The Zelle payment application has reportedly allowed criminals to defraud consumers out of hundreds of millions of dollars over the years. The Consumer Financial Protection Bureau (CFPB) places some responsibility for this on major banks due to a rushed implementation of the platform.

The CFPB has filed lawsuits against Bank of America, JP Morgan Chase, and Wells Fargo, claiming these institutions did not adequately protect customers from rampant fraud on Zelle, a popular peer-to-peer payment system. Additionally, the operator of Zelle, Early Warning Services, is also being sued.

The CFPB estimates that losses related to Zelle fraud exceed $870 million from just these three banks since the app’s introduction in 2017.

However, Zelle disputes the CFPB’s claims. A spokesperson stated, “The CFPB’s sensational number is misleading, as many fraud reports are later determined not to involve actual fraud after thorough investigation.”

Bank representatives argue that sometimes customers who think they have been defrauded later realize they made a purchase after all. Additionally, there are instances where fraudsters exploit the system by submitting false claims.

The CFPB’s figures are based on total fraud claims minus what banks reimbursed in actual losses. However, banks maintain that not all claims are legitimate fraud claims, nor do all trigger a legal obligation for banks to reimburse customers, especially in scenarios where customers are misled into making transactions, like in online scams.

Thousands of consumers have reported being victims of fraud, according to the CFPB, often receiving little help in recovering their funds. The agency noted that some people were advised to directly contact the fraudsters to seek a resolution.

‘A lucrative opportunity for fraud’

Rohit Chopra, the CFPB director, expressed during a press conference that major banks have not addressed critical issues in the Zelle system while promoting its fast money transfer feature as secure.

“What they’ve developed has turned into a lucrative opportunity for criminals,” Chopra asserted.

Bankers view CFPB’s actions as a ‘last resort’

Banking representatives defended the Zelle platform, claiming that the CFPB’s lawsuit is an overreach.

Zelle responded to the situation, stating that the CFPB’s actions seem politically motivated and an attempt to expand existing regulations beyond their intended scope.

Bill Halldin, representing Bank of America, emphasized that the bank disagrees with the CFPB’s intent to impose considerable new costs on the roughly 2,200 banks and credit unions offering Zelle to their customers for free.

He mentioned that “23 million Bank of America customers actively use Zelle to transfer money to friends, family, and trusted individuals.” The bank claims to work closely with clients experiencing issues.

Trish Wexler, a spokesperson for JPMorgan Chase, described the CFPB’s December lawsuit as “a last-ditch effort to further their political agenda.”

“The CFPB is stepping beyond its authority by holding banks accountable for the actions of criminals, including romance scammers,” Wexler explained in an email to the Free Press.

“This indicates a troubling trend of regulatory enforcement bypassing the necessary rulemaking process,” Wexler added.

The Consumer Bankers Association also issued a statement supporting the banks’ actions.

“Banks have consistently adhered to the law in offering services through Zelle. However, the CFPB is now suggesting that ‘being safe’ extends beyond the legal definitions set by Congress,” said Lindsey Johnson, president and CEO of the Consumer Bankers Association.

This controversy may become another significant topic for discussion in Washington in 2025, as President-elect Donald Trump and congressional Republicans are poised to attempt to limit the CFPB’s authority.

The CFPB was established following the 2008-09 recession as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010.

Scams are prevalent, and losses are genuine

Consumers have expressed frustration over numerous scams where funds from their accounts are taken via Zelle. Fraudsters no longer need to instruct their victims to buy gift cards, as they can obtain immediate cash transfers through Zelle.

Over the years, I have spoken to many individuals from various financial institutions who have encountered significant issues due to sophisticated tactics employed by fraudsters, often beginning with the impersonation of bank representatives or other trusted figures, resulting in unauthorized withdrawals through the Zelle app.

Consumers often shared their frustration about being trapped in fraud schemes and losing money.

A consumer advocacy group praised the CFPB’s legal action as a crucial move toward making payment systems accountable for facilitating fraudulent and unauthorized transactions.

Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center, stated, “Payment fraud affects all Americans, regardless of age or community.”

