Fraud concerns mount as verifying identities becomes harder

Attendees at Nacha’s Smarter Faster Payments conference last month were coasting through a late morning panel discussion on fraud just before lunch when one panelist’s comments stirred up the ballroom.

Consolidated Edison Director Frank D’Amadeo, who leads treasury operations at that utility, was asked by a moderator about “pain points” faced by companies amid rising payments fraud. With his response, D’Amadeo took on the banking and payments professionals packed in the room.

“There is a need in our country for fraud to be stopped before it even gets to us, and there’s a lot of data out there where, if the banking community shared information, they could prevent a good amount of fraud before it even occurred,” D’Amadeo said. “The banks need to do a lot more,” he said during an earlier panel, making the message clear for those attending the annual conference in Las Vegas.

His remarks sparked a mini-debate in the ballroom over whether banks are doing enough, jointly, to thwart criminals who shift from one bank to another, undeterred, in search of new victims.

JPMorgan Chase, the biggest bank in the U.S., didn’t respond to a request for an interview on the topic, but the moderator for one of D’Amadeo’s panels, JPMorgan Executive Director Steven Bernstein, opened with this: “Fraud is prevalent.”

Fraud has become a big problem for payments players, which include banks, processors, card networks and a host of intermediaries and fintechs. Now, the rise of faster digital payments, including the impending launch of the FedNow real-time system, and artificial intelligence innovations threaten to exacerbate the trouble.

Here’s how Thomas French, a senior fraud consultant at software company SAS Institute, described the current environment: “That's just a basket full of awful there, between scams, scams, scams and more scams. When you combine scams with faster payments, you get faster fraud.”

While there has always been fraud, it has worsened in the past year to 18 months, said French, who spent 27 years working for banks, including Bank of America and the former Wachovia and First Union. “It's the industrialization of fraud, where you’ve got different criminal rings doing different things,” he said in an interview this month. “I’ve never seen it so sophisticated, so fast, and so full of crooks in my 30-plus years.”

Bank customers have suffered alongside their financial institutions. The amount of money American consumers reported losing to fraud last year jumped 30% to $8.8 billion compared to 2021, the Federal Trade Commission said in February, and much of that fraud flowed through some part of the payment system. Those frauds took place in business, shopping, investment and online dating settings, among others. 

The FTC was able to identify a payment method for 17% of consumer fraud reports last year. Of those methods documented, the biggest losses were in bank transfers and payments, with those losses more than doubling to nearly $1.6 billion last year, compared to $762 million in 2021. That payment channel constituted the single biggest area of fraud losses for the past three consecutive years, the FTC data showed.

While the most dollars were lost through bank payments last year, the highest number of fraud reports were regarding credit cards, according to the FTC.

Businesses looped into losses

With such large losses, it’s not just consumers being targeted for the frauds. It’s also companies of all sizes, including D’Amadeo’s power company servicing the New York City area. With respect to incoming customer payments, the utility receives 500 to 600 fraudulent receipts daily from valid debit accounts, but they are accounts for which a fraudster likely bought information on the dark web. In some cases, they even brazenly use Con Edison account numbers. That fraud is minimal, relative to the utility’s three million customers, he said. 

But D’Amadeo worries more about outgoing payments. The company is “constantly” targeted by email scams in which con artists, purporting to be Con Edison executives or vendors, seek payments, putting hundreds of millions of dollars at risk. For instance, a firm to which Con Edison owes money may have been hacked, and the hacker sends the utility an invoice with accurate information, but an altered bank account directing money to the fraudster. 

“The biggest concern we have is on the disbursement side where we’re being compromised and duped into changing payment instructions to a counterparty and, look, if you don’t catch it within the first 24 hours, you’re not getting that money back,” he said.

Smaller companies are targets too. Jefferson Grace, a Las Vegas detective who also spoke at the conference, described how one local business owner that had been in business for 30 years went belly up after he misdirected $1.1 million in payments to a crook impersonating a vendor. He explained how fraudsters take over or mimic email addresses and glean executive names from social media sites, like LinkedIn, to send persuasive emails.

