The U.S. Treasury is talking to digital payments providers about quick ways to disburse funds to recipients of stimulus checks within a couple of weeks, but payments industry experts foresee troubling security issues even with most of the obvious options.
The problem the government must solve is that 40% of taxpayers who are set to receive stimulus checks lack a direct deposit connection to the Internal Revenue Service, and thus won’t automatically receive funds via ACH, the main channel Treasury intends to use.
Plans call for mailing paper checks to unbanked consumers and those unable or hesitant to enroll their bank account details to a portal the federal government plans to establish in the coming days. But the mailed check option could accelerate the spread of COVID-19, with many bank branches temporarily shuttered and the virus risk that surrounds manual check-cashing, observers say.
The IRS reportedly has said it could take many weeks to cut and mail checks to tens of millions of recipients not already in its ACH file.
Treasury Secretary Steve Mnuchin said during a Thursday White House briefing that the government is “working with all the digital companies,” including prepaid debit card providers, to find solutions to get funds into recipients’ hands; he didn’t specify which companies might be deployed, but he insisted funds will be distributed in “weeks, and not months.”
Observers said the government’s promise to quickly and securely deliver funds to customers through alternative channels looks precarious.
Even the new IRS website to enroll customers’ bank account details poses a major fraud threat.
“Security issues are significant here. I can envision fraudsters offering to ‘help’ people without digital access to sign up and instead of using the intended resident’s checking account, they use their own account details. I think many consumers would and should be skeptical of providing their account details digitally, fearing the site might be fake,” said Sarah Grotta, director of debit and alternative products advisory at Mercator Advisory Group.
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Popular P2P apps like PayPal’s Venmo, Square Cash or Early Warning’s Zelle have talked about making their services available to the Treasury to rapidly deliver funds to consumers with bank accounts, with some experts envisioning a hub where consumers could choose their preferred P2P channel.
But fraud could also threaten stimulus payment deliveries through ACH-powered P2P apps, according to Grotta.
“With a P2P app like Square or Venmo, email and mobile phone numbers must be supplied, which are just as susceptible to fraud. If a fintech or a challenger bank were to provide Treasury with their client list that included identifying information like a Social Security number, and Treasury could match their check file to that, perhaps more could receive an electronic payment versus a paper check,” Grotta said, adding that solution might be somewhat time-consuming.
Fraudsters have many vectors to prey on stimulus check recipients, said Ben Jackson, chief operating officer of the Innovative Payments Association.
“Consumers under stress are more likely to be susceptible to social engineering and fraud prevention teams will be facing heavy caseloads,” Jackson said.
Debit push payments — which Visa and Mastercard have touted as efficient channels for disbursing funds to consumers after natural disasters — present another possible solution, with different challenges.
The pandemic’s scale is much larger than a natural disaster, affecting tens of millions more recipients, and establishing connections to citizens receiving stimulus funds would require some painstaking work. But harnessing debit push payments for stimulus funds offers at least one benefit, Jackson said.
“The value of using debit push payments would be funds can get right into the accounts that people use for bill payments and online shopping. It also will make it easier to deliver future payments if they become necessary,” he said.
Fintech companies see big opportunities to help the government connect consumers and small businesses and banks with funds, but many gaps stand in the way, said Jareau Wadé, vice president of growth at Finix, a San Francisco-based payments software infrastructure provider that launched in 2015.
“A lot of fintechs want to be involved in helping disburse government funds, but they can’t because they’re not banks. And a lot of banks who could help are choosing not to, because they’ve decided it’s not worth it,” Wadé
said.
The government’s best option might be testing an approach that offers consumers several options for receiving funds.
“Ideally, consumers could go to a central location and pick any number of different disbursement options and there might be some complications with fraud and ID, but it would still be better to get funds out quickly, especially to the millions of people who are underbanked. There are more underbanked people operating in cash than most people realize,” Wadé
said.
Social Security recipients will receive funds even if they didn’t file a tax return, Mnuchin said. Currently more than four million unbanked receive federal funds monthly through the Direct Express prepaid debit program operated by Comerica Bank. Direct Express is a likely channel for unbanked stimulus funds recipients, but the Treasury Department was not available to comment.
If the government fails to find a workable digital solution to send stimulus funds to the unbanked or to consumers whose bank account details aren’t on file with the IRS, checks will be the fallback approach and there will likely be many chokepoints, said Richard Crone, a principal with Crone Consulting LLC.
“Banks have already restricted access to branches because of COVID-19, and for those that are still open, we’re possibly looking at lines forming at these locations, and under social distancing guidelines it will be chaotic,” Crone predicted.
Many smaller and community banks don’t support mobile check deposit technology, and for those that do, large portions of the population likely to receive stimulus checks may not be able to use or access mobile check deposit methods.
Even using an ATM to deposit a check poses a threat of disease spread, according to Crone.
“You can wipe off the ATM but you can’t clean the chip card reader inside the machine, which swallows the card into a viral petri dish,” Crone said.
It seems unlikely, but if the government could provide a digital dashboard for stimulus check recipients to select a channel to receive funds with secure KYC and identity verification, the first round of COVID-19 checks could have an instantly transformative effect on the payments industry, Crone said.
“Square, Venmo or Zelle or even Apple Cash could stand this up quickly and there would suddenly be a $1,200-a-person incentive to sign up for P2P, which would be the greatest marketing program in history,” Crone said.
