It is not the responsibility of the banks to compensate the losses of the victims of the scam

Disclaimer: The opinions expressed below belong exclusively to the author.

Scams have made headlines quite frequently in recent months.

First, there was a phishing scam that targeted OCBC customers. Just a few months later, there was another one targeting DBS clients.

In general, scams are becoming more common: 2021 saw a 24% increase in reported cases compared to 2020, and while rates of other crimes have decreased overall, the increase in scams has been so significant that overall levels Singapore’s crime rates have increased.

Celebrities weren’t spared either: Singapore rapper Yung Raja lost nearly S $ 100,000 to an NFT scam earlier this year.

The growing number of Singaporeans affected, as well as the high-profile targets, have caused quite a few protests.

In response, the Monetary Authority of Singapore (MAS) has announced that a framework is on the way for fair sharing of losses from scams.

Meanwhile, the Association of Banks of Singapore has also put in place new guidelines in an effort to try to reduce the amounts lost due to scams. OCBC has even gone so far as to provide customers with access to a kill switch to lock their accounts if they suspect they have been scammed.

However, not everyone is satisfied. In particular, some have asked the banks to bear all losses from such scams, which means that Singaporean victims of the scams should be fully compensated for the amount lost.

Why should banks bear the losses?

For many consumers, this may seem fair. One of the reasons consumers put money into banks is to keep their funds safe, so security is obviously a major responsibility of banks.

When scams occur and banks release funds held by scammers, it must be argued that banks have failed to fulfill this duty – they did not keep our funds safe and the resulting loss should not be borne by the consumer, but by the lender. services, which in this case is the bank; the scam therefore reflects an underinvestment in securities by the bank.

Certainly, if banks fail to adequately ensure the safety of their clients’ funds, why should clients be held accountable when these funds are stolen? Instead, customers should be intact, with banks compensating for losses to customers due to their security oversights.

But at the same time, we should also consider that banks have taken more security measures in an effort to prevent scams. So is it really true that banks are underinvesting in their digital security measures?

There are already several levels of verification that customers have to go through to access their accounts, and even scammers have to go through them to fraudulently transfer funds.

Check for online banking
Image Credit: Banking Exchange

This means that scammers must first obtain customer credentials in order to access their accounts. If customers safeguard their credentials correctly, scammers would theoretically be unable to transfer money.

As such, customers also need to share some blame for the scams. No amount of infrastructure can safeguard against a lack of supervision.

Also, there is a limit to how much banks can increase security before it becomes a nuisance. There will just be so many hassles that customers are willing to endure before the alternative becomes preferable, a return to physical banking.

And not to forget, scams also exist for physical banking. There will always be a cat and mouse game between scammers and banking security, both online and offline.

While holding banks accountable for losses will likely encourage banks to invest in safety, we must remember that when the only tool we have is a hammer, every problem looks like a nail.

You need to find better ways to deal with scams, instead of just hammering with the one tool we have.

Incentives and arguments about moral hazard must be applied fairly

Some have also argued that if consumers share losses with banks, banks will simply find ways to place the blame on consumers in an effort to reduce their liability and losses.

This is certainly a cause for concern. American insurance companies have been in the spotlight of popular culture for their willingness to play the blame game in an effort to reduce the amounts they pay customers.

If Singapore banks were to do the same, it would be to the detriment of customers if they lose money due to scams and the banks refuse to take any responsibility.

But to suggest that the same situation would occur in Singapore simply because banks can blame consumers for their losses is ridiculous. As they say, just because you can doesn’t always mean you should.

Banks remain profit-oriented institutions: they rely on clients to deposit funds, in order to reinvest these deposits for profit and pay client interest. The difference is pocketed as a profit.

Although we can consider monolithic banks, indifferent entities in a cold country, calculating efficiency, banks are ultimately still subject to competition with each other, offering better savings plans, interest rates and terms of use.

For a bank, simply blaming customers when they are scammed would hurt their long-term profits when consumers recognize the role model and switch to another bank.

An unnecessary transfer of blame, therefore, would be a strategic commercial mistake on the part of the banks, and probably fatal.

OCBC offered the victims of the scam compensation
Image credit: CapitalLand

Singapore banks have already shown that they are willing to make lower profits to compensate the victims, even when the banks may not be entirely at fault. OCBC offered a one-time payment for the victims of the scam, fully covering any losses due to the phishing scam.

As MAS and OCBC noted, this was a one-time payment which shouldn’t indicate how to resolve future losses due to scams.

Payment is already a dangerous precedent. If consumers know that banks will cover their losses, there is really no incentive for them to remain vigilant.

While there may be lengthy investigations into the veracity of their claims that they have been scammed, customers will still receive their money at the end of the day, while banks will suffer the loss on behalf of customers.

The cost of lax vigilance, therefore, is not placed where it should be, and it is of the utmost importance that the cost is placed in its place.

The argument that there is a moral hazard in sharing losses is both ways: if we assume that moral hazard will exist for banks when they are able to pass the blame on customers, we must also assume moral hazard for banks. customers who are sure they will not suffer from their mistakes.

The way forward must therefore be one that limits this moral hazard as much as possible, but forcing banks to bear all the losses deriving from scams is certainly not a solution that satisfies this condition.

Is shifting blame really something to be avoided at all costs?

While it may seem that blame shifting is inherently bad, it really shouldn’t be considered bad. In many cases, blame needs to be shifted and when it comes to how to fairly share losses from scams, it can actually work as a positive force.

In a court of law, lawyers present the best case for their clients, the case that presents their clients as blameless as possible and transfers as much blame as possible to another party.

Old Supreme Court building
Image credit: Wikipedia

This is, ultimately, the way the legal system works: it works on the basis of arguments to ensure that judgments are fair.

The shifting of blame, therefore, is part of the game, within the limits. Lawyers present the best case, but they cannot present a false case, which is not true.

What must be avoided is an excessive shift of blame and the banks already have an incentive to avoid it.

Banks are already facing an impossible uphill battle and making lower profits to compensate victims and investigate complaints. As consumers, although the pain of losing our hard-earned money is something we wish to avoid, we should ultimately recognize that more often than not we may have a role to play in causing the loss in the first place.

When banks bear all the losses, consumers have next to nothing to lose due to their negligence and this is an unfair scenario. While the banks do their best to protect us, we must also do our part to protect ourselves.

In the end, banks are not consumers’ enemies: we both have a common interest in protecting our property from those who hope to acquire it unfairly.

But when our efforts fail, it is right that a fair share of losses be achieved, which encourages all parties to do better in the future.

Featured Image Credit: The Drum