Jul 15th, 2020
Paperless Prevails, Public Transportations Transition To Touchless Transactions, Illicit Innovations
TL;DR
Jason and Hayden discuss why paper checks are unreliable, inefficient, costly, and vulnerable to fraud, especially as stimulus delays and fake check scams exposed the weakness of paper-based payments. They also explore why public transportation should move toward touchless payments but may need to leapfrog traditional NFC contactless models in favor of app-based and kiosk-supported systems. The episode closes with a look at rising financial institution impersonation scams, digital banking enrollment fraud, and why banks need stronger MFA, better risk models, AI-driven fraud tools, and proactive customer education.
Paper Checks Are Still Somehow Alive
This episode of Cents Chat starts with a very fair question: why are we still pretending paper checks make sense?
Jason and Hayden use the early COVID stimulus payment delays as the obvious example. People needed fast access to funds, but paper checks were slow, unreliable, expensive to produce, easy to lose, and easy to counterfeit. That is not exactly the dream payment experience in a crisis.
Jason points out that check fraud is not complicated. Bad actors can print checks with stolen or fake account information, send fake stimulus-style checks, and use the interaction to steal personal or banking information. The rise of mobile deposit also adds another wrinkle. A paper check often becomes a digital item anyway, but only after it travels through a long, fragile, physical process.
The problem is not just technology. It is access. Many workers remain unbanked or underbanked, and some rely on paper instruments because traditional banking has not worked well for them. Until the industry solves financial literacy, account access, fee structures, and trust for lower-income consumers, paper checks will keep hanging on by their last breath.
Transit Payments Need to Leapfrog
The second topic moves to public transportation, where ridership had fallen sharply during the pandemic and consumers were trying to avoid high-touch surfaces.
Hayden raises contactless EMV as one possible answer, but Jason is not convinced that traditional tap-to-pay is the endgame for mass transit. His concern is practical. Transit systems handle huge volumes of low-dollar transactions, often in places where connectivity can be unreliable. If every gate, bus, or train input device depends on real-time connectivity, the payment experience can break quickly.
His bigger concern is fraud. Millions of people tapping cards and NFC-enabled devices at public terminals could create a tempting target for skimming and data collection.
Jason’s preferred model is more of a leapfrog: smartphone apps that allow in-app payment in advance, paired with kiosk-based contactless options for riders who do not have smartphones. That reduces touchpoints, speeds up boarding, and gives ISVs room to build something better than another terminal bolted onto old transit infrastructure.
Imposter Fraud Follows the Weak Spots
The final topic is financial institution impersonation fraud.
As more consumers moved from branch banking to digital banking, scammers followed. Fake checks, fake government outreach, robocalls, text messages, and emails all became tools for stealing account information and personally identifiable information. Once scammers had enough data, they could attempt online banking enrollment and use faster payment methods like Zelle or wire transfers to drain accounts.
Jason’s recommendation is straightforward: banks need digital enrollment processes that include multi-factor authentication and cannot rely only on basic PII and account information.
Risk models also need to evolve. Simple rules-based systems are not enough when fraud patterns change quickly. Jason points to AI and machine-learning-enhanced fraud detection as a way to improve detection rates, reduce investigation time, and reduce manual reviews.
The takeaway is simple: fraudsters chase the weakest target. Banks that educate employees, customers, merchants, and payment partners make themselves harder to hit. Everyone else becomes the low-hanging fruit.
Featuring
Jason
The Nerd
Hayden
Guest Speaker
Transcript
Jason: Welcome to this episode of Cents Chat with Jason and Hayden. Let's jump right in to make payments make sense.
Hayden: Jason, happy Wednesday. And due to some COVID-related issues, we weren't able to get into the office for a recording session last week, but I am stoked to be back.
Jason: As am I, Hayden. It was a very quiet Fourth of July weekend here in California, especially with all of the additional shutdowns. And I certainly did not enjoy isolating due to COVID. So glad to be back in the office and glad to see your pretty face again as well.
Hayden: Thanks, Jason. And although it wasn't a super fun Fourth of July, I'm just stoked I was able to enjoy some of your famous white barbecue chicken. Absolutely delicious. Okay, we have some interesting topics for you this week, so let's dive right in. First, paperless prevails: paper checks are past their prime. Next, public transportation transitions to touchless transactions. And last, illicit innovations: financial institution imposter issues increase.
