Fixed Price Projects With US Clients - Chargebacks & Fraudulent Payments May Be a Thing of the Past

[wlyonsatl]

Any freelancer who does fixed price contracts and has experienced payment problems in the past should celebrate this news:

https://finance.yahoo.com/news/fed-launches-new-payments-system-that-lets-you-send-money-in-seconds

It might take a while, but all major and many minor US banks will start allowing their customers to use this system, which will provide immediate credit to Upwork (and freelancers) once Upwork's bank(s) join the system. This may take a while to be broadly used, but I'd be surprised if "a while" is more than six months to a year if the cost to users is reasonable.

Unfortunately, I'd guess most credit card misuse by clients on Upwork is by non-US clients, but most non-US banks of any size typically have US branches. If these branches use this new system, then even payments from non-US clients might be transferred with this new system.

But Upwork will need to require (or at least allow) payments from clients be through this system for freelancers to enjoy any benefit from these much more reliable/nearly impossible-to-reverse payments from clients.

[tlsanders]

How will speed of payment impact chargebacks (or some similar process designed to address fraud)?

[wlyonsatl]

The point is not just the speed of payments, Tiffany, but the near impossibility for the sender to reverse payment without the recipient's (in our case, Upwork's) prior agreement.

This new system will, for the first time ever, provide consumers with a low-cost small transaction payment option for money transfer. Clients will not be able unilaterally do chargebacks - when the money leaves their accounts it's gone and cannot be reversed without the prior agreement of Upwork.

And if someone fraudulently transfers money from a bank account they don't own, the bank that did the transfer, not Upwork or Upwork's bank or the freelancer, will be on the hook for reimbursing the actual owner of the account. The money transferred will stay with Upwork unless Upwork agrees otherwise. (Of course, this being America a certain type of lawyer will have a field day in the near term testing the limits of the finality of payments through this new system.)

Understand?

[tlsanders]

No, I don't understand. I'm struggling with how and why these transfers will be exempt from the EFTA. Is that something you can explain?

If you're correct that they are, it will perhaps be beneficial in this setting, but will be a catastrophe for consumers victimized by scams and buyers whose merchandise never arrives and such.

ETA: I found the answer, but don't have time to read the 27 pages tonight. The upshot is that the final rule as reported in the Federal Register clearly states that many FedNow transactions are subject to the EFTA and those that are not are subject to UCC Article 4A. I'll dig into the details when time allows. 

[25005175]

Can you post the link? Because the news article that Will posted made no mention of debit vs credit or even the mechanics of the system, just that it would be near instanteneous instead of ACH-slow.

[wlyonsatl]

Jonathan,

What I have seen described is basically a wire transfer system that allows consumer and companies to transfer money in real time with clearance ("good funds" in the recipient's bank account) nearly instantaneous (not subject to long clearance times).

As with the current system for wiring money via bank-to-bank transfer, the receiving bank can give the ultimate recipient (freelancer, in our instance) immediate use of the money. (Freelancers already see the advantage in this if they are able to use Upwork's "Instant Pay" service, although Upwork can unilaterally reverse such payments if a credit card issuer reverses payment to Upwork.)

Under the new system the feds have set up, neither the sender nor the sender's bank can unilaterally insist money be returned. The sending bank will be responsible for confirming the sender's identity and authorization to send the funds. "Know Your Customer" (KYC) is a  watchword in US banking these days, but whether they do or not an unauthorized payment will be their, not Upwork's bank's nor Upwork's nor the freelancer's, problem.

Can you see how this is different than the current system for making payments via credit or debit card?

What remains to be seen is which banks and which customers of those banks will use this system, which will probably be in line with the percentage of bank customers who currently use PayPal, Venmo, etc., though the feds have gone out of their way to say this new system will not compete with these existing money transfer providers. We'll see, but I don't see how this can be true.

[wlyonsatl]

Well, Tiffany, I see no reason to think consumers will not still have the choice to use credit cards if they don't trust people they're making payments to, if they are worried about being "victimized." What makes you think that will be the case?

This new payment system will allow recipients to be sure they've been paid in a way that cannot unilaterally be reversed by the payor. 

As an honest freelancer, I am most interested in knowing that when Upwork passes on to me my client's payment for my work, that payment will be much more secure than under the current payments with credit cards. (Of course, since I only do hourly contracts and Upwork has excellent hourly payment protection, my payments received are much more secure than would be true if I did fixed price contracts.)

We have seen many posts on this board from freelancers who thought payment from their clients was assured because Upwork had "verified" the client's payment method and there were funds in Upwork's "escrow" via that payment method, only to find out the client didn't actually make payment when it was due. With immediate good funds received by Upwork, there will be no need to "verify" the client's payment method nor will "escrow" be anything other than good funds in Upwork's hands.

