American Banks Facing Regulatory Probes Over Zelle-Related Payment Fraud

Several of the largest banks in the world are currently in hot water over their questionable handling of customer funds. Reports emerged last week that multiple American financial staples including JPMorgan Chase, Bank of America, and Wells Fargo, each co-owners of the emergent online payment platform Zelle, are under investigation by the Consumer Financial Protection Bureau (CFPB), with the regulator attempting to determine whether these banks have been properly handling customer disputes on the Zelle platform.

Zelle launched in 2017 as the big banks’ response to the popular money transfer platforms Venmo, Cash App and PayPal. With the backing of its super bank owners, Zelle’s network has grown to now include more than 2,000 participating banks and credit unions. The platform’s ease of configuration has contributed greatly to its growth, this as Zelle does not require its own phone application to deploy, and already comes pre-linked to an individual’s consumer bank accounts under the mobile application of their primary financial institution. Further, once a transfer is completed, the funds are readily available in the receiver’s designated bank account, eliminating the step of requiring an external transfer (one that often takes multiple business days to complete) in order to see these funds hit their account. As such, Zelle has quickly developed into arguably the preferred peer-to-peer payment platform for millions of consumers across the globe for sending and receiving money, and now handles more transaction volume than Venmo, which was established 8 years earlier. With this growth in mainstream adoption however has come an increase in complaints about data security, this as the platform has become a major target for scammers. Zelle’s ability to handle disputes from consumers has now too come under fire as a result.

Zelle’s lack of customer support was brought into the spotlight recently by U.S. lawmakers who were made aware of the proliferation of scams and fraudulent activity on its network. Senator Richard Blumenthal (D-CT) recently wrote an open letter to the CFPB, calling on them to investigate the explosion of crime on this platform. In his letter, Blumenthal cited a concerning drop in reimbursed customer disputes: 62% in 2019 down to 38% in 2023. He claims that Zelle’s representatives have failed to provide a satisfactory answer for this large drop-off. Senator Blumenthal lobbied the CFPB to conduct a thorough investigation of the dispute resolution practices of Early Warning Services – the operator of Zelle – the three aforementioned banks, and any other financial institutions as warranted, including but not limited to practices of other peer-to-peer payment platforms. Blumenthal, who chairs a U.S. Senate subcommittee focused on investigations, states his board has found that reimbursements for unauthorized transactions on Zelle have fallen significantly over a five-year period.⁴ In an open letter to the CFPB, Sen. Blumenthal continued, “I further urge you to take appropriate action to ensure that these institutions fully and promptly address consumer reports of fraud, as required by law. If your investigation finds that an institution has violated the Electronic Fund Transfer Act ‘knowingly and willfully,’ I encourage you to take the strongest appropriate action.”²

Blumenthal’s letter comes after another major effort was brought forth by an additional five bipartisan lawmakers just last year. These developments were aimed specifically at protecting consumers and holding banks accountable for fraudulent transactions conducted using Zelle. The legislators called on the Federal Reserve Board, National Credit Union Administration (NCUA), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) to closely review and examine the customer reimbursement and anti-money laundering (AML) practices of depository institutions that participate in the Zelle network.³ The group of Senators warned that if bank or credit union communications lead customers to expectations of safety that are not met, it can create real risk of unfair, deceptive, or abusive practices for both customers and banks and credit unions, with these activities also threatening compliance with AML laws, KYC screening, and transaction and account monitoring.³ The CFPB appears to have taken these efforts seriously, opening an investigation into potential shortcomings in this regard among American firms. Thus far however, the banks under scrutiny by the CFPB have not been receptive in the least to this investigation. The banks have battled back against these allegations by pointing out that the vast majority of transactions made on Zelle are legitimate, and it is not practically possible to prevent all forms of fraud. To continue paying out so many disputes encourages people to game the system, they claim. JPMorgan in particular is reportedly weighing a potential lawsuit against the regulatory watchdog over these inquiries.

Zelle’s chief fraud risk manager, Ben Chance, claims that his company is already doing everything they can to minimize the risk of fraud on their platform. Chance claims that the focus and blame should be placed elsewhere – particularly on the consumers themselves and applicable law enforcement. He also added that greater awareness needs to be raised in order to prevent scams on money-sharing apps altogether. This of course implies that the ignorance of consumers is what’s causing them to get scammed. Aside from victim-blaming, Chance also claims that law enforcement is not properly funded to deal with this problem and that is where additional legislative focus should be placed. “The real solution is to focus on the criminals who are perpetrating these crimes across phone, text message, email, digital marketplaces, and social media platforms…and of course, partnering with those platforms, along with financial services and law enforcement in the prosecution and removal of these criminal actors,” Chance told Fortune.¹ To date, Early Warning Services has stated that they are proactively taking steps to go above the lawby leading the industry in scam reimbursement efforts, and noted that 99.95% of transactions are completed without any reports of fraud or scams.⁴

With upwards of 50% of Americans now utilizing online payment platforms, both consumers and the financial institutions that sponsor them must maintain vigilant to avoid falling victim to new fraud schemes. For banks boasting about the “secure” nature of the payment transfer environment they have created, the need for compliance with current AML regulations and safeguards covering this ecosystem remains paramount for the health of the domestic financial system, as well as for maintaining their own reputation.

Citations

1. Castillo, Michael del. “As Regulators Circle JPMorgan-Owned Zelle It’s Fraud Boss Calls for More Law Enforcement Funding to Fight Scams.” Fortune, Fortune, 9 Aug. 2024. 
2. “Gen Z Transforms Workplace Communication by Keeping It Caszh.” PYMNTS.Com, 8 Aug. 2024. 
3. “To Help Americans Keep Their Money Safe, U.S. Senators Urge Regulators to Hold Zelle Accountable for Inadequate Protections to Stop Fraudulently Induced Payments to Crooks.” United States Committee on Banking, Housing, and Urban Affairs, 2 Mar. 2023. 
4. “Wells Fargo among Major Banks under Investigation for Handling of Funds on Zelle Network.” Reuters, AOL, 9 Aug. 2024.