Jason, the current global pandemic has shown us that paper checks are unreliable, unsafe, and inefficient. We discussed this topic in one of our first episodes of Cents Chat, and the response from our nation in this time of need showed us how unreliable paper checks really are. In the early stages of COVID-19, people needed fast, reliable payment technology in order to feel financially safe. Stimulus checks being the best example, have taken for some up to five months to receive, which completely defeated the purpose of the check in the first place.
Jason: Yeah, Hayden, there are just so many issues with paper checks at this point, especially with the number of payment-enabled applications that allow somebody to easily add an account with little verification. Additionally, it's incredibly easy to get checks printed with somebody else's account information on them, or just fake account information altogether.
Unsuspecting people desperate for some relief from losing their income streams have received fake checks that look like government stimulus payments that instructed them to call the fake organizations before depositing their checks, only to steal their personal banking information and wipe out their accounts.
Additionally, with the cost of ACH transactions being so low, the economics of large organizations having to print checks, stuff envelopes, and pay for postage, coupled with the inconvenience of transit time and the number of lost items, just doesn't make sense anymore.
Hayden: On top of that, when looking at it from a health perspective, there are at least a dozen people touching the envelope and paper check before it reaches the receiver, making for a predictably high volume of contamination.
Jason: Totally agree. And the funny thing, Hayden, is the vast majority of these paper items ultimately get converted to digital items at the end of the day anyway. With the bank branches being closed, there was such a massive adoption of mobile banking and remote deposit solutions. The best analogy I can make for the life cycle of a paper check these days is imagine planning a trip from New York to California. You wouldn't drive all the way to Arizona and then book a flight for the last leg of the trip.
And that's effectively what's happening with paper checks these days. It makes no sense. The adoption of these remote deposit solutions makes it even easier to counterfeit checks, as there isn't a MICR reader or somebody physically examining the check for security features before depositing it. And with the banks making funds rapidly available to consumers, it's a recipe for disaster.
Hayden: Jason, in many states, regulatory barriers for fully electronic payment systems do exist, which require employers to continue to offer paper checks. But if these barriers fell and the employees were educated on other solutions, they would be able to receive their hard-earned income safely and quickly, not only in a time of crisis, but forever.
Jason: Yeah, Hayden, there are certainly regulatory items that will need to change before we can force the elimination of paper instruments. But those regulations are in place for a reason. There's a large percentage of the workforce that's unbanked. In fact, according to a 2018 FDIC report, 7.7% of the U.S. population is unbanked for one reason or another. And these consumers rely on paper instruments and check cashing services that ultimately charge outrageous fees.
Oftentimes, these consumers have debt collection issues, bad account history, or frequently overdraw their accounts, so they don't want their paycheck to just vanish upon direct deposit. Until we solve the financial literacy issues and create banking solutions that don't gouge lower-income customers with fees, these regulations are going to have to remain in place, keeping the paper check hanging on by its last breath.
Hayden: Jason, speaking of vanishing, it is no surprise that public transportation has taken a massive hit due to the global pandemic. And in some cities like New York, we have seen it fall by a whopping 90%. But consumers staying home due to most locations being closed does not make up all of the 90%. Some stay home out of fear of catching the virus. Some think one of the ways to remove this fear is to enable contactless EMV payments in the city's modes of public transportation.
Jason: Yeah, Hayden, this is certainly an industry that's ripe for innovation from the payments aspect, but I honestly think that traditional EMV contactless isn't the answer. The fact that public transportation is still accepting payments at all via cash or traditional card is pretty mind-boggling. And after the COVID pandemic, consumers want to touch as few high-traffic devices and items as possible.
I think the ideal solution here for this industry is a combination of smartphone applications that'll allow for in-app payments in advance and a kiosk-based solution that allows for contactless payments for those who don't have smartphones. Not only does this eliminate the touchpoints on the trains and the buses, but it'll also streamline the boarding processes.
Hayden: Visa is already currently engaged with over 500 cities worldwide that are all in different stages of this implementation. This digital train has arrived, and PTOs across the nation are doing everything they can to make sure they are on board.
