Dive Brief:

• As scammers rely more on advanced technology, the most savvy consumers now run the risk of falling victim to so-called authorized push payment scams, the Federal Reserve Bank of Kansas City said in a research paper published on Friday.
• "As fraudsters increasingly leverage technology to create scams that appear more realistic, even vigilant consumers may fail to detect them," the paper says.The report was written by Ying Lei Toh, a senior Kansas City Fed economist who focuses on consumer privacy, data protection and cyber-security.
• Instant payment networks like Zelle and participating financial institutions will need to play a more active role fighting scams and adopt some of the same strategies scammers use to fight bad actors, the paper concludes.

Dive Insight:

An authorized push payment scam happens when a criminal persuades an unsuspecting consumer to send them money over an instant payment network such as Zelle. 

The scams take many forms, including romance and employment scams, according to a data spotlight from the Federal Trade Commission. Consumers have a much more difficult time getting their money back when they authorize the payment than they would if a criminal hacked their account and stole money.

"Once a scam payment is executed, the victim often has little to no recourse, as the payment is often irrevocable," the Fed paper says.

Customers of Zelle disputed more than $206 million worth of transactions in 2023, the paper says, citing a U.S. Senate research report published in July. Consumers bore the costs of 80% of those transactions, the Senate report says.

Criminal groups perpetuating these scams are becoming more sophisticated, the Fed report says. While it doesn't specifically mention generative artificial intelligence — which can appear human in online chat forums — the report does say criminals are using advanced technology.

Scammers, for example, will set up so-called mule accounts which mimic a real person in dating forums or social media platforms, and use the account to trick unsuspecting consumers into sending them money, the Fed paper says. 

Executives in the payments industry have expressed concern that criminals can use artificial intelligence to create more fake accounts that pass as human and can be used to scam consumers with minimal effort.

Legislators and consumer advocates have criticized instant payment networks for facilitating scams and fraud. In a July Senate hearing, for example, Connecticut Sen. Richard Blumenthal called for greater legal protections for victims of authorized payment scams. Bank executives pushed back, saying the change wouldn't do anything to discourage bad actors from scamming consumers in the first place.

Companies like Scottsdale, Arizona-based Early Warning Services, which operates Zelle and is owned by seven major banks, say they do their part to educate consumers and warn them about potentially high-risk transactions.

But financial institutions can go a step further, the Fed paper says. 

"Financial institutions may leverage available information and technology, such as artificial intelligence and machine learning, to assess the scam risk of a transaction prior to execution and alert their customers if they are about to make a high-risk transaction," the paper concludes.