Email schemes that trick corporate executives into sending payments to swindlers has become a major stumbling-block. “We’ve put so much trust into email that was never designed to be there,” Grace said. Multiple speakers at the conference stressed the importance of executives following explicit payment processing instructions to avoid fraud.

A big part of the problem is valid accounts being tapped by bad actors. In that “synthetic identity fraud” trend some pieces of authentic information are used to create the appearance of normalcy.

“Synthetic identity is a concerning and growing threat factor,” Visa’s head of U.S. risk, Dustin White, said at another April industry conference, the ETA's Transact conference in Atlanta. “It's fairly sophisticated, and it's very devastating because it's not a $500, $1,000, $2,000 fraud run that a financial institution has to deal with. These are like $80,000, $100,000, $150,000 bust-out schemes, per instance,” he said. 

The Boston Federal Reserve Bank estimated that synthetic identities cost the U.S. $20 billion in 2021, White noted. “It's a very prevalent and growing threat vector,” he said.

The conundrum for payments and banking industry professionals alike is fixing the fraud without introducing too much “friction.” With the industry having made significant headway in making digital payments easy for consumers to use, banks and companies are reluctant to unwind features that have fostered more commerce, especially online.

Nacha pivots to fight fraud

Nonetheless, a consensus is emerging that something has to be done, and industry organizations capable of bringing the banks and payments communities together are mulling new approaches. One Citigroup executive at the Nacha conference caught up in the debate said: “It’s coming.”

A key player in any new effort would be Nacha, formerly known as the National Automated Clearing House Association. Indeed, it’s discreetly pressing for changes within its own community, including among its big bank operators, so that financial institutions take more responsibility to counter fraud.

Earlier this month, Nacha posted for public comment the outline of a new “risk management framework” it has under development in what it called a new era of fraud, where funds are mistakenly “pushed” by users into accounts where they shouldn’t be. The updated approach would address increasing fraud threats and attacks on ACH credits, wires, cards and other instant and digital payments, Nacha said.

“As a new risk management strategy, the Framework is intended to bring the ACH Network and the broader payments community together to address an emerging and important area of need, and to provide an overarching direction for new initiatives, guidance, rules and industry tools,” the May 2 Nacha executive summary said.

The aim of the new framework is to increase awareness of the illicit push schemes; reduce the success of those attempts at fraud; and improve the chances of recovering funds after the scams have occurred, Nacha said. A Nacha spokesperson, Dan Roth, didn’t respond to repeated requests for comment on the new framework.

Obstacles to cooperation

Part of the challenge in addressing the problem has been banks’ reluctance to share customer data with each other that might otherwise be helpful in fighting fraud, said Mark Dixon, who is vice president of education at the New England Automated Clearing House Association in Burlington, Massachusetts.

Banks have long been sensitive to sharing information in any way that might undercut their proprietary interests, but that attitude might be changing now, at least slightly.

“The industry is looking at how can we be more proactive with our communication,” Dixon said, pointing to Nacha’s new framework concept and a Nacha contact registry designed to help institutions talk to one another. “A challenge is going to be making sure all the institutions get on board with that.”

Increasing the difficulty is the fact that there are nearly ten thousand U.S. banks, creating a daunting task in allowing them to communicate with each other. 

As part of the effort, Nacha developed the contact registry in 2020 and had taken on the arduous task of asking bank personnel to sign in. So far, the registry has 45,000 contacts.

Nacha’s operating rules require financial institutions to provide the contacts so professionals from other institutions can reach them if need be, and all of them are supposed to be willing to share information as a part of the reciprocity of receiving it.

“The intent of the registry is to provide consistent and accurate information for a financial institution that may need to reach another financial institution regarding fraud scenarios like business email compromise and vendor impersonation,” Jeanette Fox, Nacha’s senior director for risk investigation and ACH network risk management, said in an emailed statement.