I can imagine Upwork might even let freelancers know which clients have agreed to use this new system for their payments to Upwork. Such clients would likely see more freelancers interested in their fixed price projects and generate more connects revenue for Upwork. And to the extent clients use this new system, Upwork can reduce its costs for the people and systems currently needed to deal with fraudulent card usage and client chargebacks. 

Everybody wins, except for the fraudsters.

[wlyonsatl]

Well, Tiffany, it's been two weeks and you haven't yet told us whether you still believe EFTA stands in the way of broad acceptance of the FedNow system, as if the Federal Reserve would introduce a new payment system that does not conform with EFTA.

What's important from Upwork's and freelancers' point of view is that FedNow payments will not be unilaterally reversible by the sender, unlike credit card payments (due to fraud or chargebacks).

The real question is: Will it be a net positive for Upwork to add this new payment option to its systems? Considering that Upwork set aside $9.2 million for transaction losses in the first six months of the year (that’s $18.4 million annualized), it’s unlikely Upwork would simply ignore FedNow. And how much Upwork loses on its 10% or so of reversed fixed price projects each year is not public information. Neither is it clear how much of Upwork’s operating expenses (payroll, etc.) reflect people and resources needed to deal with client (and freelancer) fraud that would be much less common with FedNow payments.

We’ll see.

[wlyonsatl]

It’s been over a month since you told us the new FedNow instant payment service violates the Electronic Fund Transfer Act, Tiffany and you asked why FedNow is exempt from that act.

You still haven’t told us what you think FedNow’s violation(s) of EFTA is/are. But if FedNow doesn’t violate EFTA there is no reason for FedNow to be exempt from it.

I don’t see anything FedNow would provide or provide for that differs substantially from services provided by Zelle since 2017, Specifically, the 1,600 or so US banks and other financial institutions and their millions of customers who have used Zelle since 2017 are clearly told in Zelle’s User Service Agreement:

Zelle Network® User Service Agreement | Zelle (zellepay.com)

“ZELLE® DOES NOT OFFER A PROTECTION PROGRAM FOR AUTHORIZED PAYMENTS MADE WITH THE SERVICE (FOR EXAMPLE, IF YOU DO NOT RECEIVE THE GOODS OR SERVICES THAT YOU PAID FOR, OR THE GOODS OR SERVICES THAT YOU RECEIVED ARE DAMAGED OR ARE OTHERWISE NOT WHAT YOU EXPECTED).”

As you know, Tiffany, I have not said transfers through FedNow are “absolutely irrevocable,” but making it more difficult for clients to simply refuse to recognize that the funds they have put in escrow are subject to Upwork’s rules would undoubtedly be a good thing. (It would be interesting to know how many clients use ACH to make payments to Upwork. As far as I know, using ACH is more complicated than using FedNow will be, but ACH payments are also more difficult to reverse than credit card or PayPal payments - reversal of ACH transfers is not possible five banking days after a transfer.)

There may be many reasons why Upwork will never accept FedNow payments from clients or freelancers or clients wouldn’t want to use that payment method, but you have provided no evidence FedNow violates EFTA. After all, the US Federal Reserve likely has many highly qualified lawyers on staff who have already addressed this issue. The same is true for the existing and expanding list of financial institutions who have already agreed to utilize FedNow.

[wlyonsatl]

So, Tiffany, it's been more than two months since you told us you found the answer as to why FedNow does not, as you initially thought, violate EFTA. I never thought there was any reason to believe the US Federal Reserve and its cadre of lawyers would be unaware of such a violation before going live with FedNow, but surely you can give the experienced lawyer's take on this issue.

[wlyonsatl]

And I'm sure the board will be grateful for your legal insights. I know I will be.

[tlsanders]

I haven't been able to find any specifics on the process or enforcement mechanism, but there is a procedure for participating institutions to recall payments in cases of fraud. I'll keep looking for more detail on the procedure and how it interacts with existing laws regarding electronic transfers. It does not appear, though, that transfers are irrevocable. 

[wlyonsatl]

I have never said transfers would be absolutely irrevocable, Tiffany. I've said they would not be UNILATERALLY reversible, as credit card payments now are. 

And it will be the sending bank that will be responsible for fixing fraudulent transfers, not Upwork or Upwork's bank(s). If that were not the case, then receiving banks would be reluctant to provide their customers with the planned immediate use of the funds and payees (freelancers  in our case), could not rely on the fact monies received were "good funds."

As with wire transfers today, a payor will not be able to simply demand money their bank sent at their instructions to be returned to them. That can require a  law suit if the payee doesn't agree to return the funds, right? And there is no reason to believe the new system would prevent such a law suit.

