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P2P Payment Transfers: Regulation E Liability

As the capability to offer fast and convenient money transfers through online banking and 3rd party cash apps becomes a necessity to satisfy consumer behaviors, compliance challenges posed by digital banking are certainly here to stay. Join us as we discuss Regulation E liability considerations in connection with peer-to-peer payment transfer systems.

Matt Goble
Blog,
Matt Goble – Senior Compliance Advisor

We’ve all been there, out to dinner with friends when the check arrives. Not long ago, this would call for a collective search for wallets or purses to divvy up the bill between the group with either cash, card, or a check. Now, this typically entails a collective reach for phones as mobile peer-to-peer payment apps are fired up and used to split the bill electronically by instantly and conveniently transferring money to the friend that covered the bill. For many, this convenience is a blessing – including for scammers.

With peer-to-peer payment apps like Apple Pay, Zelle, Venmo, and Cash App along with those offered by financial institutions through mobile banking becoming all the rage in today’s digital banking environment, it’s up to you to protect yourself as well as educate your members and customers about the risks involved as fraud cases are also on the rise. So, who is liable for unauthorized electronic fund transfers (EFTs) using peer-to-peer payment apps from their mobile phone or smart devices? The answer is: it depends.

In general, if a customer or member files a dispute for a peer-to-peer payment app transaction claiming the transaction was unauthorized or fraudulent, then the institution must accept it. You would need to follow the error resolution procedures within section 1005.11 of Regulation E. Keep in mind that Regulation E defines an unauthorized transaction as, “an electronic fund transfer from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit.” 

The Electronic Funds Transaction Act (EFTA) and Regulation E establish rules for electronic funds transfers (EFTs) involving consumers and governs transfers by mobile phone apps like Zelle or Venmo. The ground rules, liabilities, and rights of consumers who use EFTs and those who provide EFT services, including financial institutions, are set out in the EFTA and its implementing rule, Regulation E. An EFT is defined as any transaction “initiated through an electronic terminal, telephone, computer (including online banking), or magnetic tape that instructs a financial institution either to credit or debit a consumer’s account.”

If the dispute is for any other reason (other than unauthorized or fraudulent), you do not have to honor the dispute for a cash app transaction under Regulation E and advise your customer to contact the vendor.   The Regulation E responsibility would fall to the third party peer-to-peer payment app such as PayPal or Venmo as they would be considered a service provider that does not hold the consumer’s account as prescribed under 1005.14(b) and commentary of Regulation E. If the peer-to-peer application is acting as an electronic fund transfer service provider, then it’s still a Regulation E matter but one that is between the payment application and the user. The financial institution’s only responsibility at that point is to provide periodic statements so the customer and provider can identify transactions that may be disputed.

What about provisional credits? It is permissible for the financial institution to not provide a provisional credit until you gain further information about the transaction or hear from the merchant? The answer it yes, it is permissible to not provide your consumer customer or member with a provisional credit but only under two circumstances.

First, if your institution requires written confirmation of the customer’s claim and the customer does not provide it within 10 business days, then you’re not required to provide the provisional credit.

Secondly, if the alleged error involves an account that is subject to Regulation T, then you are not required to provide the provisional credit. Keep in mind, you have 10 days to investigate to determine if an error occurred or not without providing the provisional credit. This is addressed within section 1005.11(c) of Regulation E.

As the capability to offer fast and convenient money transfers through online banking and third-party cash apps becomes a necessity to satisfy consumer behaviors, the risks and compliance challenges posed by digital banking are certainly here to stay. For additional information on Regulation E considerations in connection with peer-to-peer payment applications and other challenges presented by unauthorized transactions, refer to the FAQs recently posted by the CFPB for additional guidance. You can find the FAQs using the following link – Electronic Fund Transfers FAQs

As always, the Temenos Compliance Advisory team is here to support your compliance management program regardless of the nature or size of your institution. We’re here to help!

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Matt Goble
Blog,
Matt Goble – Senior Compliance Advisor