Senate Democrats, including Elizabeth Warren, have urged financial regulators to address fraud associated with the bank-owned Zelle P2P payments service.
Zelle, operated by Early Warning Services, is owned by seven of the largest banks in the U.S. Since its launch in 2017, it has gained immense popularity, facilitating $629 billion in transactions in 2022—double the amount of its closest competitor, Venmo.
However, Zelle’s rapid growth has raised concerns about fraud and scams. In a letter to the Federal Reserve Board, FDIC, National Credit Union Administration, and OCC, Senators Warren, Bob Menendez, Jack Reed, Sherrod Brown, and Mark Warner highlighted the service’s "opening the door to fraud and scams on a tremendous scale."
The senators called for regulators to "closely review and examine the customer reimbursement and anti-money laundering (AML) practices of depository institutions that participate in the Zelle network." They emphasized that as regulators of the seven banks that own Zelle and the 1,800 participating depository institutions, these agencies have the authority to ensure compliance with important consumer protection and AML laws, including the Electronic Fund Transfer Act (EFTA) and the Bank Secrecy Act (BSA).
The letter expresses concerns about the operation of Zelle, noting that depository institutions currently maintain that they are under no obligation to reimburse customers for losses incurred due to fraud on the platform. Instead, it appears that these institutions often require customers to bear the financial burden, taking advantage of the ambiguity surrounding whether a payment is classified as "authorized," "unauthorized," or an "error."
In response, Early Warning Services stated that it is regularly supervised and examined by the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB). The organization emphasized its commitment to consumer protection against fraud and scams.
They reported that over 99.9% of Zelle payments are made without any reports of fraud or scams, attributing this success to the extensive consumer protection measures in place across the Zelle Network and its financial institution partners. They also noted that Early Warning has been working for 30 years to minimize risk while continuously improving its fraud prevention strategies in response to evolving criminal tactics.
To explore more about payment innovations, visit the NextGen Nordics event taking place on April 25, 2023.