Rohit Chopra, Director of the CFPB, testifies during the Senate Committee on Banking, Housing and Urban Affairs hearing titled “Semi-Annual Report to Congress of the Consumer Financial Protection Bureau,” in the Dirksen Building on November 30, 2023.
Tom Williams | Cq-roll Call, Inc. | fake images
The Consumer Financial Protection Bureau on Friday sued the operator of the Zelle payments network and the three U.S. banks that dominate transactions on it, alleging the companies failed to adequately investigate fraud complaints or reimburse victims.
The CFPB said that customers of the three banks: JPMorgan Chase, bank of america and Wells Fargo – have lost more than $870 million since Zelle launched in 2017.
Zelle, a peer-to-peer payments network run by bank-owned financial technology firm Early Alert Services, enables instant payments to other consumers and businesses and has quickly grown to become the largest such service in the country. At the same time, Democratic lawmakers have in recent years intensified criticism of banks over the financial crimes that occurred at Zelle.
“The nation's largest banks felt threatened by competing payment apps, so they rushed to pull Zelle,” CFPB Director Rohit Chopra said in a statement. “By failing to implement adequate safeguards, Zelle became a gold mine for scammers, while often leaving victims to fend for themselves.”
The lawsuit is the latest action by the CFPB in the final days of the Biden administration. Many of the actions it has taken, including moves to limit credit card late fees and overdraft fees, have met with stiff opposition from banks and their trade groups. Corporations have been successful in countering regulators by choosing legal venues known to be friendly to lawsuits that challenge federal oversight.
In fact, JPMorgan said in August that it was considering suing the CFPB if the regulator tried to punish the bank for its role in the Zelle network.
The CFPB wants to force the banks to end their allegedly illegal practices around Zelle and pay an unspecified amount in fines, it said.
'Obvious defects'
The vast majority of Zelle's activity is uneventful. Of the $806 billion that flowed through the network last year, only $166 million in transactions were disputed as fraud by customers of JPMorgan, Bank of America and Wells Fargo, the platform's three main players.
But the three banks collectively refunded only 38% of those claims, according to a July Senate report that analyzed the unauthorized transactions in dispute.
Banks say they investigate every fraud claim, but often discover that what customers say was fraud was technically a scam in which customers authorized payments. In those cases, banks are generally not required to compensate customers.
The CFPB stated that Zelle's “limited identity verification methods” have allowed criminals to infiltrate the network, allowing them to divert payments and move between member banks that did not share information between institutions.
The Zelle online banking logo is displayed on a smartphone with the Zelle website visible in the background in this photo in Brussels, Belgium, December 10, 2023.
Jonathan Raa | Nurfoto | fake images
The agency also said the banks did not adequately investigate complaints about Zelle activity and did not consistently report fraudulent activity.
“Banks failed to fix glaring flaws in their systems, even as hundreds of thousands of customers filed fraud complaints,” Chopra told reporters during a call on Friday. “The banks knew they were stealing money from their customers, but because they could not bear the cost of these losses themselves, they were slow to fix the problems.”
Zelle is the preferred way for cybercriminals to extract funds because it is faster than other remittance options, according to Tom Peacock, director of global fraud intelligence at cybersecurity firm BioCatch.
'Meritless' and misleading
Early Warning Services said in a statement Friday that it was prepared to defend itself against this “baseless lawsuit.”
“Zelle is leading the fight against scams and fraud and has industry-leading refund policies that go above and beyond the law,” said Jane Khodos, spokesperson for Early Warning Services. “The CFPB's misguided attacks will embolden criminals, cost consumers more in fees, stifle small businesses, and make it difficult for thousands of community banks and credit unions to compete.”
Additionally, the $870 million figure cited by the CFPB for fraud losses is misleading because it includes incidents in which the bank discovered that the cases did not involve fraud, but rather errors or false claims, according to Early Alert Services.
Early Warning Services has said that while transaction volumes increased in 2023, reports of scams and fraud fell by almost 50%, with only a small fraction of payment volumes being questioned as fraud.
