Government Lawsuit Alleges Three Major U.S. Banks Allowed ‘Fraud to Fester’ on Zelle
Last updated December 24, 2024
The Consumer Financial Protection Bureau (CFPB) has accused Zelle and three of the major U.S. banks that own the most widely available peer-to-peer payment system in America, of “failing to protect consumers from widespread fraud.”
The CFPB claims the Zelle network, advertised as “safe,” “secure,” and “backed by the banks,” was rushed to market to compete against other payment apps, such as Venmo and Cash App, “without implementing effective consumer safeguards.”
As a result, the government alleges, a total of 914,000 customers at JPMorgan Chase, Bank of America, and Wells Fargo who used Zelle and complained about fraud, lost more than $870 million since the service was launched in 2017.
“The nation’s largest banks felt threatened by competing payment apps, so they rushed to put out Zelle,” CFPB Director Rohit Chopra said. “By failing to put in place proper safeguards, Zelle became a gold mine for fraudsters, while leaving victims to fend for themselves.”
The CFPB lawsuit, filed December 20, asserts that hundreds of thousands of Zelle users who complained about fraudulent transactions were largely denied assistance,” with some being told to contact the fraudsters directly to recover their money.
The government alleges Bank of America, JPMorgan Chase, Wells Fargo, and Early Warning Services (the consortium of seven banks that run the Zelle network) violated federal regulations by leaving users vulnerable to fraud and by failing to investigate complaints or provide consumers with “legally required reimbursement” for fraud and errors.
“Essentially, they were walking away from consumers when they’d been harmed,” said Adam Rust, director of financial services at the Consumer Federation of America. “This is a classic case of a bank trying to get away with something, and the CFPB is stepping in and saying, ‘no, you can’t do that.’”
Some of the losses referenced in the CFPB lawsuit resulted from unauthorized transactions initiated by someone who obtained access to the customer’s mobile device through fraud or theft, and for which that customer did not receive any benefit.
It’s the same as if a stolen ATM card is used to withdraw cash. It’s an unauthorized transaction, and the cardholder is protected.
Other consumers lost money, the CFPB said, when they sent money to the wrong person because of “errors and inaccuracies” in the Zelle Network Directory of phone numbers and email addresses; something that was beyond their control.
Problems on Top of Problems
For years, consumer groups have warned about the risk of using peer-to-peer apps in general, and Zelle specifically. They welcomed the government’s action.
“It’s crucial that in our incredibly cashless age, we have digital financial systems that the public can trust and use without fear of losing their money,” said Mike Litt with U.S. PIRG.
“The CFPB is standing up for people who weren’t able to get the big banks to take their claims of fraud seriously and return their hard-earned money,” said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center.
In 2022, Checkbook reported on how Zelle often refused to help scam victims.
Banks and credit unions offering Zelle would be required to reimburse customers for some imposter scams, including when a scammer “impersonates a bank to trick a consumer into sending them money with Zelle.” The new policy “went beyond legal requirements,” the company noted and was being done, Zelle said at the time, to “improve the consumer experience and address the dynamic nature of fraud and scams.” Zelle would not specify which imposter scams were covered by the new reimbursement protection policy.
Bankers Respond
Zelle claims the CFPB’s lawsuit is “meritless” and will harm consumers, empower criminals, and hurt small businesses and community banks.
“The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle,” spokesperson Jane Khodos said in a statement. “Zelle leads the fight against scams and fraud and has industry-leading reimbursement policies that go above and beyond the law.”
While transaction volume increased 27 percent in 2023, fraud complaints decreased by nearly 50 percent, Zelle said, resulting in 99.95 percent of payments being sent without fraud being reported.
The CFPB filed its lawsuit with just weeks remaining in the Biden Administration. There’s no way of knowing what will happen with this case once President Trump appoints a new director for the agency.
How to Use P2P Apps safely
Transferring money with peer-to-peer apps, such as Zelle, Venmo, PayPal or Cash App, is quick and convenient. That’s why 51 percent of Americans make P2P payments regularly, according to a recent report from PYMNTS, a data and analytics company.
In most cases, there’s no problem. But when things go wrong, it can be difficult or impossible to reverse the transaction.
Here’s how to pay it safe:
- Only use peer-to-peer apps for transferring money to people you know and trust, such as family, friends, or a local brick-and-mortar business you’re familiar with.
- Always make sure you use the correct mobile number or email address. Do a test transfer of $1 to make sure you’re sending money to the intended recipient.
- Think before you confirm the transaction. P2P transfers cannot be canceled or reversed. If you send money to the wrong person, or a scammer, or don’t get what you ordered, you may not get it back.
- Treat these payments as you would cash. If you’d hesitate to hand that person a $50 bill, don’t send them money this way. When in doubt, use a credit card, which provides strong fraud protection. That’s why Checkbook recommends paying with a credit card for online, catalog or phone purchases.
More Info:
AARP: How to Avoid Scams on Zelle, Venmo and Other P2P Apps
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.