Nov 13 (Portal) – Banks on the payments app Zelle have started refunding victims of scams to address consumer protection concerns raised by U.S. lawmakers and the federal consumer regulator. This is an important change in their policy.
The 2,100 financial companies on Zelle, a peer-to-peer network owned by seven banks including JPMorgan Chase (JPM.N) and Bank of America (BAC.N), began offering remittances to customers starting June 30 to whom they have sent money fraudsters claiming to be from a government agency, a bank or an existing service provider, said Early Warning Services (EWS), the bank’s company that owns Zelle.
That is “significantly above existing legal and regulatory requirements,” Ben Chance, chief fraud risk officer at EWS, told Portal.
Federal regulations require banks to reimburse customers for payments made without their authorization, such as by hackers, but not if the customer makes the transfer themselves.
While Zelle announced on August 30 that it had launched a new reimbursement service for “certain types of fraud,” the company has not yet provided details on its new fraud reimbursement policy, fearing it could encourage criminals to make false fraud claims a spokesman said.
The new policy represents a major shift from last year, when bankers including JPMorgan CEO Jamie Dimon told lawmakers concerned about rising fraud that it was unreasonable to require banks to handle wire transfers refunds that customers were tricked into agreeing to.
After its launch in 2017, Zelle grew to become one of the largest peer-to-peer payment networks in the United States by total number of payments. A March 2022 New York Times report that fraud was flourishing on Zelle caught the attention of lawmakers who are often critical of big banks, including Senator Elizabeth Warren.
She and other lawmakers launched an investigation and estimated that Zelle users lost $440 million to fraud of all kinds in 2021 alone. During a Senate hearing last year, Warren told Dimon and other bank bosses that they had created a “perfect weapon” for criminals but had failed to stand by their customers. According to EWS, more than 100 million people, all with U.S. bank accounts, have access to Zelle.
According to the Federal Trade Commission, copycat fraud was the most commonly reported fraud across all payment methods in the United States in 2022, causing $2.6 billion in losses.
Banks fear that covering the costs of authorized transactions will lead to more fraud and potentially leave them out of pocket for billions of dollars. Instead of requiring lenders to refund customers, EWS has implemented a mechanism that allows banks to reclaim funds from the recipient’s account and return them to the sender, Chance said.
Chance said lenders on Zelle will now also be required to implement a tool that flags transfers with risky characteristics, such as a payment to an account that has never been used to transact on the Zelle network. He said Zelle had seen a “significant decline” in fraud rates this year, but declined to provide details.
“We have had a strong system of controls in place since we launched the network, and as we have journeyed we have continually evolved those controls… to keep up with what is happening in the market,” he said.
Chance said EWS has spoken to policymakers about the need for a “holistic approach” to fighting fraud, including advocating for more dedicated resources for law enforcement.
Under pressure from Warren and other lawmakers, the Consumer Financial Protection Bureau (CFPB) considered forcing lenders to reimburse scammers, but Zelle’s changes have so far satisfied the agency, a person familiar with the matter said.
A CFPB spokesman declined to comment on Zelle or possible rule changes, but said the agency is working to protect customers “by, among other things, ensuring that financial institutions comply with their investigative and remediation obligations.”
JPMorgan, Bank of America and Zelle’s five other owning banks declined to comment.
“Zelle’s platform changes are long overdue,” Warren said in a statement to Portal. “The CFPB stands with consumers, and I urge the agency to continue to pressure Zelle to protect consumers from bad actors.”
Market pressure
Zelle has long argued that fraud and fraud rates are low.
According to the network, $629 billion worth of payments were processed in 2022, with 99.9% of transfers occurring without fraud or scam reporting.
It competes with other peer-to-peer payment platforms like PayPal (PYPL.O) and Venmo, which consider situations on a case-by-case basis and have a purchase protection program for eligible transactions that covers fraud. Experts point out that the different classifications make it difficult to compare fraud rates across different platforms.
Zelle’s about-face shows how banks are feeling competitive pressure to raise the “market standard of care,” said Trace Fooshee, strategic advisor at Datos Insights.
Still, regulations requiring protection from fraudsters would be better for customers because lenders’ policies may be unclear or they may not follow them as promised, said Carla Sanchez-Adams, a senior attorney at the National Consumer Law Center.
“The only thing I think is problematic is that the consumer really doesn’t know they have this option, and if they know and the bank doesn’t refund them, there’s no private recourse,” she said, noting Still Zelle’s policy change was a “good first step”.
Payments fraud is likely to come up again when bank bosses appear before the Senate next month, according to industry experts. This time they think they have a good story to tell.
“The banks have actually proactively said through Zelle – no regulation, no legislation – we’re going to make sure that we … try to address any kind of consumer issues or harms,” said Lindsey Johnson, CEO of the Consumer Bankers Association.
Reporting by Hannah Lang in Washington; additional reporting by Chris Prentice in New York; Editing by Michelle Price and Rod Nickel
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