Earlier quoted context omitted.
You can't always reverse the transaction in regular financial world. It is typically possible if all parties involved act in good faith, and often possible in other cases too, if you act fast, or the bad faith actor is less than competent. However, this is not always the case. Imagine the following scenario: bank A sends $100M to bank B, which then sends it to bank C. By "reversing" the A->B transaction, all you're d…
Isn't the obvious solution to also reverse the transfer from Bank B to Bank C? If multi-hop transfers are treated as irreversible, then it creates an incentive for fraudulent sellers to collect all payments through multiple hops. If instead fraudulent transactions may be reversed at the first payment processor, the payment processor then has a financial incentive to make sure that they only pass through valid transac…
Yes, but it's only one of the incentives they're facing. Another one is to provide useful and convenient service to its customers.
Try to think more about the example I provided. The account in bank A is victim's, while accounts in banks B and C are owned by the fraudster. The transfer from A to B is fraudulent, but the transfer from B to C is perfectly legitimate as far as B bank knows: the name on the destination account in bank C might even be exactly the same as in bank B, so why would bank B have any suspicions? At best, it could reject incoming transfer from bank A if it had suspicions (which, by the way, why would it have?). Would you want to be a customer of a bank that can just reject incoming transfers, so that you have trouble getting paid?
Finally, consider that bank C might then allow the fraudster to withdraw the proceeds in cash. Bank C might be foreign, and B communicates with it through SWIFT, and might simply refuse reversing the transaction, or again might already have sent the funds to bank D in yet another country. The point is that you cannot treat regular financial transactions as reversible either. They might be reversible sometimes, especially if everyone involved acts in good faith, but there is no guarantee.
> In an analogous situation, suppose I go to a physical store and buy a TV, only to find that it doesn't turn on. I have the right to return it to the same store that I bought it from, and to receive a full refund.
That's not really an analogous situation. Here's what would be closer: imagine you order a specialty TV online from China. The retailer A orders a company B that manages it warehouse to pack it on a truck of company C that specializes in LTL, which then ships it to company D which coalesces LTL freight into packed containers, then puts on containers owned by a shipping company E, which ships them across the Pacific to port authority F, then we have a shipping company in G in states, another truck company H to ship it to train yard H that gets it to LTL company I's warehouse, which then is passed on to courier company J, an independent subcontractor K of which finally gets it to your front door. Then your TV doesn't work, and you want to return it.
Will you try to unravel the chain back the same way it arrived? Are you going to find the subcontractor K, and have him ship it back to courier company J, to send it back to the LTL company K etc? No, you'll go straight for the original retailer. Similarly, with financial fraud, you'd need to go straight for the fraudster.