Fintech’s Fraud Problem: Why Some Merchants Are Shunning Digital Bank Cards

When Robyn Mathis, a 41-year-old food production plant worker from Brunswick, Georgia, stepped off a flight to Philadelphia last June, she expected an easy passage to her destination. She was set to pick up her rental car and charge it to her Chime card, as she had done several times before. For the last few years, the digital bank’s debit and credit cards had been her payment methods of choice. But at the Budget car rental desk at Philadelphia's International Airport, Mathis got an unpleasant surprise. Budget would not accept her Chime credit or debit card. Frustrated, Mathis, who was traveling with her two college-aged children, called other airport rental outlets—Enterprise, Avis and Dollar. All said they wouldn’t take her card. After two hours, Mathis finally gave up and called an Uber. Fintech had failed her. Upon returning home, she moved most of her money from Chime to her account at Bank OZK, a regional institution with more than 200 branches and roots stretching back to 1903.

Digital-first “neobanks” like Chime are one of the hottest sectors in the fintech revolution. They offer fast approval and low- or no-fee accounts, all without any brick-and-mortar branches—a powerful selling point during a pandemic. Chime grew from 7 million U.S. customers at the start of 2020 to more than 13 million by the end of this year, according to estimates by eMarketer. Chime’s valuation hit a stunning $25 billion in August, and an initial public offering that could value the enterprise at $45 billion is in the works. Square’s Cash App, which began as a peer-to-peer money transfer service and has evolved into a digital bank, added 12 million users in 2020. Square’s stock has more than tripled since the pandemic began, and it now boasts a market capitalization of about $90 billion.

But the same “frictionless” signup and ease-of-use features that make digital banks appealing to customers have given crooks an opening to wreak havoc through various schemes. That includes “first-party fraud,” where customers (with accounts in their own names) do everything from racking up charges and yanking the money to pay those charges out of their accounts before a transaction settles to illegally collecting unemployment insurance in states where they don’t live or work. Another tactic: exploiting America’s tortoise-like bank-to-bank transfer network by moving money from one account to another and then withdrawing the same funds from both accounts while the transfer is in process. Fintech providers also appear to be more susceptible to identity theft and “account takeovers,” where swindlers get access to another person’s account and start spending.

Take the case of Shayla King, a single mother of four from Tampa, Florida, who became a Chime fraud victim in July 2021. She first noticed the problem when she woke up on a Friday to see dozens of automated texts on her iPhone asking if she had made 62 transactions totaling $744 from different businesses in India. She texted back “no” and then got an automated text confirmation that the charges would not go through. King says she also immediately rang Chime’s customer support line to report the charges were fraudulent. But come Monday, her Chime account was nearly emptied.