“If you and the United States federal government disagree whether a transaction is final, you are wrong. That is true for notorious Bitcoin thefts, but it's also true for wire transfers, conveyances of real estate, credit card payments, and grave robbing.”

I think the acknowledgement of an ad read sounds cooler in Japanese.

Cool, right? So picture this. You've finally recruited that engineer you've been eyeing for months. The interview feedback was unanimous. Totally cracked. Their salary and equity grant were pricey, but worth it. You can't wait to get them to work. On filing expense reports? No, of course. You've never hired anyone just to have them do expense reports. But everyone you hire has to do expense reports because you're a grown-up company with stakeholders to satisfy. And perhaps you've even adopted one of the more modern expense report systems to be 50% less insultingly wasteful. Mercury, the banking provider I use for my own business, has an alternative, Mercury Spend. Your team's expense policies, approvals, limits, and reporting live in the same place with the rest of the business banking. So you spend less time asking an engineering lead to ask a senior engineer to fish out a SaaS invoice and more time actually doing things that matter. Have you ever really enjoyed a conversation with an accountant about expense substantiation? No, and the accountant didn't either. Just forward the SaaS receipt email to the usual alias and Mercury spend will save humans from thinking about the rest. When my assistant last told me a Mercury debit card charge was declined, I was able to approve a temporary increase in the cards limits in less taps than it took me to text them to try again, please. I also love being able to spin up cards trivially for a person, project, or expense category. A $1,000 a week limit on software. I'm a sassy guy. And like the rest of Mercury, it works regardless of whether you're a startup getting formal for the first time or a well-established company. Mercury has over 300,000 customers of all sizes. Fittingly, you don't need to talk to sales to liberate your team from expense report drudgery. Go to mercury.com to learn more and sign up in minutes. Mercury is a fintech company, not an FTIC insured bank. Banking services provided through Choice Financial Group and Column NA, Members FDIC. The IO card is issued by Patriot Bank, NA, member FDIC, pursuant to a license from MasterCard International Incorporated. Meetings get a bum wrap. This meeting could have been an email. But sometimes it is really useful to get everyone in a room so there are no misunderstandings. So do the notes for the meeting actually reflect what was decided in it? That is where Granola comes in. It is a modern notepad for meetings. You attend the meeting like you usually do, and Granola, running on your own device, securely transcribes it. You jot down notes as you usually do, and Granola enriches your version, tracking multiple speakers, the back and forth of the meeting, and final decisions. You can even chat with your notes, live or after the meeting. Why did this slip from Q3 again? Who is in charge of getting sign-off for marketing? Granola lets everyone be present in the meeting rather than having one person sidelined by being note-taker. It's your usual meetings, now with superpowers. Action items, actioned, owners, owned, synergies. Sorry, no amount of meetings will ever let me say synergies unironically. If meetings are eating up your day, Granola is a no-brainer. You can try it totally free. Just head to granola.ai/slash complex systems. That's granola.ai slash complex systems to get your time back. Try it for free at granola.ai slash complex systems. To make a long story short, if you want to make a approximately $8 million interest payment via FlexCube, you have to enter that fact in more form fields than is obviously sort of like naturally required. And if you don't hit all of those form fields, you will instead wire out the entire principle of the loan rather than simply an interest payment. And there will be a confirmation, but the confirmation won't exactly make it obvious that the entire principal of the loan is leaving the bank. And so, on August 11th, 2020, while attempting to make about an $8 million interest payment, one employee at a business outsourcing firm in a business process outsourcing firm in India attempts to key in that interest payment for $8 million and queues up Citi to send out $900 million or so. And then a second employee at the BPO also makes substantially the same mistake in checking it, and then it gets sent over to a city approver who actually works in Delaware, and that person also approves it, and so out $900 million goes. So, this hits the account of various lenders, and the lenders are largely surprised to get it. There is internal chatter. Was this a mistake? Did Citibank send us a notice that they were going to repay the Revlon thing early? And bluntly, if you think about it for a few seconds, this kind of stinks to high heaven because this debt is trading at like 20 to 30 cents on the dollar, and you don't expect to get 100 cents in full satisfaction out of the clear blue sky several years early. From, again, a party with extremely averse interest to yours, who you might be engaged in an act of litigation with. So, Citibank realizes its mistakes within a day and hits all of the lenders with a recall notice, saying essentially, hey guys, we goofed. You're going to do the thing that the culture that is. New York City strongly suggests you're going to do right now, right? And some lenders return the money, about $400 million worth. But about 10 managers representing various funds and similar and high-net worth individuals that were invested in this instrument continue to hold about $500 million. So who is out the $500 million? It is Citi. And Citi is pretty unhappy for a variety of reasons. $500 