Legislative Pressure Mounts to Curb Fraud on Zelle

Pressure from the Senate Banking Committee on Early Warning Systems LLC, operator of the Zelle peer-to-peer payment network, is rising as committee members continue to press Early Warning for information about the extent of fraud on the network.

A report released by Sen. Elizabeth Warren’s office late Monday charges that fraud and theft are rampant on the network, but also argues member banks are not repaying victims in the vast majority of cases where customers were fraudulently induced into making payments on Zelle. It adds that Zelle members are not repaying customers who contest unauthorized Zelle payments, potentially violating federal law and Consumer Financial Protection Bureau rules.

In April, Sen. Warren (D-Mass). opened an investigation of Zelle and Early Warning and requested information from the bank owners of Early Warning about fraud on the network.

To support its claims about fraud on Zelle, the report cites data from Early Warning Systems, Zelle’s owner, that says consumer losses due to fraud and scams totaled an estimated $440 million in 2021. More specifically, that report cites data from four banks that shared information about fraud losses on Zelle. This information indicates there were 192,878 cases of customers being fraudulently induced into making $213.8 million in payments through Zelle during 2021 and through the first half of 2022. The report projects fraud losses on Zelle for those four banks will exceed $255 million in 2022. 

The report adds that, in the majority of cases in which consumers were fraudulently induced to make a payment using Zelle, the banks did not repay the customers involved. Three banks that provided data on repayments in instances of consumer fraud reimbursed in 3,473 cases, or 9.6% of consumers. Reimbursements totaled $2.9 million, or 11% of the losses claimed by consumers, the report says.   

In cases of consumers who were victims of so-called me-to-me fraud, in which criminals gain access to a consumer’s Zelle account and use it to make unauthorized payments, 47% of the total amount lost during 2021 and through the first half of 2022 was reimbursed. Under Regulation E, banks are required to repay customers when funds are illegally taken out of their account without authorization, the report states.

To improve customer protections on Zelle, the report recommends the CFPB clarify and strengthen Regulation E and include fraud in the Regulation’s error-resolution purview. That would increase banks’ responsibility to keep Zelle safe and to ensure that consumers are protected, the report argues.

“The findings of this report reveal that fraud and theft on Zelle are widespread and growing, with consumers losing millions each year. The banks that own and profit from the platform are failing to make their customers whole for both authorized and unauthorized fraudulent transactions, while refusing to release information publicly or to their customers that could help keep all consumers safe. Given this uncertain landscape and the banks’ abdication of responsibility, regulatory clarity is needed to further protect Zelle users,” the report concludes.

In response, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, and The Clearing House issued a statement acknowledging that, while Zelle is not free of fraud and scams, the report “fails to acknowledge that 99.9% of the 5 billion transactions processed on the Zelle network the past five years were sent without any report of fraud or scams.”

The statement also detailed steps Zelle members take to prevent fraud and criminal activity, such as routinely warning customers not to send money to people they don’t know and using innovative technology to urge their customers to show caution. “In addition, and contrary to Sen. Warren’s report, banks are obligated under federal law to investigate every instance in which a customer disputes a transaction made via Zelle and provide reimbursement if the transaction was unauthorized, an obligation banks take seriously to ensure protection for their customers,” the statement says.

The statement goes on to argue that expanding the current liability framework for banks, as the Warren report suggests, would force Zelle members to scale back Zelle’s P2P services, limit the instantaneous features, or impose fees to recover their additional costs.

“Either way, consumers’ access to these valued services would be limited, forcing them to meet their needs outside the well-regulated banking system. Further, a change in the current framework would have a chilling and disproportionate impact on community banks, and all small financial institutions, and some would be unable to offer P2P payment services altogether, given the potential for unlimited liability,” the statement adds.

The ABA, Bank Policy Institute, CBA, and The Clearing House conclude by urging policymakers and law enforcement to join with the payments industry in preventing criminals from defrauding consumers. It also argues for educating consumers about how to safely use Zelle.