“The CFPB is advocating for individuals who struggle to get major banks to take their fraud claims seriously and refund their hard-earned money.”

The U.S. PIRG Education Fund has been actively raising awareness about issues related to fraud and other concerns involving peer-to-peer payment platforms like Zelle. They released a report titled “Virtual wallets, real complaints” in June 2021.

Mike Litt, the director of PIRG’s consumer campaign, noted that consumers have been facing fraud problems on Zelle for years.

Litt expressed hope that the CFPB’s lawsuit could bring about positive changes.

“These serious alleged practices need to be resolved quickly by all involved parties. It’s essential that as we move towards a cashless future, we have digital financial systems that the public can trust and use without fear of losing their funds.”

There is ongoing debate about the types of fraud that existing banking regulations cover. Questions arise over whether a consumer willingly sent money due to a romance scam or if they engaged in an act that falls outside of coverage. Regulators are urging banks to address a new category of fraud known as “induced fraud,” where a customer is deceived into sending money under false pretenses.

In the previous year, I reported that, following significant public pressure, Zelle’s network operator agreed to implement new rules to ensure “reimbursement for certain types of scams” on its platform. However, Zelle has not clarified the specific types of scams that qualify for reimbursement.

Consumers can notify their banks about fraud incidents and file complaints with the CFPB at www.consumerfinance.gov/complaint.

CFPB’s Insights on Zelle

The CFPB’s recent complaint addresses alleged shortcomings of the Zelle system that have facilitated fraud.

Chopra stated that the CFPB investigation discovered two significant trends of account takeover fraud that banks overlooked.

He mentioned that some criminals managed to capture one-time passcodes to gain access to accounts.

Additionally, he noted that other criminals physically stole phones or devices with banking apps to execute immediate, unauthorized transactions.

“In numerous situations,” he said, “banks frequently denied help requests, ignoring clear evidence from customers that their accounts had been compromised and that the transactions were unauthorized, including police reports detailing the incidents.”

The lawsuit claims that over $360 million in losses related to Zelle fraud affected 420,000 Chase customers, while roughly 210,000 Bank of America customers reported losses of $290 million, and 280,000 Wells Fargo customers claimed to have lost more than $220 million.

Chopra indicated that the Zelle system allowed fraudsters to quickly transfer funds. Many consumers found it nearly impossible to recover their lost money.

Chopra noted that often, banks did not take adequate measures to halt suspicious activities across the banking ecosystem.

“When one bank identified fraud and closed an account, there was nothing stopping the criminal from moving to another bank to commit further fraud,” Chopra elaborated.

He asserted that the three banks systematically let their customers down who fell victim to fraud on Zelle.

In response to competition from other money transfer platforms like CashApp, Venmo, and PayPal, the major banks collaborated to create Zelle. However, regulators assert that the rush to introduce the Zelle network was executed without the necessary consumer protection measures.

Early Warning Services, the entity behind Zelle, is co-owned by seven major banks: Bank of America, Capital One, Chase, PNC Bank, Trust, U.S. Bank, and Wells Fargo. This firm is a financial technology and consumer reporting company based in Scottsdale, Arizona.

The Zelle system is vast; in 2021 alone, approximately 1.8 billion payments worth $490 billion were processed through the Zelle Network, as reported by Early Warning Services. The amount transferred increased by 59% compared to 2020.

Regulators are not filing lawsuits against the other banks that jointly own Zelle, as most disputes involve the three banks being sued.

The CFPB aims to halt the “alleged illegal practices, secure restitution and penalties, and seek other remedies.”

While consumers have reported fraud-related losses across various financial institutions using Zelle, regulators did not discuss these losses during the media briefing. About 2,200 financial institutions in the U.S. offer the Zelle app to their customers.

The lawsuit notes that Zelle is built into the mobile applications of Bank of America, Wells Fargo, and Chase, and users cannot deactivate the Zelle feature.

The legal complaint claims that from the outset, Zelle’s marketing and branding took advantage of consumers’ trust in its perceived reliability and security.