million operational mistakes are not exactly unknown in the financial industry, but they're pretty rare. Citi sues over this. Gets to the district court, and the district court says, well, there is this obscure thing in New York law called the discharge for value defense. This charge for value defense is basically like, in the case of an obvious error in a payment, we reverse the payment. No worries. But if the recipient of the payment has the like legitimate belief that, no, the payment is something that is actually owed to them in a way that a lender might assume that full repayment of a loan is actually owed and they haven't received notice of the error at the point the payment is made, payment is good. And so the judge says, nope. In this case, industry standard practice does not control New York law controls, and New York law says you can just keep the $500 million that you believe you are owed. This causes an absolute firestorm in the financial industry for so many ways and results in, oh boy, probably north of $500 million in legal spend as so many contracts get rewritten to say, despite what New York law says, if there is an erroneous payment, you absolutely do not do the thing that New York law suggests that you have the default right to, but instead will hew to what was previously industry-stranded practice, take the telephone call and return the money, you freaking idiots, sign on the dotted line, please. But it turns out that the non-final final payment is more final than was expected at the moment because it goes to the Court of Appeals. And the Court of Appeals says, among other things, you can read the entire opinion at your leisure. One, they think the district court judge erred in applying the discharge for value defense. And then two, it's just like monstrously perverse and disruptive that this transaction would get allowed to stand. That despite being a wire transfer, this should have been non-final from the jump. And I think that is very instructive in the way that the sort of technical reality of the wire and the social reality of the wire that, you know, we have this culture in the industry of doing hold harmless. And this should have been nothing more than like a single, not very stressful phone call between Citi and each lender. It resulted in a multi-year, multi-court battle. And then the legal reality trumped the legal reality, trumped the social reality, trumped the technical reality of the wire. And I find that to be just endlessly fascinating. But the international comparison here is also quite instructive. So in the United States, we've mentioned that subject to ongoing disputes or, well, they're not ongoing at the moment, but give it a minute. Subject to disputes between the regulators of United States banks and the banks with respect to Zelle. Zell payments are broadly thought to be like mostly final at the moment for one interesting class of payments. Zell, oh man, I should write an essay about this at some point, is a blocking play. It basically exists to give the banks a way to say, don't just take all your day-to-day activity to Cash App or Venmo. And it is broadly underbaked as a solution in a lot of ways. But it offers substantially instantaneous payments. And there are two competing standards for doing substantially instantaneous payments between bank accounts in the United States. But Zelle is the one that has most of the adoption right now. One is FedNow, which the payment wag joke for many, many years has been calling it Fed Later. And the other is RTP, which stands cleverly for real-time payments. You can make real-time payments right now, but the supported institution set for both sending and receiving is very far from full coverage. And Zell is much closer to full coverage. And so most people use Zell. The guarantees that different nations make with respect to whether consumers are at risk for their payments or not are very different from each other. The UK, for example, has substantially instantaneous bank account transactions between banks, requiring a two-factor authentication, typically through a mobile app. So the UK, as a broad feature of bank accounts, allows you to do instantaneous payments between bank accounts at almost any pound amount. And this has caused a lot of what's called. App fraud, APP, APP fraud, and it largely affected the usual suspects, largely consumers who might not be very sophisticated, older savers in particular, who responded to SMS messages or phone calls from scammers, et cetera, et cetera. So the UK said, okay, well, we're going to make the banks eat that one in the same way that Regulation E in the United States makes banks largely finally responsible for certain forms of fraud committed against users, and then the banks in the US offload it elsewhere. And there is a sort of cap on the amount that the payment standards body in the UK makes the bank eat, but it's very generous, 85,000 pounds or so reduced after pressure from more than 400,000 pounds. And the first year reimbursement was on the order of 173 million pounds out of banks. So not a small amount of money. Also, probably not full coverage for frauds committed in the United Kingdom, but it's just my finger-to-the-wing guess based on the size of the economy and typical fraud rates. So the PSR made an independent valuation and believes that app fraud was down by about 21%, which translates to about 70 million pounds of savings to consumers. And they thought, well, this is just that after this guarantee makes it possible to reverse these transactions, even with the bank being ultimately responsible for it, it's just a less attractive fraud surface. And that sort of whack-a-mole is quite common. Fraudsters go to whatever rail makes it most possible for them to successfully extract the money. India also historically had a similar problem with UPI. And India's solution was somewhat different. So