slower methods, since the amount of time available to detect and stop fraud is significantly reduced. Naturally, P2P payments rely on real-time fraud detection using any and all data that can be accessed on both participants in the transaction, including location, transaction history, devices, and more. 

While real-time fraud prevention and detection systems already exist and are in constant employment across all types of electronic payments, the extremely high number of P2P users experiencing fraud makes it clear that current systems aren’t nearly effective enough. Better real-time fraud prevention systems need to be designed, but until they’re available, P2P payments companies should also consider tightening their current security rules to increase the number of transactions that are blocked, the number of times step-up authentication is triggered, and, most importantly, the number of times users are given pause to think before continuing with a transaction. 

Consumer demand for faster, more frictionless payments isn’t going to change any time soon, meaning peer-to-peer payments are here to stay. But, while the future of P2P payments and what fraud will mean for banks is still up in the air, it’s clear that the status quo just won’t cut it if widescale consumer adoption is the goal. So, the question today isn’t really if consumers will gain more protection from P2P payment fraud as the space continues to grow, but how.



IRIS CRM is the payments industry’s premier customer resource management platform. It offers ISOs and PayFacs a complete suite of tools to centralize and streamline merchant acquisition, residuals management, reporting, merchant service and support, and much more. It also includes Dispute Responder, an advanced fraud prevention tool designed to help merchants and ISOs lose less money to friendly fraud and chargeback abuse. 


To find out more about how the platform can save your ISO or PayFac countless hours while maximizing portfolio growth, schedule a free guided demonstration of IRIS CRM today.