Dive Brief:

• Zelle, the peer-to-peer payments service, faced calls from consumer advocates to improve its fraud and scam reimbursement policy during a hearing of the Senate Committee on Homeland Security & Governmental Affairs’ Permanent Subcommittee on Investigations last week.
• Delicia Hand, a senior director at Consumer Reports, called on the P2P service to centralize its fraud and scam reporting process, which is currently split between a consumer’s bank and Zelle, which is operated by big bank-backed Early Warning Services.
• “The scale of fraud on the Zelle platform is unacceptably high,” said National Consumers League Vice President John Breyault, one of the consumer advocates who testified, told the subcommittee during the May 21 hearing entitled, “Fraud Alert!: Shedding Light on Zelle.” “It is estimated that total fraud rates on Zelle will likely exceed one billion dollars annually by next year,” he said.

Dive Insight:

The subcommittee has been investigating how Zelle and the financial institutions that use it handle reports of fraud and scams for nearly one year, according to opening remarks by Senator Ron Johnson (R-WI).

“More may need to be done to assist individuals who have fallen victim to a scam that tricks them into sending money to another user,” Johnson said. “The banks need more incentives to invest in more secure systems for peer-to-peer payments.”

Scottsdale, Arizona-based Early Warning Services has faced scrutiny from lawmakers, including Sen. Elizabeth Warren (D-MA) after a March 2022 New York Times report said that scams were flourishing on Zelle. Warren is not a member of the subcommittee, but has examined Zelle as a member of the Senate Committee on Banking, Housing, and Urban Affairs.

The following month, Warren’s office opened an investigation into the P2P payment service, collecting fraud data from big banks and issuing a staff report in October 2022. The report found that fraud was both “rampant” and growing on Zelle, and that banks were not repaying “the vast majority” of victims.

Warren and two other Democratic senators wrote an open letter in February to Cameron Fowler, CEO of Early Warning Services, asking that the company clarify and simplify its reimbursement policy for Zelle users.

“Less than one tenth of one percent (.1%) of transactions are reported as fraud or scams, making Zelle one of the safest ways for consumers to pay people they know and trust,” an EWS spokesperson said in an emailed statement.

However, “fraud is a significantly underreported crime,” Breyault testified. He cited a 2023 report from the Federal Trade Commission that estimated annual fraud losses in 2022 to be about $137.4 billion, as opposed to the $10 billion in losses reported by consumers.

Hand also cast doubt on EWS’s claim in an interview on Tuesday. “I would also raise a question as to whether those are the real figures or not. And then if they really are just 0.1%, surely the banking institutions, at least the seven that own Zelle, right, who make up the majority of those transactions can come together and figure out an industry-wide solution.”

While Zelle is offered to customers of about 2,000 financial institutions, Sen. Richard Blumenthal (D-CT) said during the hearing that a small group of banks were responsible for most of the payments on the service.

“Just three banks, JPMorgan Chase, Bank of America, and Wells Fargo handled 73% of all Zelle transactions in 2023,” Blumenthal said according to the text of his remarks. “Customers of those three banks submitted claims reflecting a combined total of $456 million lost to scams and fraud on Zelle in one year, 2022 alone. And only a fraction were repaid, $341 million. More than two thirds of these losses were never repaid by those banks.”

Part of the challenge is that current law does not protect consumers in cases where they authorize a payment, even in the case of a scam, Tatar Law Firm Attorney Stephanie Tatar testified.

“Because the consumer was involved in the transfer and authorized a payment, there is no remedy for the consumer under the Electronic Funds Transfer Act (“EFTA”), and no duty by the bank to credit the consumer’s account,” according to the text of her remarks.

In its statement, Zelle said “​As of June 30, 2023, we expanded our network operating rules to require all participating financial institutions to reimburse consumers for certain qualifying imposter scams. This consumer benefit for reimbursement of certain authorized payments (scams) is unique to Zelle and goes beyond legal and regulatory requirements.​”

Lawmakers may soon extend the law to cover Zelle with a bill called the “Protecting Consumers From Payment Scams Act,” which has been released in discussion draft format by congress member Maxine Waters (D-CA) according to Breyault.

“The bill would expand the definition of ‘unauthorized electronic fund transfer’ in the EFTA to cover fraudulently induced payments. This simple fix would address fraudulently induced payments on all payment platforms covered by EFTA, including P2P apps,” he said.

The subcommittee also plans to hear directly from Zelle and big banks about how they handle fraud and scams. Blumenthal gave conflicting dates for the hearing, initially saying it would happen in June, then later said it would happen in July.

“We have invited Zelle and the three largest banks to appear,” Sen. Blumenthal said. “It's an ongoing investigation. Hopefully the banks will cooperate.”