Senators Warn Regulators on Zelle Fraud Risks


Five Senate Democrats are sending a warning on Early Warning Services’ Zelle.

In a letter addressed to the Federal Reserve, the FDIC, the National Credit Union Administration and the Office of the Comptroller of the Currency, the senators warned that Zelle’s “model has opened the door to fraud and scams on a tremendous scale.”

The senators — Jack Reed of Rhode Island, Mark Warner of Virginia, Elizabeth Warren of Massachusetts, Sherrod Brown of Ohio and Robert Menendez of Ohio — noted that Zelle offers a convenient way to send money through the banking system. But, they added, emphasis must be placed on compliance with consumer protection and AML laws.

Examining Responsibility

The senators urged the OCC and the Fed “to examine Early Warning Services on an ongoing basis,” adding that the agencies “coordinate their  supervisory approach with the Consumer Financial Protection Bureau.”

In particular, they spotlighted the issue of responsibility when things go awry, when fraud is in the mix.

“The depository institutions currently take the position that they are under no obligation under the [Electronic Funds Transfer Act] to make their customers whole when fraudsters use the network to steal their hard-earned money. Instead, depository institutions appear to have forced their customers to foot the bill in the vast majority of these circumstances, often relying on ambiguity over whether a payment is classified as ‘authorized,’ ‘unauthorized,’ or an ‘error’ to avoid reimbursing customers who have been victims of fraud,” the letter stated.

As noted here, the debate has been raging about who bears the ultimate responsibility when Zelle and other P2P options are leveraged by fraudsters — especially when a consumer’s bank account credentials have been compromised by a third party when access was allowed but the information was used to commit fraud.

The question of responsibility becomes especially urgent, given continued spike in volumes across the Zelle Network. Those volumes swelled 26% last year to $629 billion and more than 2.3 billion payments, and the number of participating financial institutions increased by 40% to more than 1,800. Sen. Warren has estimated that fraud tied to the Zelle network has topped $255 million last year.

As reported late last year, some of the largest banks, including Bank of America and J.P. Morgan Chase, have been crafting a plan to reimburse scam victims. Under the terms of the reported plan, if the financial institution (FI) is able to conclude that a customer was duped into sending funds, the bank that holds the account where the money was sent would return the money to the victim’s bank, and the customer’s account would be reimbursed. But the refund framework would not apply to customers demanding refunds for goods or services they did not get — or if they entered a typo and payments were sent to a party other than the recipient that had been originally intended.

At issue is how to redress victims across a financial services landscape where social engineering has been growing by leaps and bounds, and mobile devices are key pieces of hardware where fraudsters can spoof unwitting victims and induce them to send funds — never to be seen again. The PYMNTS and Featurespace report on the state of financial fraud found 62% of FIs have reported that fraud attacks are on the rise, and 50% said that Zelle fraud rates had risen. Advanced technologies, with artificial intelligence (AI) and machine learning among them, can help improve fraud rates. Roughly 86% of FIs we surveyed stated that these technologies are high priority.

Education is also a key line of defense for FIs and for their consumers. As Ingo Money CEO Drew Edwards has stated, the P2P model is a “sender beware” model that demands that senders check, recheck and verify that everything — amount being sent and the recipient — is as intended.

The letter from the senators this week only signals that the conversation about Zelle, and liability, is only going to become louder and more urgent.