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How Cash Meant for Friends Can Fall Into Crooks' Hands

Consumer advocates urge care when using an app to send money

spinner image Closeup hands holding mobile phone with application for send and receive money. Man and woman holding smartphone and making payment transaction. Smart phone screen displaying payment sent and money received message after transaction.
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Law professor Adam J. Levitin often pays with cash, reasoning that parting with greenbacks makes him a more prudent spender.

But for his students at Georgetown Law in Washington, D.C., cash continues to lose cachet.

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“Almost none of them carry cash,” says Levitin, 42, who teaches courses on the federal regulation of financial institutions and consumer finance.

Though not as often as his students, the professor sometimes turns to a mobile app on a smartphone to make a so-called peer-to-peer (P2P) payment electronically. He’s used a digital money-transfer service, Venmo, to split a bar tab with friends, or, if he forgets to bring a check, pay for his kids’ music lessons.

While Venmo and its competitors are popular, especially among young adults, Levitin and other experts urge consumers of all ages to pay attention to detail when they embrace new payment technologies. Such services are marketed as fast and easy — even fun — but the transactions carry fewer consumer protections than those done with credit and debit cards. And when cybercrooks prowl the platforms, the ease and speed of the new services can hasten misdeeds, experts say.

Launched in 2009, Venmo is a mash-up of “ vendere ” (Latin for to “sell”) and “mobile.” Based in New York, the firm in 2018 processed $62 billion in payments, a 79 percent increase from a year earlier, according to Venmo spokeswoman Juliet Niczewicz.

spinner image The Paypal Holdings Inc. Venmo application is displayed on an Apple Iphone
Fast apps can trigger faster fraud, experts say.
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Venmo, owned by PayPal Holdings Inc. in San Jose, Calif., works this way: Users download the Venmo app and create an account tied to a bank account or debit or credit card. They send money or receive funds from other users, and if there’s a balance in a Venmo account, it can be transferred to a bank account.

But unlike money in the bank, funds parked in a Venmo account are not insured by the Federal Deposit Insurance Corporation and do not earn the user interest. Venmo invests account balances and keeps all interest and earnings, according to the company’s 37-page user agreement. The firm charges for some services, such as instantly transferring money from a Venmo account to a debit card.

Problem scenarios

Levitin, the professor, says one set of problems arise when you use Venmo or another service and transmit money to the wrong person. Funds are transmitted to a named person, handle (@username), phone number or email. Since he and a sister have similar emails, a few misplaced keystrokes means “my sister gets the money and says, ‘Thank you very much.’ And good luck getting it back from her,” Levitin says.

Another headache: You try to buy concert tickets online from a stranger, transfer the money, and, Levitin says, “they never ship the item and they don’t take your calls. They disappear. They just abscond.”

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On the flip side, you as a seller who ships an item can get stiffed.

Venmo’s user agreement bars people with personal accounts from doing business with other personal account holders to buy or sell goods. That’s not the case when people buy things from businesses authorized to use Venmo.

But Levitin, without singling out any company, believes P2P companies are aware regular people are selling event tickets and other goods using their personal accounts. The firms, he says, “are playing a bit of a game. They know they’re being used for (person-to-person) commercial purchases, but more usage helps their bottom line.”

Who’s using P2P?

Young adults were the most likely — and boomers the least — to use person-to-person payments. Only 18 percent of people 55 and older reported using a service such as Venmo or Cash App in the last 30 days, according to Al Pascual of Javelin Strategy & Research in Pleasanton, Calif.

In research last year, top P2P usage was among people ages 25 to 34 (59 percent said they used one of the apps in the prior month). Next were people ages 18 to 24 (48 percent), ages 35 to 44 (37 percent) and 45 to 54 (21 percent).

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With respect to all online payment services, the Federal Trade Commission tallied 7,826 consumer complaints in 2018, nearly twice the number from a year earlier. Separately, the federal Consumer Financial Protection Bureau has a searchable database with redacted complaints about P2P services on its web site. The bureau did not respond to requests to comment for this story.

Venmo declined to say how common fraud is on its platform, but spokeswoman Niczewicz calls the safety of users and their personal information a “top priority.”

Complaints to the CFPB about Venmo included someone who sent $450 to a daughter’s account, which later was frozen so the funds couldn’t be accessed; hundreds of dollars in Venmo charges appearing on a credit card held by a person who had never heard of the company; and an account holder who lost $600 worth of concert passes to a scammer.

Asked about these cases, spokeswoman Niczewicz declined to discuss “specific accounts” but says the service is designed for payments between people who trust one another.

A Venmo competitor, Zelle, takes its name from the “quick and elegant” gazelle, says spokeswoman Meghan Fintland . Zelle launched a mobile banking app in 2017 and processed transactions totaling $119 billion last year, Fintland says. The figure represents about a 59 percent jump from the previous year.

The network is owned by Early Warning Services LLC in Scottsdale, Ariz., which in turn is owned by JPMorgan Chase, Bank of America, Wells Fargo and other big banks.

Zelle, too, has been subject to complaints about frauds and scams, but Fintland declined to say how many such cases were reported last year. She says the network has had “very few incidences” of fraud “amongst the millions of transactions” processed daily.

Zelle tells users to send money only to people they trust and advises against using its P2P service purchases on online bidding or sales sites. It helps participating financial institutions investigate unauthorized transactions and removes emails and mobile phone numbers from the network if an account has been compromised, Fintland says.

New report flags potential problems

At the nonprofit National Consumer Law Center, a consumer advocacy group, attorney Lauren Saunders in a recent report highlighted concerns and potential problems involving fintech (financial technology) providers, including:

  • Fraud and identity theft. “Faster account applications or faster payments can mean faster fraud and identity theft,” she wrote. “Slick mobile apps can gloss over how a product actually works.”
  • No humans, no records and lack of customer service when things go wrong. “Fintech products invariably rely on mobile and internet interfaces and electronic communications,” Saunders wrote. “But if something goes wrong or you need a person to explain something, customer service may be difficult or impossible to reach. Interactions that take place entirely on a mobile device have no paper record of the agreement or paper statements to call attention to fees and charges.”

So before you whip out your phone and send money — pronto — consider some tips from the FTC:

  • If you transfer money from your P2P account balance to a bank account, confirm with the bank that the deposit went through, since a transfer could take a few days, or longer if it’s flagged for additional review.
  • If you’re selling goods online, transfer a P2P payment to a bank account and ensure it’s in that account before shipping the item.
  • Check your bank account settings to enable multi-factor identification requiring a PIN or using fingerprint recognition.
  • Since some payment apps share data on social media, adjust account settings based on what you’re comfortable telling the world.

Saunders endorses tougher regulations for P2P. “We are trying to raise the alarm about the need for stronger protections in faster-payment systems,” she says, “and tell lawmakers that companies that set up systems that enable scammers to receive funds should be responsible, and need to protect the consumer.” 

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spinner image cartoon of a woman holding a megaphone

Have you seen this scam?

  • Call the AARP Fraud Watch Network Helpline at 877-908-3360 or report it with the AARP Scam Tracking Map.  
  • Get Watchdog Alerts for tips on avoiding such scams.