[wlyonsatl]

Here's some additional information for you, Tiffany:

"...instant payments’ speed and irrevocability make them different from most payment options'"

https://explore.fednow.org/guided-journey?id=3&stage=7&role=fi_sp-eu_spe&resourceTitle=fraud-and-ins...

And there's still no indication that FedNow violates any US consumer protection rules, laws, etc.

[spectralua]

Tiffany is gone from this useless platform. Sorry, but look like she will never repply.

[6bfcdaf8]

I don't see people switching away from credit card payments. Especially in favor to those that don't offer chargebacks.

[wlyonsatl]

Alper,

It says something about a client that they want to be able to unilaterally do a chargeback in a dispute situation rather than adhere to Upwork's policies and procedures.

I don't use fixed price contracts because there are so many clients who think that way now - and I can't identify them ahead of time because Upwork tells me practically nothing about their history of demanding refunds, etc. on Upwork.

I'm a pretty good freelancer, but I'd only offer my services to honest fixed price clients who do things the way Upwork wants them done. I have had clients invite me to submit a proposal or even sent me an offer on their new fixed price projects and I always tell them I don't do fixed price contracts. Some change their project to hourly; other don't. That's OK with me either way.

If I was assured their "escrowed" funds would be "good funds" at Upwork, I'd at least be open to the idea of working on fixed price jobs, if Upwork confirmed such clients are using the new funds transfer system for Upwork to put in "escrow" for milestones.

But I take it you believe most/all other freelancers just don't care that the current system of "verifying" clients and putting their funding in "escrow" leaves them exposed to fraudulent payment methods and illusory funds in "escrow." We'll see. You might be right.

[wlyonsatl]

Alper,

If Upwork offers significant incentives that clients think are valuable, such as a reduction in Upwork's fees when Fed Now is used to make  payment to Upwork, some clients would likely be happy to reduce their cost of using Upwork. Only "clients" who intend to defraud Upwork and freelancers would ignore the option out of hand. 

How many clients would feel this way? Who knows? It's up to Upwork to decide how valuable receiving more-difficult-to-reverse payments from clients would be. That isn't a decision Upwork is likely to make quickly.

But Upwork currently spends (or loses) a lot of money by allowing clients to pay their freelancer and other charges via credit card. If Fed Now payments turn out to be much more difficult to reverse than the current payment methods Upwork management would be foolish not to take a hard look at the Fed Now option once adoption gains a foothold in the US market, especially if Upwork's fees for using Fed Now are also much less than the fees Upwork currently pays for accepting credit cards and other fee-creating payment methods.

[bobafett999]

Upwork will NEVER force the buyers to use this system.

IMO the discussion is mute.

[wlyonsatl]

Prashant,

Upwork needn't "force" clients to use this better payment system, but they could offer clients incentives for using it - e.g lower fees - since Upwork would likely have much lower costs in the staff and systems needed for dispute resolution, the cost of making complimentary payments to mollify clients and freelancers in dispute and, maybe most importantly, the cost of funding its own excellent hourly payment protection payments.

For example, in the three months ended March 31, 2023 Upwork had an expense of $6.7 million for transaction losses. That works out to more than $25 million a year - a number that I'm sure Upwork would like to reduce. Allowing for more reliable payments from clients should be of interest to Upwork, don't you think?

And other experienced, highly skilled freelancers who currently refuse to work on fixed price projects might change their minds, which would be a good thing for clients who want to at least have access to all of Upwork's best freelancers. 

How or whether Upwork will use this new system is hard to predict, but I don't believe management will ignore the opportunity. I doubt they see the opportunity as "moot."

[bobafett999]

Thanks for correcting my "mute".  You do have a point.

[6bfcdaf8]

How about upwork giving us an option to opt out of any payment protection? If you think about it we are forced to buy a very expensive insurance and i'd like this to be optional.

[3755345a]

However, there are a few points to consider regarding this news:

1. Implementation and Adoption: While the launch of a new payments system is promising, the timeline for its widespread adoption can vary. As you mentioned, it might take a while for all major and minor US banks to integrate and offer this system to their customers. The process might involve technical, regulatory, and logistical considerations.

2. International Transactions: While this system could potentially enhance the payment process for US-based freelancers and clients, its impact on international transactions could be limited. Cross-border payments often involve different banking systems, currencies, and regulations, which might not align seamlessly with this new system.

3. Upwork's Integration: Upwork's integration with this new payment system would be a key factor in its potential benefits for freelancers. Upwork would need to align its processes and policies with the system to ensure that freelancers receive timely and secure payments.

[wlyonsatl]

All of which I have said in this thread before, Sana.

[wlyonsatl]

Well, our resident self-proclaimed legal expert hasn't provided any reason why FedNow violates EFTA and needs to be exempt from it. 

Of the many reasons FedNow might not be a useful or likely new payment mechanism for Upwork's US clients, addressing its supposed violation of EFTA is not relevant.