Payments app Zelle begins refunding imposter scams after pressure from Washington

Banks on payment app Zelle have started refunding victims of imposter scams to address consumer protection concerns raised by US lawmakers and the federal consumer watchdog, in a major policy shift.

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 deceived customers to send money to scammers claiming to be from an existing government agency, bank or service provider, said Early Alert Services (EWS), the banking company that owns Zelle.

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

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

While Zelle revealed on August 30 that it had introduced a new refund benefit for “specific scam types,” it had not previously provided details about its new refund policy for imposter scams due to concerns that doing so could encourage criminals to make false claims about scams, a spokesperson said. saying.

The new policy marks a major shift from last year, when bankers including JPMorgan CEO Jamie Dimon told lawmakers concerned about the rise in scams that it was unreasonable to require banks to refund transfers. that customers were tricked into approving.

After launching in 2017, Zelle grew to become one of the largest peer-to-peer payments networks in the US by total payments. A March 2022 New York Times report on the rise of Zelle scams caught the attention of lawmakers who frequently 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 CEOs that They had created a “perfect weapon” for criminals, but they had not supported their clients. According to EWS, more than 100 million people, all with bank accounts in the United States, have access to Zelle.

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

Banks are concerned that covering the cost of authorized transactions will encourage more fraud and put them at risk for potentially billions of dollars. Instead of requiring lenders to refund customers, EWS has implemented a mechanism that allows banks to recover funds from the recipient’s account and return them to the sender, Chance said.

Zelle lenders must now also 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. She said Zelle has seen “a radical reduction” in fraud and scam rates this year, but declined to provide details.

“We’ve had a strong set of controls in place 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 engaging with policymakers about the need for a “holistic approach” to combating scams, including promoting more dedicated police resources.

Under pressure from Warren and other lawmakers, the Consumer Financial Protection Bureau (CFPB) considered forcing lenders to refund scams, 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 possible rule changes, but said the agency is working to protect customers “including by ensuring that financial institutions meet their obligations to investigate and resolve errors.”

JPMorgan, Bank of America and the five other banks that own Zelle declined to comment.

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

MARKET PRESSURE

Zelle has long argued that its fraud and scam rates are low.

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

It competes with other peer-to-peer payment platforms like PayPal (PYPL.O) and Venmo, which review situations on a case-by-case basis and have a purchase protection program for eligible transactions that covers scams. Experts note that it is difficult to compare fraud and scam rates between platforms because rankings vary.

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

Still, regulations requiring protection against imposter fraud would be better for customers, since lenders’ policies may not be clear or followed as promised, said Carla Sánchez-Adams, senior attorney at the National Consumer Law Center. .

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

Payment fraud is expected to resurface when bank CEOs 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 – no regulation, no legislation – have actually gone proactively and said, we’re going to make sure that we’re… trying to address any type of consumer issues or harms,” ​​said Lindsey Johnson, director executive of Consumer Bankers Association.