CFPB Sues JPMorgan Chase, Bank of America, Wells Fargo Over Zelle Fraud

The Consumer Financial Protection Bureau (CFPB) has sued the operator of the Zelle payments network and the three U.S. banks that dominate transactions on it, alleging that the firms failed to properly investigate fraud complaints or give victims reimbursement.

The CFPB said that customers of the three banks – JPMorgan Chase, Bank of America, and Wells Fargo – have lost more than $870 million since the launch of Zelle in 2017. Zelle is a peer-to-peer payments network run by bank-owned fintech firm Early Warning Services, which allows for instant payments to other consumers and businesses and has quickly surged to become the biggest such service in the country.

CFPB Director Rohit Chopra said that the banks felt threatened by competing payment apps and rushed to launch Zelle, but failed to put in place proper safeguards, allowing fraudsters to exploit the system. "The nation’s largest banks felt threatened by competing payment apps, so they rushed to put out Zelle," Chopra said. "By their failing to put in place proper safeguards, Zelle became a gold mine for fraudsters, while often leaving victims to fend for themselves."

The CFPB wants to force the banks to stop their allegedly unlawful practices around Zelle and pay an unspecified amount in penalties. The agency also claims that Zelle’s "limited identity verification methods" have allowed criminals to infiltrate the network, enabling them to divert payments and move between member banks that didn’t share information among institutions.

The CFPB also criticized the banks for not properly investigating complaints about Zelle activity and not consistently reporting fraud activity. "The banks failed to fix glaring flaws in their systems even as hundreds of thousands of customers filed complaints about fraud," Chopra said. "The banks knew their customers were having their money stolen, but since they weren’t bearing the cost of these losses themselves, they dragged their feet on fixing the problems."

Glaring Flaws

The vast majority of Zelle activity is uneventful. Of the $806 billion that flowed across the network last year, only $166 million in transactions was disputed as fraud by customers of JPMorgan, Bank of America, and Wells Fargo, the three biggest players on the platform. However, the three banks collectively reimbursed just 38% of those claims, according to a July Senate report that looked at disputed unauthorized transactions.

Banks say they investigate each fraud claim, but often find that what customers say was fraud was technically a scam where customers authorized payments. In those cases, banks aren’t usually required to make customers whole.

Meritless and Misleading

Early Warning Services, the operator of Zelle, said in a statement that it was prepared to defend itself against this "meritless lawsuit." "Zelle leads the fight against scams and fraud and has industry-leading reimbursement policies that go above and beyond the law," said Jane Khodos, an Early Warning Services spokeswoman. "The CFPB’s misguided attacks will embolden criminals, cost consumers more in fees, stifle small businesses and make it harder for thousands of community banks and credit unions to compete."

Conclusion

The CFPB’s lawsuit against Zelle and the three banks is a significant development in the ongoing debate over the role of banks in preventing fraud and protecting consumers. The agency’s allegations highlight the need for greater oversight and accountability in the financial industry, and the importance of ensuring that consumers are protected from fraud and abuse.

Frequently Asked Questions

Q: What is Zelle?
A: Zelle is a peer-to-peer payments network that allows for instant payments to other consumers and businesses.

Q: Who is the operator of Zelle?
A: Early Warning Services, a bank-owned fintech firm, operates Zelle.

Q: What is the CFPB’s lawsuit alleging?
A: The CFPB is alleging that the operator of Zelle and the three banks that dominate transactions on the platform failed to properly investigate fraud complaints or give victims reimbursement.