Early Warning Services, the bank-owned operator of the payment tool Ze also operates a national shared database to which the largest U.S. banks contribute account information, but professionals note it has a significant gap in coverage because smaller banks have more than a quarter of accounts.

Banks launch another initiative

Other banking organizations also are brainstorming new ways of combating fraud. The American Bankers Association is working on a new anti-fraud prevention project with Early Warning Services, according to one well-placed industry source who asked not to be identified.

That effort is starting out with just a handful of banks participating and is about to kick off a pilot phase, the source said, declining to provide further details. 

Sarah Grano, an ABA spokesperson, declined to comment, as did Meghan Fintland, a spokesperson for Early Warning Services.

Professionals from those organizations meet regularly to discuss fraud and risks, but French still has concerns that banks aren’t capturing and sharing as much information as they might. He notes that bankers are steeped in policies that keep them from sharing information with third-parties. Also, some professionals say they lean away from broadcasting new techniques for fear of tipping off fraudsters. “There is some sharing, but I think there’s a need and a desire for more sharing of different information,” said French, whose firm sells fraud analytics software.

Still, plenty of companies have been stepping up public campaigns to sell new fighting-fraud tools in recent months, including SAS Institute, card network company Mastercard, credit bureau Experian and a parade of fintechs introducing new services and products.

Europeans explore a new approach

Across the Atlantic in Europe, there has been more movement in terms of a collective industry response. A new concept of “authorized push payments” has taken root, with a sense of shared liability among banks for wayward payments, said Donna Turner, a former chief operations officer at Early Warning Services who is now a consultant for the auditing firm Ernst & Young.

European financial institutions on the sending side are now taking as much responsibility for fraud as those on the receiving end, Turner said. Increased data sharing among banks in Europe has unfurled with the open banking trend following a 2016 adoption of the European Union’s Second Payment Services Directive, known as PSD2.

Bank and payment actors on either side of a transaction have an increased incentives to change their behavior to fight fraud, Turner said in an interview this month. “It’s about protecting the ecosystem,” she added.

Participants in the U.S. payments ecosystem may be starting to embrace the same approach as they seek to build stronger industry defenses against fraud.

 

Citizens Bank will pay $9 million to settle Consumer Financial Protection Bureau allegations that the Providence, Rhode Island-based lender improperly managed customers’ credit card disputes and fraud claims, the agency said Tuesday.

The penalty stems from a January 2020 lawsuit the bureau filed against the bank, alleging it improperly denied customer reports of fraud and errors and failed to fully reimburse users, in some cases.

“While Citizens continues to disagree with the CFPB’s stance with respect to these long-resolved issues, which were self-identified and voluntarily addressed years ago, we are pleased to put this matter behind us,” the bank’s general counsel, Polly Klane, said in a statement.

Klane added that the “operational errors” the bank disclosed in 2015 affected “a very small subset” of customers — roughly 25,000.

As part of the settlement, Citizens must ensure its treatment, handling and resolution of billing error notices and claims of unauthorized credit-card use comply with the Truth in Lending Act. 

Specifically, the CFPB ordered the bank to prohibit its employees from requiring customers to provide a fraud affidavit signed under penalty of perjury to support a credit card claim. The bureau labeled that practice as “unnecessary and burdensome.”

The bank must also ensure it refunds any fees or other amounts, calculated from the date of the error or unauthorized use. The CFPB accused Citizens of “sometimes not refunding all finance charges or fees owed to customers” when unauthorized use and billing errors occurred.

Additionally, the bureau said, the bank failed to give some customers proper acknowledgment and denial notices to inform them their disputes had been received or, in some cases, denied. Citizens, on some occasions, routed some customers to the bank’s collections department rather than providing them with credit counseling information, the agency said.

