The Risks of P2P Payment Apps

Peer-to-peer (P2P) payment apps—such as PayPal, Venmo, and Zelle^®—have simplified money transfers by requiring only a name, email, or phone number to send or receive funds almost instantly. But as their popularity has increased, so have incidents of fraud.

"One common scam is a text purportedly from your bank that asks if you want to authorize a $500 payment to a P2P app," says Andrew Witt, a senior manager in Schwab's financial crimes risk management team. When you reply "no," an impostor passing as a bank representative calls you to report an account breach. They then ask for your credentials, along with the one-time code frequently sent to validate access. "That allows them to associate their device with your account," he says.

This type of fraud exists in a gray area of the Electronic Fund Transfer Act, which typically requires banks and/or P2P services to refund consumers for unauthorized transactions. "Currently, your bank or P2P app is not required to reimburse you for any authorized payments—even if they are inadvertent transfers to the wrong recipient or the result of a scam," Andrew says. "But rules may change, and some financial firms, including Schwab, may reimburse you on a case-by-case basis, so check how they handle such liabilities."

To protect yourself against both fraud and human error:

• Verify unexpected requests: If you receive an unusual inquiry from someone claiming to represent your financial institution, hang up and call an official number to verify the authenticity of the request.
• Enable enhanced security settings: Two-factor authentication requires you to confirm your identity in two ways—usually a password plus a verification code sent via email or text—neither of which should ever be divulged to a third party. If your payment app allows it, you should also set up a password, PIN, facial recognition, or a fingerprint that must be used to complete each transaction.
• Confirm before you click: Unlike traditional bank or credit card transactions—which you may stop payment on or dispute—P2P app transfers are like sending cash. Typically, you won't be able to cancel or reverse a transaction after it's processed, so make doubly sure you've got the right recipient before you hit send.
• Sign up for fraud alerts: These automatic notifications will alert you to suspicious activity, but you should regularly check your account statements as well.

If, despite your best efforts, you pay the wrong person or find yourself the victim of a payment scam, take action right away:

• Report the incident to your financial institution and the P2P company through which you made the transaction. Even if you authorized a payment by mistake, reporting it in a timely manner may increase your odds of recovering the funds.
• Also report any scam to the Federal Trade Commission and the Consumer Financial Protection Bureau to help curtail future fraud.