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Banks Face Pressure Over Zelle Payment System

Last week, representatives from the largest U.S. banks faced intense questions from Massachusetts Senator Elizabeth Warren about fraud and theft related to their online Zelle payment system. At the hearing, the executives agreed to provide data to the Senate Banking Committee, resulting in a report released by Warren’s office yesterday.

The report says theft and fraud related to Zelle are increasing. The report also alleges that banks are not fulfilling their obligations to reimburse customers who have had money stolen and do not provide enough safeguards to customers who lose money through fraud schemes while advertising the payment method as “safe.”

Some definitions: In online payment systems, a theft occurs when a bad actor gains access to someone’s account and transfers money from that person’s account without the knowledge or approval of the person. A fraud is when a bad actor persuades, tricks, or coerces a person into transferring money under false pretenses. The Consumer Financial Protection Bureau protects consumers from unauthorized transactions—theft as defined above. In these cases, banks are obligated to reimburse consumers. Consumers do not have protection from fraudulent payments—payments authorized by the consumer under false pretenses.

The report from Warren said that of the four banks that provided data, customers reported 145,874 unauthorized payments totaling $176.2 million in losses in 2021 and through the first half of 2022. Of that total, the banks reimbursed $83.06 million or 47 percent. The report also calls for tighter regulation and protections for consumers who are defrauded of their money.

A consortium of banking organizations, led by the American Bankers Association, refuted several points made in the report. “Contrary to Sen. Warren’s report, banks are obligated under federal law to investigate every instance in which a customer disputes a transaction made via Zelle and provide reimbursement if the transaction was unauthorized, an obligation banks take seriously to ensure protection for their customers,” the groups’ joint statement said.

The statement also said regulations that require banks to guarantee against fraudulent activity would force banks to impose limits or fees on transactions, which would unnecessarily burden a popular payment innovation—one that has grown to a total of five billion transactions since it was introduced five years ago, 99.9 percent of which are legitimate payments.

“The report issued today offers no constructive solutions to better prevent and crack down on fraud,” the banking groups said in the statement. “We urge policymakers and law enforcement to join with the payments industry in focusing on steps to prevent bad actors from scamming customers out of their money and educating consumers on how to use these services safely. Let’s stop the criminals rather than create policies that risk diminishing the value and benefits of this increasingly popular and indispensable service.”

Zelle is run by Early Warning Services, a company owned by the seven largest U.S. banks: JPMorgan Chase, Bank of America, Capital One, PNC, Truist, U.S. Bank, and Wells Fargo. The banks developed the payment system and incorporated it into their online banking sites and apps to compete with the rise of payment systems Venmo and Cash App. According to Forbes, Zelle quickly grew into the largest such payment system, processing $490 billion in 2021, compared to $230 billion for Venmo and $15 billion for Cash App.