US Banks May Pay For Zelle Fraud As Lawsuits Mount

June 8, 2022
As five US banks square up to class actions over their handling of fraud cases on the popular Zelle payment service, hundreds of other participants in the network could also become embroiled as potential litigants.

As five US banks square up to class actions over their handling of fraud cases on the popular Zelle payment service, hundreds of other participants in the network could also become embroiled as potential litigants.

Zelle fraud has hit the headlines in recent months after the New York Times claimed in March that fraud was “flourishing” on the payments network and that banks were doing nothing to stop it.

US customers are now going to court in increasing numbers, with multiple class-action lawsuits being filed against several participant banks that it is claimed failed to handle their fraud claims properly.

Bank of America (BofA), Capital One and TD Bank have become the latest to face court actions, following ongoing suits launched against Wells Fargo and the Navy Federal Credit Union (NFCU).

Although BofA and Capital One are part owners of Zelle’s parent company, Early Warning Services, they have not been sued in such a capacity. Instead, they are facing these consumer actions as participants of the Zelle network.

Launched in 2017 by seven of the US’ largest banks, Zelle has become the most widely used money transfer app in the US. In 2021, the app transferred instant payments worth a total of $490bn between account holders.

At the same time, fraud on P2P payment apps such as Zelle or Venmo cost nearly 18m in losses for Americans in 2020 alone, according to estimates by Javelin Strategy & Research.

When it comes to fraud on Zelle and other P2P mobile apps, however, many US banks shake off responsibility and ignore the issue, it has been claimed.

In late April, US senators Elizabeth Warren (D-MA) and Robert Menendez (D-NJ) wrote to Zelle owner banks demanding them to report back on what procedures they have in place for rooting out scams.

Although only five Zelle participants have so far been taken to court to defend their fraud handling practices, further actions are possible, and even likely, given the number of participants in the scheme.

Once sent, gone forever

The lawsuits allege that Zelle, which is automatically integrated into the banks’ network, is “prominently touted” by the banks as a “secure, free, and convenient way” to make money transfers. However, when it comes to fraud, Zelle does not provide protections for victims of fraud.

“[U]nlike virtually every other payment method commonly used by American consumers — debit cards, credit cards, and checks — there is no protection for account holders who are victims of fraud, and virtually no recourse for account holders attempting to recoup losses due to fraud,” the complaint against BofA says.

It argues that the banks misrepresent and omit this key fact to encourage their customers to use the service.

“The unique, misrepresented, and undisclosed architecture of the Zelle payment system means … that virtually any money transferred for any reason via Zelle is gone forever, without recourse, reimbursement or protection.”

In addition, the BofA, NFCU and Capital One claims allege that, despite their legal obligation to cover unauthorised fraudulent transactions, the banks and credit union adopted a “secret policy” to refuse to reimburse fraud losses incurred via Zelle, even where their customers timely inform them of the fraud.

Anyone on Zelle network might face legal action

Although Wells Fargo, Capital One and BofA are all owners of Zelle, only the Wells Fargo suit relies on this fact as a part of its argument.

Most of the claims, however, target the banks in their capacity as a member of the Zelle network, which includes 1,500 banks and credit unions.

As Zelle participants, the banks were aware of the widespread fraud problem on their hands, the claims argue, but have misrepresented its risks and failed to take reasonable steps to warn their customers of those risks or to protect them.

The claims seek to represent all US persons that had a bank account with the defendant banks, signed up for the Zelle service and incurred unreimbursed losses due to fraud.

If the suits prevail in court, any bank that enables their customers to link Zelle to their bank account may face massive class actions provided their practices are similar to those described in these cases.

In addition, one plaintiff argues that Wells Fargo intentionally refused to refund an unauthorised transfer via Zelle “due to, at least in part, their financial self-interest as a stakeholder in Zelle”.

The claim goes on to say that Wells Fargo uses Zelle “to insulate themselves from financial liability for unauthorised transactions”, which would otherwise be the bank’s liability under federal law.

BofA, Capital One, Wells Fargo and TD Bank did not reply to a request for comment by the time of publication.

A Navy Federal spokesperson said the claims have no merit and NFCU “looks forward to addressing them in court”.

Early Warning Services (EWS), the network operator behind Zelle, said it is aware of litigation. “EWS views the claims in these lawsuits as without merit and intends to vigorously defend itself in the lawsuits where it is named as a defendant,” the company told VIXIO.

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