Payments app Zelle begins fraud refunds after pressure from Washington

Nov 13 (Reuters) – Banks on payments app Zelle have started refunding fraud victims to address consumer protection concerns raised by U.S. lawmakers and the federal consumer watchdog, in a major policy change.

The 2,100 financial firms on Zelle, a peer-to-peer network owned by seven banks including JPMorgan Chase ( JPM.N ) and Bank of America ( BAC.N ), began reversing transfers starting June 30 for customers who were tricked into sending money to fraudsters claiming to be from a government agency, bank or existing service provider, said Early Warning Services (EWS), the banks’ company that owns Zelle.

It is “well above existing legal and regulatory requirements,” Ben Chance, head of fraud risk at EWS, told Reuters.

Federal rules require banks to reimburse customers for payments made without their permission, such as by hackers, but not when customers make the transfer themselves.

While Zelle revealed on August 30 that it had introduced a new compensation benefit for “specific fraud types”, it has not previously provided details of its new fraud refund policy due to concerns that it could encourage criminals to make false fraud claims, a spokesperson said .

The new policy marks a major shift from last year, when bankers, including JPMorgan CEO Jamie Dimon, told lawmakers worried about rising fraud that it was unreasonable to require banks to refund transfers that customers were tricked into authorizing.

After launching in 2017, Zelle grew to become one of the US’s largest peer-to-peer payment networks by total payments. A report by the New York Times in March 2022 that fraud was flourishing at Zelle caught the attention of lawmakers who often criticized big banks, including Senator Elizabeth Warren.

She and other lawmakers launched an investigation and estimated that Zelle users had lost $440 million to all types of fraud in 2021 alone. During a Senate hearing last year, Warren told Dimon and other bank executives that they had created a “perfect weapon” for criminals but did not stand up for their customers. More than 100 million people, all with US bank accounts, have access to Zelle, according to EWS.

Impersonator fraud was the most reported scam in 2022 across all payment methods in the United States, accounting for $2.6 billion in losses, according to the Federal Trade Commission.

Banks worry that covering the costs of authorized transactions will encourage more fraud and put them on the hook for potentially billions of dollars. Instead of requiring lenders to reimburse customers, EWS has implemented a mechanism that allows banks to take money back from the recipient’s account and return it to the sender, Chance said.

Lenders on Zelle are also now required to implement a tool that flags transfers with risky attributes, such as a payment to an account that has never transacted on the Zelle network, Chance said. He said Zelle has seen “a gradual decrease” in fraud and fraud rates this year but declined to provide details.

“We’ve had a strong set of controls since the launch of the network, and as part of our journey we’ve continued to evolve those controls… to keep pace with what we see happening in the market,” he said.

Chance said EWS has been in touch with policymakers about the need for a “holistic approach” to fighting fraud, including advocating for more dedicated law enforcement resources.

Under pressure from Warren and other lawmakers, the Consumer Financial Protection Bureau (CFPB) considered forcing lenders to reimburse fraudsters, but Zelle’s changes have so far satisfied the agency, a person familiar with the matter said.

A CFPB spokesperson declined to comment on Zelle or potential rule changes, but said the agency is working to protect customers “including by ensuring that financial institutions live up to their investigation and resolution obligations.”

JPMorgan, Bank of America and Zelle’s five other bank owners declined to comment.

“Zelle’s platform changes are long overdue,” Warren said in a statement to Reuters. “The CFPB stands with consumers, and I urge the agency to keep the pressure on Zelle to protect consumers from bad actors.”

MARKET PRESSURE

Zelle has long maintained that fraud and fraud rates are low.

It processed $629 billion worth of payments in 2022, according to the network, with 99.9% of transfers made without a fraud or fraud report.

It competes with other peer-to-peer payment platforms such as PayPal ( PYPL.O ) and Venmo that review situations on a case-by-case basis and have a buyer protection program for qualifying transactions that covers fraud. Experts note that it is difficult to compare fraud and fraud rates on different platforms because classifications vary.

Zelle’s u-turn shows how banks are feeling competitive pressure to raise “the market standard of care,” said Trace Fooshee, a strategic advisor at Datos Insights.

Still, regulations requiring fraud protection would be better for consumers because lenders’ policies may be unclear or they may not follow through as promised, said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center.

“The only thing that I think is problematic is that the consumer really wouldn’t know that they have that option, and if they do know, and if the bank fails to reimburse them, then there’s no private remedy,” she said, noting. Still, Zelle’s policy change was a “good first step.”

Payment fraud is expected to resurface when bank executives appear before the Senate next month, according to industry experts. This time they think they have a good story to tell.

“The banks through Zelle — without regulation, without legislation — have actually proactively gone and said, we’re going to make sure we … try to address any kind of consumer problem or harm,” said Lindsey Johnson, CEO of the Consumer Bankers Association.

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