Ask HN: Why can't banking practices change to prevent money-forwarding scams? | Hacker News Reader

Ask HN: Why can't banking practices change to prevent money-forwarding scams?

36 pointsdjellybeans29 comments

A lot of these scams still exist, where someone is given a check or e-check with no funds behind it and being told to deposit/spend it. Why can't banks put in place safety measures in order to require identification of the check-sender so that the recipients aren't left holding the bag?

Is this not possible due to political/policy-related reasons, or is it more because of logistical reasons?

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There are many varieties of “money-forwarding scams” and many of them illicitly forward good funds, some with the knowledge of the money mules (a term of art) and some without.

With regards to the exact scenario you outline, the core problem is that ACH payments in the US cannot, at the receiving bank, be guaranteed to represent good funds except probabalistically after the ACH return window has passed, and may not be good funds even then. There are both legacy reasons why this is true, dating to the clearinghouse system for paper checks, and UX reasons why it remains true.

Many remediations against this and similar attacks create winners and losers in the legitimate economy. For example, increasing the friction to receive a transfer from a novel source impacts the ability of family members to help relatives in event of emergency, hits the cash flow of semi-formal businesses severely (many sole props operate out of personal accounts and may take dozens or hundreds of first-time payments a month), affects new clients in the onboarding window (who you can’t usefully exclude because they make up a large chunk of accounts which will participate in this fraud), etc.

Note that another way to phrase “Ensure customers don’t end up holding the bag” is “Banks should be less willing to extend credit to poor people” and that there are non-trivial policy and justice implications of that proposal. It is not widely understood by consumers that a US checking account is a credit product, but it is, and the operation of many households assumes this fact of the status quo.

Have you ever considered what a banking solution from first principles would look like? Ignoring cash for the moment, consider that banks are properly characterized as a connected graph of double-entry ledgers, where the edges are network connections. As such, it should be trivial to a) assign a public/private keypair to each bank node, b) encrypt and/or sign outbound messages, and c) have it work in real time. We could even impose serializability on the whole network, and still operate in real time.

Perhaps it is impossibly naive to think that centrally controlled bank systems could be so straight-forward and simple, free of precedent and regulation, but I'd like to understand why.

The banking industry is capable of near real-time, international, encrypted, irreversible transactions in which the identities of persons on both sides of the transaction are confirmed. It's just a more expensive system which requires more hoops than is necessary for the bulk of bank transactions.

I'm sure we could build a better banking system if we scrapped everything and started over. But what we have is really good enough for most people.

The last sentence is a pithy summary of the state of the banking industry.

Having worked with the banking industry for over two decades, the banking industry is capable of a lot. They have infinite capital and they hire some of the best people on the planet.

Fundamentally Banking is risk-averse conservative culture. Their primary focus is "good enough for most people" then don't break it. Absent government regulations from a major catastrophe or an existential competitive threat, they will not change.

It's not necessarily a more expensive system, such systems are used for the bulk of bank transactions in many places.

It's just that there are some minor disadvantages (a bit of profitability back when higher interest rates meant that any delay brings interest revenue to the bank, but mostly customer habits - no single institution wants to be the one to try and change them) so USA banks won't make such a change unless forced to.

Are wire transfers free in Europe? I've only used them a handful of times, but each time the cost was not insignificant, like $30 or so. A quick look around online suggests that price is consistent.

This suggests to me that there's a intrinsic cost to supplying the guarantees that a person gets with a wire transfer over something like an ACH. And that's probably why ACH has the shortcomings that it does.

SEPA same day is free in a lot of countries from my experience setting up bank automation for various corporate clients. Not sure if it’s free for people though.

SEPA same minute for sure is free for private customers in some EU countries.

For EUR transfers within EU, the SEPA CT is the equivalent of a wire transfer and has pretty much replaced them. The fully loaded cost of processing such a transfer by a bank is in the ballpark of 0.01-0.02 EUR if I recall correctly, depending on the economies of scale they can get; so for private persons some banks/some markets offer them for free and some banks/markets charge something like 0.30 EUR, it depends on the level of competition for general services, how much they can earn on other services from that customer, etc. As for most services, the price is not really determined by costs but by the competition and plausible alternatives.

