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US senators have poured criticism on large banks for ignoring widespread fraud and scams on the Zelle money transfer platform.
According to Democratic Senators Elizabeth Warren (D-MA) and Robert Menendez (D-NJ), Zelle’s big bank owners have failed to address scams and provide appropriate redress to defrauded consumers.
Zelle is owned by Early Warning Systems, which is owned by seven of the US’ largest banks, including J.P. Morgan, Bank of America, and Wells Fargo.
The Senators’ letter follows reports in March by the New York Times that claimed that Zelle had become a preferred tool for grifters, especially romance fraudsters, cryptocurrency con artists and social media scammers.
That is largely due to the instant nature of the payments, which are irrevocable, meaning customers are prevented from stopping transactions once authorisation has been made.
It is, however, also linked to the fact that the platform is controlled by big banks that lent their credibility to the service.
“[Its] connections to large financial institutions allowed it to sell itself as ‘fast, free, and ubiquitous,’” and provided “an implicit promise that activity on the platform is as secure as activity at the bank teller window”, the Democrats wrote.
They argue that the “widespread fraud” on money transfer apps has affected nearly 18m Americans.
Although the growing level of fraud on instant payment networks is a concern for regulators and policymakers everywhere across the world, US banks have reportedly refused to take any responsibility for authorised payment scams spreading on Zelle.
According to campaign group Consumer Watchdog, banks essentially “throw up their hands and say ‘it’s not our problem because you authenticated it’”.
Zelle’s website states that, in case of scams, which they describe as a situation where someone is tricked or persuaded into sending money to a scammer, they are “unable to assist with getting your money back”. They urge customers to report these cases, however, so that it can help prevent others from having the same experience.
This argument relies on federal regulations that establish the liability of financial institutions, and mobile P2P service providers, in case of “unauthorised” electronic fund transfers.
Although most banks automatically add Zelle to their customers' banking services, even owner banks are throwing off responsibility, telling customers that Zelle is a separate company, according to reports.
Despite the banks’ interpretation, the Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB) have previously clarified that the liability protections for unauthorised transfers apply even if a consumer “is deceived into giving someone their authorisation credentials” and consumer negligence cannot be used as the basis for imposing greater liability than permitted.
In a supervisory report issued last month, the FDIC underscored that both banks and mobile P2P platforms, such as Zelle, have to investigate fraud disputes and limit consumer liability if the consumer’s allegations are confirmed.
The senators are asking Early Warning to reply to a list of questions, such as what procedures does the firm have in place for rooting out scams and how many fraud reports has Early Warning received from Zelle customers throughout the last five years.
Zelle was launched in 2017 as a mobile P2P offering, partly as means to ensure banks maintained their position at the heart of the consumer payment experience in the face of increasing competition.
Zelle is the largest mobile P2P service in the United States, competing with the likes of PayPal’s Venmo or Square Cash.
Owner banks are now mulling plans to expand their services into merchant offerings. However, proposals had a mixed response from member banks with J.P. Morgan reportedly preferring that they should first focus on improving fraud detection.