“Federal law provides important rights to credit cardholders when disputing transactions and resolving billing errors,” CFPB Director Rohit Chopra said in a statement. “As outstanding credit card debt approaches $1 trillion, the CFPB will be closely watching the conduct of the credit card industry.”

Citizens, in its statement, said its remediation efforts were completed shortly after the issues were discovered and “exceeded all obligations to make customers whole.”

“We remain proud of our commitment to transparency, our rigorous compliance programs, and our consistent effort to treat customers fairly and operate responsibly,” Klane said Tuesday.

Dive Brief:

• After an investment firm issued a controversial report last Thursday that took aim at digital payments company Block and its Cash App money transfer business, some analysts called on Block to release more business statistics and information about its anti-fraud practices.
• Block rebutted the report and issued a statement the same day calling the report from Hindenburg Research “factually inaccurate and misleading.” Block also said it’s exploring legal action against the firm and is in touch with the Securities and Exchange Commission. “We intend to work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report they shared about our Cash App business today,” the company said in its statement.
• Nonetheless, analysts who follow Block paid attention to the Hindenburg report. “Unfortunately, questions have been raised in the Hindenburg report, and even if false, it's likely to weigh on sentiment and could spur further regulatory scrutiny of the (peer-to-peer) space,” Oppenheimer & Co. Analyst Dominick Gabriele wrote in a Thursday note to investor clients.

Dive Insight:

New York City-based Hindenburg says on its website that the firm specializes in forensic financial research. Hindenburg was founded in 2017 by Nathan Anderson, who has worked in the hedge fund industry at several firms over the past decade, according to his LinkedIn profile. He also previously worked at data company FactSet Research Systems, Reuters reported in January when it covered a Hindenburg report related to another company.

In its report on Block, Hindenburg alleged, among other things, that Block inflated user metrics and allowed fraud on its Cash App platform.

In response to the report, Block said Hindenburg is “known for these types of attacks, which are designed solely to allow short sellers to profit from a declined stock price.” Block contended the report seems designed to deceive or confuse investors, and the company won’t be “distracted by typical short seller tactics.” 

“We are a highly regulated public company with regular disclosures, and are confident in our products, reporting, compliance programs, and controls,” Block said in the statement.

Block didn’t further describe its communications with the SEC with respect to the Hindenburg report. Block spokespeople didn’t immediately respond when asked for more detail on the contact with the SEC.

Hindenburg Research has been identified by some news outlets as a short seller, which is an investment firm that takes stock positions that profit from the decline in a company’s stock. Still, Hindenburg noted in its report on Block that it intends “to continue transacting” in the company’s securities and may be long, short, or neutral, regardless of its initial recommendations or conclusions.

Block’s stock price began declining on Tuesday last week, in the days before the report was publicly released, dropping nearly 22% by last Friday, before beginning to recover this week. In morning trading today, the stock remained about 14% below its closing price on Tuesday last week.

As the stock price decreased, the net worth of Block co-founder and CEO Jack Dorsey fell $526 million, Bloomberg reported.

Hindenburg said its report on Block followed a two-year investigation. The investment firm’s report has received attention partly because it has issued some impactful reports in the past. Hindenburg is known for these in-depth reports which make very specific claims, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business, noting that the company “can't blow it off.”

In 2020, Hindenburg published a report on Phoenix-based electric truck maker Nikola, alleging that company deceived investors; Nikola’s founder, Trevor Milton, was convicted in 2022 of defrauding investors, according to The New York Times.

Some of the points raised by Hindenburg regarding Block caught the attention of analysts who cover that San Francisco-based company, which also owns the buy now, pay later business Afterpay. They suggested more information from Block could help allay concerns. 

“While we understand that (Block) doesn't want to give credence to short-seller reports, we also think further detail on (monthly active users) and (know your customer) practices would be welcomed by investors,” Wolfe Research analysts wrote in a Thursday note to investor clients.