There is some intrinsic cost for a 'true' wire transfer, but (1) it's not due to the benefits/guarantees that the customer gets, but due to legacy/compatibility issues requiring a not-that-scalable process, lack of international cooperation, and the inefficiencies of bilateral settlements (or, often, a chain of bilateral settlements) vs a centralized bulk settlement system; and (2) it's not in line with the prices charged. $30 for a wire transfer is a reasonable market price in many markets, but the fully loaded cost for a wire transfer (assuming a electronically initiated proper payment without any missing information so it gets 'straight-through processing') that I recall is something comparable to $2, the rest is profit - the market for this service is simply not competitive (people choose their banks based on other factors, not the level of rare fees like this) so that's a revenue stream that nobody wants to let go without a good reason.

In all the banks I know in Europe (France, Germany, Italy, Belgium and probably others I sent or got money from) , SEPA wire transfers are free. This is probably not a law, but driven by competivity.

The limitations discussed in the parent post come from a clearing system that must (for legacy reasons) support payments via cheques. There are many payment systems which don't do that (e.g. SEPA credit transfers in EU, and various other 'giro payment' schemes), and can do fast and cheap payments that are actually known to be fully cleared right after receiving them.

The key thing for preventing money-forwarding scams, however, is that all the commonly used payment systems in your society must be "reliable". If some are, and some are not, then the intersection of these payment systems opens people up to an "arbitrage" of sending "reliable money" after receiving "unreliable money"; you won't eliminate this type fraud by making a better payment system accessible, that will happen only after systems like cheques are driven out.

principle agent problem

Banking is, from a software perspective, a graph of connected, double-entry ledgers. On the back end, state changes propagate electronically over old and hoary roads (FTP, as another poster mentioned). The businesses that operate these strange constructs are old and powerful, and jealous of their position of authority. And the modern information age has vastly increased their power, as never before has so much information been available for so many transactions! Money is action is state, so the banks know, modulo cash spending, what literally everyone in the world is doing. If regulation and old tech wasn't there to protect their entrenched interests, the banks would have to invent it.

I loved this comment for the first two lines. The third line went off the rail in that it transitioned from mapping banking structures to other well known structures to a emotional rant to finally a conspiracy theory. But it has this strange psychedelic quality to it, like a Matt Taibbi article on acid. I could not bring myself to downvote it.

I was going for a more Lovecraftian "cosmic horror" vibe, but thanks.

You are welcome, reminder to self - read HP Lovecraft :)

Do yourself a great favor and read it at night, during a storm, by candle-light.

> is it more because of logistical reasons?

In the US, ACH/cheque cashing with the number on the bottom is a FTP-based legacy system. Your bank floats you the amount as a credit within a few days or a week, depending on the funding source. For example, business cheques usually "clear" faster because they are less risky.

But they haven't actually cleared yet, it's a multi day (probably weeks, tbh) situation where you have to download ACH return/error files every day and hope none contain that transaction.

This is why a lot of places don't accept personal checks. This has been around for decades "bounced checks" - NSF (not sufficient funds), REFER TO MAKER, STOP PAYMENT, etc. Not only do you not receive the funds, you are fined by your own bank.

It is a crime in most states (keep the returned check handy) https://oag.ca.gov/consumers/general/bad-checks but kind of hard to enforce

The answer to the categorical "why do scams exist" is based on current systems which have misaligned incentives. Banks do not view the problem of money forwarding scams large enough to fix. If there were added regulatory burden of getting fines, class action lawsuits, pressure from the media or Congress, then the economics may change enough to fix their operational deficiency.

Look at other dark patterns that used to exist but no longer do, like suppressed salary collusion between Google, Microsoft, Apple 15 years ago vs now. As technology and society changes though, more opportunities for new dark patterns emerge. It takes a lot of dead bodies and time before politics and policies take notice and build up enough outrage to catalyze a change.

But banks do prevent old-fashioned check scams. By providing better payment options. I frankly don't know anyone who still uses checks for anything, and that's probably with good reason. Instead of sending a check, the payer could simply transfer money.

Though it would be nice if you could pay by having the bank hold the money in escrow and releasing it upon proof of delivery. That would be a really nice improvement that I haven't seen yet (at least not for small payments).

Here's a business model

https://techcrunch.com/2020/10/06/nivelo-nabs-2-5m-seed-to-r...

The same reason any type of financial fraud continues to exist.

The costs associated with fixing the last 1% exceed the total liabilities of that last 1%.

Because fools are so ingenious

Maybe there's a business model here?

Or maybe a need for regulation. Make it so the banks can't recoup the money from customers and the problem would get fixed quickly.

That was basically what I meant (and got downvoted for).

"A business model of supplying banks with certain technologies to meet regulatory constraints (which could perhaps be easier to realize with the promise of said in place) and stop this from being so much of a problem."

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