Explicit Claims of Failing to Prevent Fraud

The CFPB stated on Friday that the banks in question neglected to establish sufficient fraud prevention and detection measures. The CFPB alleges that Bank of America, JPMorgan Chase, Wells Fargo, and Early Warning Services breached federal law due to significant failures, including:

• Zelle’s inadequate identity verification processes allowed criminals to rapidly create accounts and target its users. According to regulators, offenders exploited Zelle’s framework to ensure that payments meant for consumers instead reached accounts held by fraudsters.
• Early Warning Services and the involved banks were “too slow to implement restrictions and track criminals as they exploited numerous accounts throughout the network.” Regulators stated that banks did not share details regarding known fraudulent transactions with other banks in the network, leading to repeated fraud schemes.
• Fraudulent activities could occur across numerous institutions before they were noticed, or in some cases, not detected at all.
• Although the CFPB received numerous fraud complaints, the defendant banks allegedly did not utilize this information to avert future fraud. They reportedly breached the Zelle Network’s rules by inconsistently and untimely reporting fraud cases.
• The defendant banks are accused of failing to thoroughly investigate complaints from Zelle customers and take the necessary action against certain fraud types and errors, despite their obligations related to the Electronic Fund Transfer Act and Regulation E.

Zelle’s Response

Jane Khodos, a spokesperson for Zelle, sent a statement via email to the Free Press, asserting that the CFPB’s lawsuit would adversely affect consumers, small businesses, community banks, and minority-owned banks as well as credit unions.

“Zelle is at the forefront of combating scams and fraud, boasting industry-leading reimbursement practices that exceed legal requirements,” the statement declared.

According to Zelle, “The CFPB’s misguided actions will only empower criminals, impose higher fees on consumers, hinder small businesses, and complicate matters for numerous community banks and credit unions trying to compete.”

In its defense, Zelle indicated that in 2023, the company experienced a 27% rise in transaction volume, paired with nearly a 50% decline in the reports of scams and fraud. Furthermore, 99.95% of transactions were conducted without any claims of fraud or scams.

Zelle also raised concerns regarding the timing of customer reimbursements under current laws, which has been a contentious point between banks and consumer advocacy groups.

“Zelle reimburses customers for all fraud cases as mandated by the law under the Electronic Funds Transfer Act and Regulation E, and the current legal action initiated by the CFPB does not contest that,” Zelle pointed out.

The company further stated that it exceeds legal requirements by reimbursing customers for certain scams where a transaction was authorized by the customer.

According to Zelle, the CFPB’s litigation “would introduce and enforce new legal obligations that go beyond what Congress authorized for CFPB to implement.”

Understanding Regulation E

The crux of the matter is how far the CFPB can extend consumer protections under Regulation E. Banks argue that the CFPB is overstepping its bounds.

Zelle asserted that the “CFPB is trying to unjustly broaden the law to compel banks to compensate consumers for transactions they approved, which exceeds the parameters set forth by Congress in the Electronic Funds Transfer Act.”

Consumers should remain cautious of every communication that claims to be from a trusted institution or financial entity. It’s crucial to accept that there might be instances where money lost due to fraud may not be refunded by the bank. Avoid rushing to resolve situations—like those involving alleged unpaid taxes—by quickly transferring funds through payment applications.

A U.S. Senate permanent subcommittee on investigations revealed in July that nearly two-thirds of consumers did not receive reimbursements for losses incurred in 2023 when disputing transactions related to scams with Zelle at major banks like Chase, Bank of America, and Wells Fargo. The total unreimbursed amount reached nearly $102.3 million in 2023, according to the findings.

The subcommittee highlighted various ways Congress, regulators, and Zelle Network participants could enhance consumer protection, such as updating the Electronic Funds Transfer Act to mandate financial institutions reimburse consumers for “fraudulently induced” transactions that were authorized.

Additionally, it was suggested that the CFPB revise Regulation E to obligate financial institutions to provide improved transparency and clarity regarding what constitutes a “reasonable” investigation, aiming for a higher standard in dispute investigations and establishing minimum requirements for banks.