Wolfe analysts pointed out that third-party app data on Cash App’s monthly active users generally matches what the company has reported. In its fourth quarter earnings materials, Block said Cash App had 51 million monthly transacting active accounts across the U.S. and Europe in December. That referred to accounts that had at least one transaction using a Cash App product or service during that time period.

The Hindenburg report makes “valid arguments” – including drawing attention to the fee Block charges for its instant deposit feature – which “might increase regulatory scrutiny,” Mizuho Securities analysts wrote in a Thursday note to clients.

In the Oppenheimer note to investors, Gabriele said Block “should share special data given the magnitude of these allegations.” 

Peer-to-peer payments likely experience more fraud than credit cards, he said, noting PayPal erased 4.5 million accounts after it reviewed 2021 activity. “An internal review process that likely will be done by (Block) given the spotlight from this report could result in a culling of accounts similar to measures taken by (PayPal),” Gabriele wrote. 

Additionally, “we expect (Block) to explain/report tighter controls for customer acquisition and review its customer base,” Gabriele wrote in his note.

Analysts largely brushed off Hindenburg’s unsubstantiated allegations that Block is complicit with criminal activity tied to Cash App, noting Zelle or other bank products also risk being used in a fraudulent or criminal way.

Block spokespeople didn’t respond to requests for comment on analysts’ points.

The Consumer Financial Protection Bureau sued Block last August, accusing the company of “slow-walking” its responses to a Cash App-related probe by the agency, Reuters reported. In November, a federal judge ordered Block to comply with those investigative demands made by the CFPB.

The CFPB declined to comment Tuesday on the status of the Cash App-related probe.

In addition, Block has received demands for information from attorneys general in multiple states over Cash App’s handling of customer complaints and disputes, the company disclosed last year in its annual filing with the SEC.

As the Federal Reserve prepares for the launch of FedNow as early as May, it’s focusing on building fraud prevention features into the new real-time payments system.

“Fraud management features are a high priority for (financial institutions) and are being tested along with transaction flows in the countdown to launch,” the Federal Reserve said in a website post, citing FedNow Senior Vice President Nick Stanescu.

The central bank is zeroing in on the fraud prevention effort as other speedy payment systems fend off criticism that consumers can run into trouble when fraudsters trick them into sending payments that can’t be reversed. That’s been the case with Zelle, the peer-to-peer payments system operated by the bank-owned Early Warning Services. 

That system, introduced in 2017, has been battered by complaints from bilked consumers. Sen. Elizabeth Warren (D-MA) took up their cause last year, railing against Zelle and calling for increased regulations to protect consumers. For its part, Zelle has said that the fraud on its system accounts for well under 1% of transactions.  

FedNow won’t be offered directly to consumers, but rather to some 10,000 banks and other financial institutions that are connected to the FedLine network. Those financial institutions will, in turn, make the instant payment services available to corporate clients and ultimately consumers as well. 

After years of planning for FedNow, the payments system entered the final phases of testing and certification last month, with an aim to make the service available sometime between May and July of this year.

“Early adopters in the FedNow Pilot Program — FIs, processors and service providers among them — are now sending test payments messages to one another using the FedLine infrastructure,” the Feb. 6 Fed update said.

All of that development comes with an eye on fraud prevention, as users ultimately tap it for account-to-account money transfers and bill payments, among other services.

In a separate post, the Fed said the initial launch of FedNow will allow financial institutions to impose value limits for transactions and specify some situations in which transactions would be rejected. It also will offer features that let the institutions check whether a message was altered as well as options for running transaction reports.

The update made clear that the Fed is keenly aware of the troubles that have recently plagued Zelle and the inability to reverse payments so it’s seeking to find ways to bolster defenses against fraud. It will encourage financial institutions to mimic Zelle’s extra layer of prompts asking users if they’re sure they want to send a payment.

Identity theft and account takeovers are the types of schemes that the Fed is bracing for as it anticipates that criminals will infiltrate the new real-time payments system, as they have other forms of payment such as debit cards, checks and automated clearing house payments.

