As a result of COVID-19, many businesses are leery of handling cash, credit cards, or debit cards, and consumers feel concerned about using paper money and coins. It is therefore unsurprising that a byproduct of the COVID-19 pandemic is a boom in touchless payment. Peer-to-peer payment platforms, such as Venmo, PayPal, Xoom, and others, allow for the digital transfer of money from one user to another in a quick, convenient, and socially distanced manner. Digital wallet platforms have seen a dramatic increase in personal use throughout the pandemic and are beginning to expand their touchless payment services to brick-and-mortar stores and retailers such as CVS.
On January 21, 2021, Paypal Holdings Inc. received a Civil Investigative Demand ("CID") from the Consumer Financial Protection Bureau ("CFPB") "related to Venmo’s unauthorized funds transfers and collections processes." This is not the first time Venmo’s practices have come under scrutiny from the CFPB. A CID is when the CFPB is in the fact-gathering stage to determine whether Venmo has violated the Fair Debt Collection Practices Act and if enforcement action is necessary.
To understand the reasoning why a CID was made, it is important to understand Venmo’s history and how it operates. Venmo provides the instantaneous transfer of money from one user’s account to another. The funds transferring may require a day to move from the user’s bank account to the other party, therefore a transferring user’s Venmo account is overdrawn. To complete the instantaneous transfer, Venmo covers the specific money transferred between accounts until the user’s bank can transfer the funds. Problems arise, however, when the user’s bank does not have the money to transfer the funds. To cover these losses, Venmo may use the assistance of debt collectors for users with negative account balances and also has amended its user agreement to give itself the power to recover money by seizing it from other PayPal accounts owned by the Venmo user. Thus, the CFPB’s inquiry into whether this activity violates the Fair Debt Collection Practices Act.
Venmo’s collection practices have come under scrutiny for two reasons: the timing and the context of the overdrawn accounts. Indeed, many overdrawn accounts are the result of account thefts and/or scams on Venmo that have increased significantly throughout the pandemic. Notably, scammers use stolen credit cards to transfer money into an unknown user’s account. The user receives a message requesting the money back that was accidentally transferred into the user’s account. By the time the user transfers the money, the scammer updates his payment method to receive the money on his own card and the money is fraudulently withdrawn from the user’s bank account. On its website, Venmo lists many other common scams on the platform. Despite scrutiny over its collections, Venmo has yet to change its approach.
Venmo is complying with the federal investigation, and the result will have an interesting effect on all peer-to-peer payment platforms. Is the convenience of instant transfers too high of a risk for digital payment providers outweighed by potential violations of law and unfair collection practices? The pandemic touchless payment boom will undoubtedly raise many legal questions for both providers and users of these platforms as they continue to become the norm for personal and business payments.