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US payments company Early Warning Systems has rejected allegations, made in a lawsuit filed by the state’s attorney general, Leticia James, that it allowed fraud on its Zelle platform.
A company spokesperson said: “Zelle leads the fight to stop fraud and scams in America. This lawsuit is a political stunt to generate press, not progress.”
In a suit filed on Wednesday August 13, James charged that Early Warning Services designed Zelle to be as simple as possible to use and rushed it to market, leaving it vulnerable to fraudsters.
“EWS’s rush to market came with a significant and foreseeable cost: EWS’s key design decisions made the Zelle network an obvious conduit for fraudulent activity,” the suit says.
“From its launch the Zelle network has been teeming with fraudsters who have stolen staggering sums from consumers.”
Regulatory standard setting
The lawsuit suggests that regulatory oversight raises company standards. It alleges that Zelle implemented basic network safeguards proposed in 2019 only in 2023 when facing an investigation by the Consumer Financial Protection Bureau (CFPB) and several members of Congress.
According to the suit, the safeguarding implementation produced immediate and significant results.
“Despite overall transfers over the Zelle network growing by billions of dollars that year, consumer losses to reported fraudulent activity dropped by hundreds of millions of dollars.”
It continues: “Yet these measures were too little too late: EWS did nothing to remedy the vast losses that consumers already suffered due to its failure to adopt the basic network safeguards in July 2019, and even with those safeguards in place Zelle continues to facilitate substantial fraudulent activity.”
However, Early Warning Services said that if James had investigated Zelle, she would have learned it leads the industry, with more than 99.95 percent of all Zelle transactions being completed without any report of scam or fraud.
“The Attorney General wants to hand criminals a blueprint for guaranteed payouts with no consequences, opening the floodgates to more scams, not less. That’s bad policy and puts consumers at greater risk,” the spokesperson added.
“This is nothing more than a copycat of the Consumer Financial Protection Bureau lawsuit that was dismissed in March. The Attorney General should focus on the hard facts, stopping criminal activity and adherence to the law, not overreach and meritless claims,” the spokesperson added.
Claims reopened
The suit reopens claims made by the CFPB that were subsequently dropped by the Trump administration.
It is a demonstration of state regulatory assertiveness by New York’s attorney general, and comes at a time when the CFPB is considering a further retreat from the supervisory sphere.
The development illustrates how state attorneys general have the option of stepping into the space vacated by the CFPB, leading to a patchwork of different regulatory regimes in the US for payments companies to navigate on a state-by-state basis.
Questions of responsibility
The lawsuit also raises questions about the extent of a company’s responsibility for fraud that takes place on its platform.
In addition, it adds to the debate over whether interventionist regulatory approaches that shift the onus from the consumer to the business, with attendant compensation for regulatory breaches, could incentivise false fraud claims.
Regulated firms need to make sure their anti-fraud procedures are functioning effectively to identify fraudulent claims and avoid both legitimate compensation claims and enforcement action.