“The rise of instant payments is a reminder that while fraud itself may be as old as human civilization, new ways of making payments invariably introduce fresh fraud management challenges to financial services sectors and their customers,” the Fed post said.

The Fed said it may also eventually give financial institutions the ability to fine-tune their controls for certain types of customers that allow them to better screen out requests to send payments to bad actors. 

The central bank could also use the FedNow system to monitor for illegal activity, such as “aggregated concentrations of inbound and outbound activity” that may suggest illicit “mule activity.” It could also tap machine-learning capabilities to assess transactions.

The central bank did say that potential features planned for a roll-out in 2024 may allow financial institutions using the system to reject payments that exhibit “unusual frequency patterns” or show an unusual cumulative value over certain periods of time.

“This could address fraudsters’ efforts to work around transaction limits by originating large numbers of low-value payments in a short window,” the Fed said in the web post.

In the meantime, the Fed is relying on education to make sure the financial institutions know how to use the system in a way that mitigates fraud.

Financial institutions aren’t completely unfamiliar with how a real-time payments system works because a group of big U.S. banks introduced their own real-time payments system, called the RTP network, in 2017. Smaller institutions that have been reluctant to use a system run by their larger rivals are expected to tap FedNow for services.

Comments from Stanescu came in an interview of the Fed official with the trade publication Pymnts.com, the Fed said in its web post.

Dive Brief:

• Over the next decade, global card fraud losses for issuers, merchants and acquirers will total $397.40 billion, according to the December 2022 issue of industry publication the Nilson Report. That’s down from the projection last year of $408.50 billion. U.S. fraud losses are expected to amount to $165.12 billion over the next 10 years; a Nilson Report spokesperson wasn't immediately able to provide last year’s U.S. projection. The figures include global brand, domestic and private label credit, debit and prepaid cards.
• Gross card fraud – expressed as a share of every $100 – continues to decline, due to improved industry efforts to combat such fraud, said Nilson Report publisher David Robertson. That figure in 2021, the most recent year available, was 6.6 cents globally per $100 in total volume, compared to 6.8 cents in 2020. Over the past decade, it peaked at 7.2 cents in 2016.
• “The industry’s getting better at fighting fraud through various means,” Robertson said, and “powerful, organized crime figures are going in another direction. They’re looking at more lucrative opportunities with less fraud-fighting headache, and that’s been in cryptocurrency and synthetic fraud.”

Dive Insight:

Card fraud losses globally amounted to $32.34 billion in 2021, about a 14% increase over 2020, when losses totaled $28.43 billion, according to the most recent report from Nilson. In the U.S. alone, 2021 fraud losses totaled $11.91 billion, an 18% increase over $10.09 billion in 2020. 

By 2031, global fraud losses are expected to total $47.22 billion on total card volume of $73.86 trillion, the publication estimated. In the U.S. alone, fraud losses will reach $19.24 billion by 2031, with total volume tallying $19.38 trillion. 

Those fraud loss increases are projected because card spending keeps growing, Robertson noted. Globally, volume on credit, debit and prepaid cards amounted to $48.96 trillion in 2021, up about 17% from 2020. In the U.S., total card volume tallied $11.27 trillion in 2021, up 20% over 2020.

But “the curve is bending,” with card fraud measured in cents per $100 continuing to trend downward, Robertson said. In the U.S., fraud losses were 10.6 cents per $100 in 2021, compared to 10.7 cents in 2020. A Nilson spokesperson wasn't immediately able to provide additional detail on how that figure has tracked in the U.S. over the past decade.

Card companies are using machine learning and artificial intelligence to improve their ability to fight fraud, meaning “the ability to spot new trends used by professional fraudsters is getting better all the time,” Robertson said. “It’s limiting the fraudsters’ ability to maximize their outtake, what they can extract from a business.”

That, in turn, has led fraudsters to move away from the card business and into newer arenas like cryptocurrency, which doesn’t have as many defenses against fraud, he said.

