With any nascent payment offering, as consumers embrace new digital means of transaction and volumes increase, regulations and guidelines take shape. These rules define the responsibilities of different stakeholders – senders, receivers, financial institutions (FIs), FinTechs and intermediaries.
They also govern what happens when things go wrong, when funds end up, for example, in the wrong account.
Peer-to-peer (P2P) payments have taken off like a proverbial rocket, where transaction volumes are leaping by triple-digit percentage points amid the great digital shift.
And while it’s well known that P2P transactions can be done directly between banks through account-to-account (A2A) transfers, there’s another type of transaction in the mix.
A mediated transfer exists as a type of P2P transfer where funds are sent from a sender to a receiver through a transfer provider. This provider executes the sender’s instructions through two separate transactions: a funding transaction (funded by debiting a consumer’s account with their bank to deliver funds to an operating account controlled by the transfer) and a payment transaction to deliver funds to the recipient.
In an interview with Karen Webster, Rob Hunter, Deputy General Counsel of The Clearing House (TCH), and Stephen Krebs, Vice President and Associate General Counsel, said there was some uncertainty about liability and liability. liability for intermediated transfers – even following the Consumer Financial Protection Bureau’s (CFPB) FAQ on the Electronic Funds Transfer Act, revised late last year.
The problem is the application of Regulation E, the federal regulation that aims to protect parties against fraudulent transactions or erroneous transfers of funds. Under Reg E, the transfer provider and the sender’s bank are “financial institutions”. Simply put, there is little in the CFPB guidelines that cover the intricacies of intermediated transfers and the responsibilities of the two financial institutions.
As Hunter explained, “There are areas of exploration…that would benefit from detailed technical analysis.”
This level of detail is presented in a new whitepaper from TCH, a new resource for banking professionals, titled “Error Resolution for P2P Payment Services: Beyond the CFPB FAQ”.
In terms of mechanics, transfer providers offering intermediated payments operate on two models: prepaid accounts, tiered wallets or a combination thereof, and where debits for funding transactions are made through an automated clearing house (ACH ) or debit cards.
Whether consumers are protected for payments they authorize but are required to make is a hot topic in the industry.
“Banks are responsible for errors and authorizations on things they control…consumers are generally responsible for who they send payments to, because that’s something consumers control,” Hunter said.
This principle applies to P2P payments initiated via banks (in the A2A model) and those initiated via an intermediated transfer model offered by a transfer provider.
When it comes to intermediated transfers, the picture becomes a bit murky and complicated when unauthorized payments or other regulatory errors occur or are alleged by consumers. A consumer can report the error to their bank or transfer provider.
Krebs gave an example where an unauthorized debit is pushed to an account and the instruction itself was not authorized.
“Typically, both institutions would be responsible for this. [if the consumer reports the unauthorized electronic funds transfer (EFT) to the institution],” he said.
Elsewhere, if the P2P provider sends funds to the wrong account, it is a provider error, not the funding transaction that debited the customer’s account. And, as has been widely noted, if consumers are tricked into authorizing payments to someone else, this is currently not defined as error at all under Reg E.
TCH’s white paper discusses several other scenarios involving intermediated transfers, such as where a P2P payment is funded partly by a prepaid balance held with the transfer provider and partly by a funding transaction that debits the consumer’s bank account. .
It also explains the operation of the Reg E provisions that apply when the transfer provider is an EFT service provider that does not hold the consumer’s account and certain conditions are met. Where these provisions of Reg E apply, the account holding bank is under no obligation to investigate or resolve the error, and the transfer provider that offers the EFT service to the consumer is solely responsible for resolving the errors. .
As Krebs said, “Anyone can understand when there’s one financial institution the consumer interacts with – but when you have a model with two financial institutions, there are new issues to solve and think about.”
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