Instant Payments: Are They Too Fast?

Instant Payments: Are They Too Fast?

May 16, 2024

Today, the demand for quick and easy financial transactions is higher than ever.  Frictionless payments, which include real-time payment systems (RTP), offer a convenient solution by allowing money to change hands almost instantaneously. This infrastructure is fundamental in supporting various types of transactions, including peer-to-peer (P2P), business-to-business (B2B), and more, ensuring that funds are available almost instantaneously and around the clock.

Unlike traditional transactions that can take days to clear, RTP ensures that funds are transferred within seconds, benefitting both consumers and businesses who value efficiency and immediate liquidity. It is no wonder that RTP is growing in popularity.

Source: Ernst & Young

The Challenge of Irrevocability

However, with great speed comes great responsibility — or, more aptly, a great need for caution. One of the most significant challenges of frictionless payments is their finality. Once a payment is sent, it is complete and irrevocable. This can pose a serious risk if funds are sent to the wrong account or if there’s a misunderstanding about the product or service being paid for. Unlike credit card payments, where the chargeback system acts as a safety net — allowing consumers to dispute transactions and potentially recover their money — RTP offers no such option.


P2P Transactions: Convenience vs. Risk

The irrevocable nature of these transactions is particularly problematic in peer-to-peer (P2P) exchanges. P2P transactions refer to the exchange of funds between two individuals without the intermediation of a traditional financial institution or bank. This form of transaction is facilitated by P2P payment apps and platforms, such as PayPal, Venmo, Zelle, and Cash App, which allow users to send and receive money directly from their mobile devices or computers. P2P transactions are becoming increasingly popular. According to Forbes, the total number of P2P transactions is expected to reach nearly $2.3 trillion annually by 2026.

Here’s why:

Convenience and Speed: P2P transactions are quick and can be completed within minutes, making them highly convenient for users who need to transfer money swiftly.

Low or No Fees: Many P2P platforms offer the service with low or no fees for basic transactions, especially when linked to a bank account or when using standard transfer options.

Uses: P2P payments are commonly used for splitting bills, paying rent, or transferring money to friends and family.

Security: P2P payment systems are generally secure with multi-factor authentication, device and biometric identifiers, and one-time passwords (OTP) common across platforms.

Regulation and Protection: P2P platforms are subject to financial regulations, but the level of consumer protection can vary.


The Risks of Quick and Easy P2P Payments: Errors and Fraud

Unfortunately, the ease and speed of sending money via P2P apps lend themselves to human error. If you accidentally enter one wrong digit when typing an account number, those funds could be gone forever, with no simple way to get them back.

It can also facilitate fraud. An example of a case highlighting the risks of P2P payments involved a man who sent $500 to a fraudster via Zelle. Due to the irrevocable nature of the transaction, he faced difficulties in recovering the funds. Despite his efforts and appeals to his bank for intervention, the money was not returned, as the transaction was authorized by him, and Zelle’s policy does not guarantee the recovery of funds sent in error.

This is not an isolated case. Consumer Reports survey found that out of those who use P2P payment services at least once per week, 12% had sent money to the wrong person, and 9% had been the victim of a scam. Forbes provides similar numbers, indicating that 8% of all banking customers report being victimized by a P2P scam in the last 12 months, with a median monetary loss of $176 per customer in 2022. This data shows the dangers of P2P payments and highlights the importance of users verifying transaction details carefully before sending money.


Credit Cards: Chargebacks as a Safety Net

This finality is in stark contrast to the protections offered by credit card companies. With credit cards, Visa, Mastercard, and other networks provide a form of consumer protection by allowing chargebacks for fraudulent transactions or for goods and services that don’t meet the buyer’s expectations.

Chargebacks are a consumer protection mechanism provided by credit card companies that allow cardholders to dispute a transaction and secure a refund for purchases that are fraudulent, unsatisfactory, or not delivered as agreed.

How Chargebacks Work:

Initiating a Dispute: When a cardholder notices a transaction that they did not authorize or a product/service that didn’t meet their expectations, they can initiate a chargeback. This involves contacting their credit card issuer and providing details about the issue.

Investigation: Once a chargeback is requested, the credit card issuer investigates the claim. They will ask the cardholder for evidence such as receipts, communication with the merchant, and proof of product or service issues.

Merchant Response: The merchant is given an opportunity to respond to the chargeback. They can accept the chargeback, which means agreeing to the refund, or they can dispute it by providing their own evidence that the transaction was valid or the product/service was delivered as promised.

Resolution: If the merchant disputes the chargeback, the credit card issuer evaluates the evidence from both sides. If the issuer decides in favor of the cardholder, the transaction amount is refunded to the cardholder’s account. If the merchant wins the dispute, the charge will remain on the cardholder’s account.

This system protects the consumer and gives them confidence when using their cards for a variety of transactions.


Balancing Speed with Security: Why Credit Cards Offer Greater Safety

While the speed of frictionless payments, including P2P transactions, offers significant advantages, they also pose challenges that require reevaluating consumer protection in the digital age. These systems, despite their convenience, often lack the robust protections provided by traditional credit card transactions.

As instant payments continue to rise in popularity, it is crucial to ensure they do not leave consumers vulnerable. Enhancing security measures and possibly integrating some form of dispute resolution or protection similar to chargebacks in P2P platforms could help mitigate these risks. Until such improvements are made, credit cards remain a safer choice for consumers seeking security along with convenience.