The U.S. was responsible for about 37% of global losses to fraud, although it only accounted for 23% of volume, the Nilson Report pointed out. The higher share of fraud losses attributable to the U.S. was partly due to a 25% jump in purchase volume on credit cards, following an 8.8% drop in 2020. “Outside the U.S., card spending is dominated by PIN-based debit card payments, which better protects against fraud,” the publication said.

Additionally, card-not-present transactions – which are more susceptible to fraud – continued to rise in the U.S. and contributed to the actual dollars lost to fraud, the publication noted. Card-not-present sales exploded during the COVID-19 pandemic’s e-commerce surge and that’s “really where fraud continues to grow,” Robertson said. 

By card type, the vast majority of fraud in 2021 – $29.11 billion – occurred on global brands’ cards, which includes Visa, Mastercard, American Express, Discover/Diners Club, UnionPay and JCB, the Nilson Report said. That figure was about 16% higher that year than in 2020. 

The other card types that made up a minority of the fraud in 2021 included: ATM cards not processed on major card networks amounting to $1.29 billion in fraud losses; domestic-only cards accounting for $1.26 billion; and private label cards issued by airlines, stores and other businesses with $67 million in losses. 

Robertson also noted a drop in ATM fraud, as major card networks have become skilled at spotting that and swiftly contacting a bank to shut the schemes down. Private label cards that have been moved to Visa and Mastercard branded cards benefit from their enhanced fraud fighting capabilities, he said.

Dive Brief:

• Sen. Elizabeth Warren (D-MA) is calling on the Consumer Financial Protection Bureau (CFPB) to bolster regulations governing how banks reimburse scammed customers, citing rampant fraud on the peer-to-peer payments network Zelle.
• In a letter sent to CFPB Director Rohit Chopra on Wednesday, Warren said she collected private data from several banks that shows fraud rates are rising on the platform, and offered to share the data with the bureau.
• Zelle, which is owned by seven of the nation’s largest banks, has been a frequent target for the Massachusetts senator, who this month released a report that found Zelle reimbursed 47% of the amount customers reported in fraud in 2021 and the first half of 2022.

Dive Insight:

“My investigation, which is based on previously non-public information obtained from the banks that own and run the platform, shows that Zelle is increasingly becoming a tool of bad actors who use the platform to defraud consumers, while the big banks that own Zelle do little to stop them or provide recourse to their consumers,” Warren wrote in her letter to Chopra.

Warren, who is also a member of the Senate Banking Committee, urged the regulator to amend Regulation E of the Electronic Fund Transfer Act “to increase consumer protection and interpret the guidelines surrounding peer-to-peer platforms.”

“The rising volume of fraud and scams — combined with banks’ failure to make consumers whole in more than 90% of authorized scam cases and nearly 50% of unauthorized fraud cases — is a violation of banks’ responsibilities to their consumers and is not consistent with the goals of Regulation E,” she wrote.

Zelle operator Early Warning Services and bank trade groups have pushed back against Warren’s attacks in recent months, claiming fraud makes up a small percentage of transaction activity on the platform.

“Disputes and complaints about P2P payments are uncommon, especially for Zelle payments when compared to nonbank P2P products,” the American Bankers Association wrote in a letter to Chopra on Thursday. “As noted, 99.9 percent of the 5 billion Zelle transactions processed in the past 5 years were sent without any report of fraud or scams.”

The group cautioned the bureau against taking steps that would shift liability for Zelle fraud to banks.

“Shifting liability for payments the customer has authorized and later claims were made to a scammer will harm consumers in the form of higher costs, fewer options, and less competition,” the group wrote.

The group also highlighted a campaign to educate consumers on how to avoid falling victim to scammers on the platform. 

“More than 2,000 banks have participated since the campaign began in 2020,” the group wrote. “The free materials were refreshed in early October 2022 and include educational information empowering consumers to spot common P2P payment scams.”