Financial technology remains a hot topic for consumers, offering the possibilities of increased convenience and access to financial services at a lower cost. As part of its FinTech Forum series, the FTC continues to promote public discussion of the ways in which innovative FinTech services – many provided by non-banks and technology companies within the FTC’s jurisdiction – can benefit consumers and the potential issues for stakeholders to keep in mind. Like the first FinTech Forum on marketplace lending, the FTC’s second FinTech Forum brought government and industry participants, consumer advocates, and other stakeholders together. They discussed two evolving types of financial technology: peer-to-peer payment systems and crowdfunding platforms.
Peer-to-peer payment systems are online services – often mobile apps – that allow consumers to exchange money electronically. Millennials may account for the majority of early adopters, but as two panelists pointed out, people across all age groups use peer-to-peer payment systems and these services are expected to grow among older users. Some panelists touted the potential benefits that peer-to-peer payment services offer consumers, including convenience, speed, and the relatively low cost of sending money, and suggested that benefits like that could be particularly important to consumers in financial distress.
Crowdfunding provides a platform for charities and individuals to raise funds quickly in times of need and for small companies and entrepreneurs to raise money, gain exposure, and build a market for a product. Panelists focused primarily on donations-based and rewards-based platforms. The FTC’s Office of Technology Research and Investigation also presented the results of a survey of crowdfunding platforms’ online practices, including what kind of information is available to consumers.
Participants on both panels noted that existing consumer protection laws, including Section 5 of the FTC Act, apply in these areas. Here are a few potential issues that panelists raised and that market participants will want to think about as they continue to innovate in these arenas.
Frauds and scams that could target platforms
Both panels discussed how scammers could try to use peer-to-peer payment and crowdfunding platforms to defraud consumers. In the words of one panelist, “The mode is new, but the scams are old.”
For example, in the context of peer-to-peer payments, a consumer may send money to buy an item, but never get the promised goods. In another variation, a consumer may offer something for sale, receive notice that a purported buyer has paid for it, and then provide the item, only to find that the buyer reversed the payment after receipt, leaving the consumer with neither the merchandise nor the money. Easy-to-imagine examples like that suggest that consumers would benefit from clear information about the risks of those transactions and any recourse they have if they experience a problem.
For crowdfunding, panelists described the possibility that some fraudsters may simply pocket the money they raise in campaigns, instead of using it for the project or cause they promoted. For example, in FTC v. Chevalier, a project creator raised money from consumers to produce a board game and promised backers rewards. But instead of using the funds to create the game, he used them for unrelated personal expenses. The FTC alleged that was deceptive.
Panelists also discussed how platforms could take steps to reduce this kind of fraud. Some speakers pointed out that it’s in a platform’s best interest to weed out deceptive campaigns, including by providing consumers with an easy-to-use mechanism for reporting fraud.
Both panels raised concerns about dispute resolution. For peer-to-peer payments, what recourse do consumers have if they believe they have been defrauded? Panelists also asked what would happen in the case of a simple mistake – for example, if a consumer mistypes a phone number or email address and accidentally sends money to the wrong person. As explained in the FTC staff’s 2013 Mobile Payments Report, the statutory protections a consumer may have from unintended or unauthorized charges depend on the payment source used (credit or debit card, prepaid account, linked bank account, etc.). Platforms also may voluntarily offer dispute resolution protections. The best advice for companies: Develop clear policies regarding unauthorized payments and explain those policies up front so consumers understand what to expect if there is a dispute.
On a crowdfunding platform, disputes may arise if the campaign appears to be engaged in fraud or if the consumer wants a refund. Will people know whom to contact to report a problem or ask for their money back? As with payment platforms, companies should clearly disclose how consumers can raise and resolve disputes.
Privacy and security
Like any other company, peer-to-peer payment and crowdfunding platforms need to keep consumer privacy and data security in mind from design to roll-out and beyond. Participants on both panels discussed the dangers posed by hackers targeting sensitive financial information. One panelist suggested that FinTech startups may be particularly attractive targets due to the nature of the data collected and the fact that the technology is developing. As the Mobile Payments Report noted, for transactions on a smartphone, an app may be able to a collect a significant amount of sensitive data. The FTC publication Start with Security: A Guide for Business provides practical information for FinTech companies, both new and established, on how to combat security risks and keep consumer data secure. Panelists also noted that some apps have social media functions that make certain details about financial transactions public. Clearly disclosing those functions will help consumers make informed choices about using the apps, including whether to enable settings to help protect their privacy.
Our previous FinTech Forum post emphasized the need for adequate disclosure of costs in financial transactions. Participants in our second Forum focused on that point as well. For peer-to-peer payment systems, consumers may be charged fees to sign up for the service, to send money, or to receive money. In the context of crowdfunding platforms, consumers may be charged platform fees, payment processing fees, and shipping fees for rewards. As always, companies must get consumers’ consent for all charges.
Information about costs and fees should be presented clearly and conspicuously and the principles in the FTC’s .com Disclosures: How to Make Effective Disclosures in Digital Advertising apply. Case in point: If a product’s basic cost is advertised, but there are significant additional fees, the existence and nature of those fees should be disclosed clearly and close to the cost claim. Just one example of an enforcement action the FTC has brought in this area is Network Solutions, LLC. According to the complaint, the company violated the FTC Act by advertising full refunds while burying information about a cancellation fee in a small hyperlink at the bottom of the webpage.
Where does the conversation go from here? At the FTC, we like to emphasize that consumer protection and innovation go hand in hand. Innovations like peer-to-peer payment systems and crowdfunding platforms can provide significant consumer benefits, and companies – whether brick and mortar or online – should always keep consumer protections in mind. We look forward to continuing the discussion at the next FinTech Forum, set for March 9th at the University of California, Berkeley. The topics on the table: the consumer implications of blockchain technology and artificial intelligence.