Watch Out for Fraud on Instant Payment Apps

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The popularity of payment apps has been rising this year as some people strive to avoid as much personal interaction with others as possible during the COVID-19 pandemic. These include PayPal’s Venmo, Square’s Cash App and Zelle, which was created by a coalition of banks.

Also known as peer-to-peer payment services, these apps allow instant payments to be made to others (both businesses and individuals) without the use of a traditional bank or bank account. Some of these apps have even added services like debit cards and routing numbers so they work more like traditional bank accounts and bank cards.

The Tradeoff: Higher Fraud Rates

With this convenience, however, comes potential tradeoffs, especially when it comes to payment security. These payment apps have fraud rates that are three to four times higher than traditional bank payment vehicles like credit and debit cards.

Instant payment apps are ripe for fraud, according to industry experts, one of whom commented in a recent article in The New York Times that “fast payments equals fast fraud.” One reason is the simple fact that because the transactions are instantaneous as opposed to the two or three days needed to complete a standard bank transfer, there is less time for the service providers to detect fraudulent activity. Another is the ease with which new accounts can be set up — not only by consumers, but also by thieves.

For example, an email address is all that’s needed to create a new Cash App account and a phone number is all that’s needed to create a new Venmo account. This enables scammers to set up dozens of fraudulent new accounts and send hundreds or even thousands of requests for money to unsuspecting victims. The article in The New York Times tells of a woman who called what she thought was a help line when an errant online shopping charge popped up on her Cash App.

However, the phone number she called went straight to a scammer who told her to download software onto her smartphone. The download turned out to be malware that took control of her Cash App and transferred the entire balance out of her account, leaving her high and dry.

Limited Consumer Protections

Unfortunately, instant cash apps usually don’t have the same kinds of consumer protections that traditional bank credit and debit cards do. Once thieves have stolen money using one of these apps, there’s usually very little that victims can do to recover losses.

According to The New York Times article, Zelle has experienced less fraud than the other instant payment apps due to its more robust new user authentications and enhanced legal protections. At the other end of the spectrum, Cash App may be experiencing more fraud as evidenced by the high number of fraud complaints against it received by the Better Business Bureau, as well as the high volume of online Cash App reviews that mention fraud.

Also, Cash App has just recently begun making telephone assistance available to some users, instead offering email support only. As a result, some users like the woman in The New York Times article fell for fake help line phone numbers. Venmo, in contrast, offers real-time chat support to all customers. 

Avoid Being Scammed

According to the Federal Trade Commission, the best way to avoid being scammed via an instant payment app is to ignore and delete any messages you receive (such as by text or email) telling you to send money to an unknown party using the app. Instead, log into the app to see if there are any pending requests for money.

Even then, you still have to be careful. The New York Times article also mentions a woman who received fraudulent payment requests within the instant payment app she was using. The email addresses appeared at first glance to be legitimate, but on closer inspection, it turned out that one or two letters was different. The thief stole more than $500 from the victim.

If you do end up sending money to a scammer using an instant payment app, the FTC recommends that you report it right away to the service provider and ask them to reverse the transaction if it’s not too late. You should also report the scam to FTC, which you can do here.

With the holiday shopping season fast approaching, now is the time to familiarize yourself with this new type of payment scam and take steps to protect yourself.


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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