Jason: You know, I really hope the players that are working in this space are conscious of the ramifications of deploying traditional NFC contactless payment solutions, especially in this environment. Mass transit systems run millions of low-volume transactions per day. This means that those input devices will need to have extremely fast and reliable internet connectivity in order to process these transactions. And we all know how spotty wireless-based connectivity is in these large congested cities.
Additionally, my bigger concern is the attack vectors on these solutions. Traditional contactless protocols transmit sensitive data from the card or NFC-enabled device to the point of input in plain text. Transitioning to a model where millions of consumers are waving their payment instruments in front of these devices creates a massive target for fraudsters to deploy skimming devices that read the NFC data and allow them to collect a large number of cards.
I'm fully on board with the elimination of cash and contact transactions for the mass transit industry, but I think the ultimate solution for this industry needs to leapfrog traditional NFC contactless transactions. It's a ripe opportunity for some ISVs to dominate.
Hayden: Jason, recently FinCEN, the Financial Crimes Enforcement Network, issued an advisory to motivate financial institutions' efforts in stopping suspected illegal activity. With bank security on high due to the outbreak of cybercrime during the pandemic, many scammers will be targeting customers rather than banks, meaning FIs will need to keep their alerts on high when observing potentially suspicious activities.
Jason: Yeah, Hayden, this is definitely an attack vector that's on the rise. We talked about the transition from branch-based banking to digital banking. And when you have a segment of the population that the fraudsters know aren't tech savvy, this is exactly what's going to happen. In fact, this ties into the paper check scams that we were talking about earlier. These fraudsters send fake checks designed to obtain an unsuspecting target's banking and personal information.
Oftentimes, they will then attempt to register for online banking services under the stolen identity, use real-time payment methods like Zelle or wire transfers to drain these consumers' accounts. I continue to encourage the banks that we work with to make sure that their digital banking enrollment processes encompass multi-factor authentication components so that you can't simply use basic account and PII information to register for these services.
Hayden: Jason, spikes in cybercrime have been making headlines daily, and with a 200% jump in new online banking registrations, FIs need to do whatever it takes to keep their customers from getting burned. My understanding is that risk models haven't changed much and their alert rates have remained flat.
Jason: Yeah, Hayden, unfortunately, we're seeing this trend across multiple aspects of the banking and payments ecosystem. With changing socioeconomic conditions comes evolved fraud patterns, and simple rules-based risk systems don't detect these new threats.
We have seen this pandemic force fraudsters into new patterns and strategies, resulting in increased account takeovers, increased identity theft in both the establishment of banking and payment processing services, and an increase in card fraud, especially in the affiliate marketing space.
We're working with a large number of organizations across the supply chain who are just starting to see the impact from these modified attack vectors and aiding them in adjusting their account establishment, underwriting, and transactional risk scoring methodologies. FIs that we've helped implement artificial intelligence and machine learning enhanced solutions improved fraud detection rates by 90% and decreased the investigation times by 70%. They also reduce the number of transactions that require manual reviews.
Hayden: These bad actors will pose as government agencies, like healthcare representatives engaged in pandemic crisis help, or through email, robocalls, and text messages targeting vulnerable crowds like unemployed consumers and the elderly. Being educated on this issue is going to be a key weapon in protecting yourself from these bad actors and scammers.
Jason: Hayden, that's spot on. Knowing what to look for in these attack vectors is key. And I think the supply chain, specifically the financial institutions, need to be very diligent in disseminating information to their employees, account holders, payment processing partners, and merchants. Education is absolutely key. Those that are aware of the attack vectors will be less likely to be compromised by them. The fraudsters prey on the weak and target the lowest hanging fruit.
The banks that do a good job of educating their customers will have significantly less fraud, as they will become a harder target and the fraudsters will move on to the next.
Hayden: Jason, you know what time it is. It's time to make payments make sense. Give me those takeaways.
Jason: Supply chain, let's solve the problems of the underbanked so we can finally eliminate paper checks. ISVs, pay attention to mass transit. Leapfrog NFC contactless. It's a massive opportunity. Banks, we need to get more proactive in employee, consumer, and merchant education. Don't be the lowest hanging fruit, or it's going to cost you dearly.