rather than having the transaction be reversible and put it on the banks if there's no longer sufficient funds in the account to recover, in the case of a mule account, for those of you who don't know this lingo, mules are the individuals or companies that fraudsters with active knowing coordination or otherwise suborn to move money on their behalf. Frequently, just people responding to work-from-home scams. But some mules absolutely know what they're doing is too good to be true. You know, just receive money that is directed into your bank account and then forward it on to someone we nominate and keep 10% for your trouble. And then some people are a bit more naive about how the world works. And both people who are quite sophisticated about how the world works and quite naive about how the world works are allowed to get bank accounts. And that is broadly a just decision made by society and will not be reversed anytime soon. UPI exists, public-private partnership, wonderful, substantially instantaneous rail to make payments. UPI's fraud guarantee did not cover the case of a customer being induced to approve a payment on their cell phone or other device, even if they were induced fraudulently to make that payment. And this resulted in a politically unsustainable amount of fraud in India. And so it appears that the decision the RBI made was, okay, we will allow a one-time reversal of a payment made for in this common fraud modality where it is actually the user with their own hands on their own device making the fraudulent payment, but they've been induced to do so by lies being told by the fraudster. And so they shouldn't really be liable for it. So we will allow you to reverse that one time. In the case where we can't get it back from the fraudster's mule, rather than putting it to the bank, we will put it to a special fund stood up by the RBI/slash payment scheme. This is a once-in-a-lifetime opportunity. Please don't get frauded frequently. We would like to avoid the sort of moral hazard of you assuming that we will always cover for your mistakes. And then Japan decided to do this sort of differently. So although it is technically possible to reverse a furikomi, a bank-to-bank transfer in Japan, in practice, the reversal procedure, which is called kumimuvoshi, if you want some trivia night credit for Japanese payments professionals, in practice, the reversal procedure is so rare that most people, even in the Japanese financial industry, don't understand that that is literally a thing you can do. And what it does is the sender, similar to the case of Hold Harmless in the United States, but somewhat more regimented, the sender sends a request to the receiving institution. Hey, will you allow us to recall that? The receiving institution can't, at the level of the ops team, unilaterally recall the payment. They have to ask the account holder. And the account holder, in the case of them being a money mule, will typically say no or not respond to the request. And so it is. Is this poorly understood way to reverse the bank payments doesn't solve for the fraudulent use case or even the mistaken use case in Japan? So the Japanese government said, oh, well, typically elderly people are getting taken for just absurd amounts based on scams here. What can we do about it? What they largely settled on was user education and suasion against the financial industry to sort of do, let's say, harm mitigation approaches. So we're going to ratchet down the maximum amount of payments you can send today without actually coming into the bank. We're going to have bank tellers visit old people when they come up to the ATM and say, so what brings you up to the ATM today? Is it perhaps that you have received a telephone call? If so, let's talk a little bit before you push buttons on the ATM. Because unlike ATMs in the United States, the ATM in Japan can wire out close to $10,000 without any bank staff ever being involved. But the other thing they did was they made a sort of special legal procedure by which someone could file a complaint, and then the Japanese version of the Deposit Insurance Corporation could designate a mule's account as no longer being legally owned by the mule. And then the defrauded users could take pro-router shares of the amount of money that was left in the mule's account. The problem with this is that in Japan, since money movement is substantially instantaneous and since getting cash out of the financial system is still not all that weird of a thing to do, very frequently the amount of money that was in the mule's account at the point of the legal process being sent against it was nearly zero. And so this largely didn't solve for the redress to defrauded users. And so that's how various nations have differently approached this question of: okay, if the payment is final, if we say it is, when should we say it is? And even in light of concerted government action to make certain payments less final than they are otherwise believed to be, the social, technical, cultural substrate of those payments continues to make them final. Even when the state says, no, no, we think normatively that shouldn't be final. And this is part of the ongoing cat and mouse game between the good guys, all of us, inclusive of the financial industry, and the bad guys and their ravenous attempt to get at various people's owned assets. And that is, unfortunately, a recurring theme for complex systems and bits about money. We've covered it in the past. I will put some links in the show notes, and we are quite likely to cover it in the future. But hopefully, we'll have a happier topic to end on next week. See you then.

Thanks for tuning in to this week's episode of Complex Systems. If you have comments, drop me an email or hit me up at Patty11 on Twitter. Ratings and reviews are the lifeblood of new podcasts for SEO reasons, and also because they let me know what you like.