MW More than $125 million is stolen every year on Zelle. The feds say little is done to stop it.
By Lukas I. Alpert
A lawsuit filed by the CFPB says Zelle and the big banks that own it left the platform vulnerable to fraud in an effort to rush it to market to compete with Venmo and CashApp
More than $481 billion is transferred using Zelle every year. Of that, at least $125 million is getting stolen from consumers. The government says the big banks that own the platform have done little to stop it.
In a rush to bring the payment-transfer service to market in 2017 to compete with upstarts like Venmo and Cash App, the banks that own Zelle created a product particularly vulnerable to fraud and have made few attempts to fix it, according to a lawsuit filed Friday by the Consumer Financial Protection Board.
"By failing to put in place proper safeguards, Zelle became a gold mine for fraudsters, while often leaving victims to fend for themselves," said CFPB Director Rohit Chopra.
The suit names Zelle's operator, Arizona-based fintech and consumer reporting company Early Warning Services, LLC and three of the seven major banks that own it - $Bank of America Corp(BAC-N)$. $(BAC.SI)$, JPMorgan Chase Bank & Co. $(JPM)$ and Wells Fargo and Co. $(WFC)$ - as defendants.
Those three banks accounted for 73% of transfers on Zelle in 2023, the suit said.
The banks referred requests for comment to Early Warning Services which in a statement called the lawsuit "legally and factually flawed," and said the timing of the suit appeared "driven by political factors unrelated to Zelle" given the upcoming change in administrations.
"Zelle leads the fight against scams and fraud and has industry-leading reimbursement policies that go above and beyond the law," the statement said. The CFPB's misguided attacks will embolden criminals, cost consumers more in fees, stifle small businesses and make it harder for thousands of community banks and credit unions to compete."
The suit described how hundreds of thousands of consumers filed fraud complaints with Zelle every year but "were largely denied assistance," with some even being instructed to contact the people who defrauded them in order to be reimbursed.
Since Zelle began operating in 2017, more than $870 million has disappeared due to fraud, the suit said - or about $125 million every year on average.
Fraud using peer-to-peer payment services like Zelle, Venmo and Paypal has long been on the radar of lawmakers, who have raised concerns about the level of protection offered to consumers.
Data from the Federal Trade Commission show that of people who reported fraud related to a payment app in 2023, 28% were using PayPal, 24% were using Cash App and 20% were using Zelle.
Zelle has drawn perhaps the most scrutiny due to it being owned by the banks themselves. That has made it one of the most widely available peer-to-peer payment services, as it is a feature built into customers' accounts, rather than a separate app that needs to be downloaded.
The Zelle network is used by 2,200 banks and credit unions and has more than 143 million users, the CFPB suit said. In the first half of this year, it was used to transfer $481 billion across 1.7 billion transactions.
The suit said Zelle's ease of use and widespread availability have made it especially vulnerable to fraud. Consumers have long complained that banks offered little help or guidance in response to claims of fraud, often saying there was little that they could do.
One major issue often raised is that there is no way to recover a payment once it has been made, making it nearly impossible to recoup stolen funds.
Among the various vulnerabilities alleged in the suit was that Zelle requires limited identity verification for consumers to use it, which has made it appealing to fraudsters.
The suit described how accounts simply required an email address or U.S.-registered mobile phone numbers to be set up, which made them vulnerable to being compromised.
It also alleged that banks would let single users open multiple accounts and allow them to move accounts from bank to bank, making it easier for fraudsters to avoid detection.
The suit also accused the banks of not taking steps to hold up payments that appeared possibly fraudulent or to shut accounts down quickly even when there were clear signs that they may have been operated by scam artists.
The suit alleges that despite Zelle being advertised as a safe method for transferring money, the banks and EWS were well aware of the problems of fraud and took years to implement measures to stop it, costing customers millions.
-Lukas I. Alpert
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(END) Dow Jones Newswires
December 20, 2024 12:28 ET (17:28 GMT)
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