Shared Liability

In modern financial businesses, the liability always belongs to someone else.  For example, if I am buying a house, and I take out a loan, if the value of the house suddenly drops dramatically, I am liable for the loss in value, not the bank that provided the loan.  This is true even though the bank required that the home be appraised and inspected to ensure that it would have sufficient collateral value to secure the loan.  It also works this way with transaction oriented businesses.  If I sell something and get paid through PayPal, if the buyer's check bounces or credit card is discovered to be stolen, PayPal takes the money to cover the loss from me.  And I mean, PayPal takes all of the loses from me.  If a store sells something on a Visa card, and the transaction has to be reversed due to fraud, Visa charges the store for 100% of the losses.  Financial businesses only take losses when someone walks away from debt, and even then, they don't always take losses.  I read an article a few months ago about an older couple who's house dropped in value by more than 60% when the housing bubble burst.  The value of their house was substantially lower than the remaining value on their loan.  The bank expected them to eat 100% of the loss and keep paying on the loan which the house was no longer even close to fair collateral for.  So the couple walked away.  This is the only place where banks and similar financial companies lose money.  In every other case, they charge it to some other party.

This is stupid.  Yes, I understand that businesses cannot survive net loss, but they can survive occasional smaller losses, and a well run business can handle this.  Companies like PayPal and Visa charge someone else mostly because they can get away with it.  The thing is, when a transaction has to be reversed because it is fraudulent, no one deserves the loss, except perhaps the perpetrator, who generally is both impossible to find in a timely manner and does not have the money anyway.  In short, someone is going to get ripped off.  Paypal justifies charging the seller on the grounds that the seller should have known better.  How so?  I mean, yeah, there are often warning signs and red flags, but it can be really hard to tell a good scam from a legitimate sale.  Scammers are not the only ones that hire private transportation for bulky items.  Scammers are not the only ones who have poor but passable English skills.  And what do you expect an honest person to do when they have been overpaid?  Yeah, you and I might know that overpayment is a major red flag, but scamming has become so complex that there could be whole college classes on the topic and still barely brush the surface.  An online business owner might be reasonably expected to know how to identify common scams, but in what world is it reasonable to expect every regular 9 to 5 worker who just wants to get a bucks for an old chair or table to have a top class education in internet scams?  I mean, the 5 to 10 hours required to learn about just the most basic scams would be worth more working minimum wage than the value of the typical used furniture item.

Financial companies that provide loans or electronic payment should take part of the risk.  I understand a bank offering loans repossessing the house when the buyer is no longer capable of paying the mortgage, under most conditions.  The house is not just an investment for the buyer though.  In fact, it is more of an indirect investment for the bank than anyone.  (If you have ever owned a home and kept track of all of the associated costs, you will likely be aware that homes are not investments.  They are liabilities.  The biggest financial benefit you get out of buying a home is that the net cost is lower than renting.  There is almost always a net cost though, even after selling the home.)  When the value of a home drops below the remaining value of the mortgage, the buyer has two options.  One is just walking away and taking the loss as is.  The other is continuing paying on a loan that is larger than the value of its collateral.  The first is morally questionable and the second is financially unwise.  And if the buyer does walk away, the entire liability minus what has already been paid is on the bank.  A wise and ethical bank would contact the buyer and renegotiate the loan.  This would balance the risk, earn the trust of the buyer, and help the bank cut its own losses.  Likewise, a wise and ethical electronic money transfer company, like PayPal or Visa, would also take part of the risk.  Because the fraudulent use of a credit card is not entirely the fault of the seller practically ever.  Yes, the seller might have been the victim of a scam that some people might consider obvious, but PayPal or Visa was the moron who accepted the payment in the first place!

Shared risk on this sort of thing is not merely a good idea.  It should be legally enforced.  While businesses may not be able to take a net loss, a small percentage of transactions resulting in losses is not as big a deal for them as one transaction is for someone who is just trying to sell a couch.  And if a company like PayPal or Visa is having bad transactions so frequently that it is a serious problem, that company deserves to fail.  It is bad for the economy to keep propping up companies that are too dumb to be profitable on their own.  The fact is, currently the end user ends up taking all of the risk, while the financial businesses are reaping most of the profits.  This is just plain wrong.  If the banks and electronic money transfer companies are going to making most of the profits, they should also be taking most of the risk.  And frankly, the loss of a company like Visa or PayPal is far less destructive than thousands of people getting ripped off because those companies won't take responsibility for their own security.  If Visa or PayPal dies, another company will appear to replace them.

And perhaps a legally enforced shared risk policy would prompt our financial sector make this kind of fraud harder.  They are not going to start caring about forged money orders or cashiers checks, about stolen credit cards, or about hacked accounts as long as they are allowed to keep making their customers are pay for all of the losses.  A legally enforced shared risk policy would push the financial sector to do a better job of protecting the assets of its customers.  And likewise, a legally enforced shared risk policy would also encourage lenders to adopt wiser lending policies that avoid the creation of recession causing bubbles in the first place.  And even more importantly, a legally enforced shared risk policy would make all of this stuff fair and ethical, instead of rewarding financial institutions for making fraud easy and for poor lending practices.  An effective and beneficial free market also needs to be a fair market, and right now it is not even close.