When remittance company Xoom decided to not withdraw money from its customers' bank accounts until the funds reach the recipient, it was betting the added goodwill from users would outweigh the added risk of fraud.

"We are choosing to take smart risks because we have a ten-year knowledge base that goes into our risk system," says Julian King, senior vice president of marketing and corporate development for Xoom.

Xoom's program, called Pay Only When Received (POWR), is a follow-up to another product called Status Trak, which allows people to track transfers via text messages, email and phone. The products are designed to build relationships with consumers by extending trust. POWR also makes transfers happen faster, since Xoom is "fronting" the money to the payee on the sender's behalf.

"The benefit is the peace of mind that the consumers are avoiding any perceived risk along the way," King says. "People can track the payment, and Xoom pays the payee, then takes the money from the account."

POWR is using a method similar to what bankers call a "risk" model, because Xoom is accepting the risk that the sender may not have sufficient funds. The more traditional model, called "good funds" by bankers, involves the payment facilitator—in this case Xoom—withdrawing the money from the sender's account immediately when the payment is scheduled. The transaction generally takes about a day longer this way, so the "risk" model is considered more consumer-friendly.

Banks began moving away from "good funds" model for online payments years ago.

Other payment companies, including PayPal, also allow recipients to receive money before it's withdrawn from the sender's account—thus trading more risk for faster transactions, says Arkady Fridman, a senior analyst at Aite Group.

"A PayPal seller receives funds instantly to their PayPal account when a buyer selects 'bank' as the funding instrument," he says. "This allows the seller to ship products immediately after the payment is received while PayPal holds the risk on the buyer's transaction until the bank transfer settles."  

PayPal did not make an executive available for comment by deadline.

Xoom's King expressed confidence that its transaction database can help it guard properly against overdrafts and fraud.

The company has built a proprietary internal risk system that examines past and current transactions, combined with analytics, to spot potentially risky consumers.

Xoom also uses behavioral modeling, which can spot consumer tendencies, such as debt management, or the order in which certain recurring or one-off bills are paid. These factors, combined with other tools, help proactively locate signs of financial trouble. 

"We look at thousands of data points and use a number of technologies, much of it homegrown, to make decisions on risk," King says.

Repeat customers also help mitigate risk for Xoom, Fridman says.

"This allows a level of comfort across their entire customer base," he says. "That's where the long history of transaction data helps, risk models are fine-tuned with larger data sets."

Xoom's mobile apps can also help it combat fraud, says Richard Crone, a payments consultant.

"If you look at the Xoom app, you are registering that customer. The mobile phone number can be used to validate the name and address of the consumer," he says.

As prepaid cards migrate to electronic channels, a "risk" model can be a useful tool to fund gift cards faster, Crone says. "Gift cards used to have a 24-hour delay, now there's an expectation of faster availability," he says.

Other companies were reluctant to discuss the subject. Western Union would not comment on its remittance model, nor would Boom, which competes with Xoom as an alternative remittance provider.

The OfferWise/Foursquare product offered by First Data does not use the "risk" withdrawal model to fund its real-time merchant offers, said Elizabeth Grice, a First Data spokeswoman, in an email. First Data did not disclose the funding model for that program, nor would it say if it's using a "risk" withdrawal model in other products, such as Telecheck, First Data's check acceptance system.

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