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On Friday, the Consumer Financial Protection Bureau (CFPB) defendant four financial companies involved with Zelle. The CFPB’s lawsuit (through CNBC) accuses Zelle’s operator (Early Alert Services) and three of the service’s partner banks (JPMorgan Chase, Bank Of America and Wells Fargo) of failing to protect consumers from widespread fraud in the peer-to-peer payment system.
The CFPB says customers of those three banks have lost more than $870 million during Zelle’s seven years as a payment service. The lawsuit claims that hundreds of thousands of customers who filed fraud complaints were denied meaningful assistance, and some were told to “contact the scammers directly to get their money back.” (Pro tip: don’t do that.)
“The nation’s largest banks felt threatened by competing payment apps, so they rushed to pull Zelle,” said CFPB Director Rohit Chopra. wrote in a statement. “By failing to implement adequate safeguards, Zelle became a gold mine for scammers, while often leaving victims to fend for themselves.”
The CFPB says one of the loopholes in the system is that its “tokens” (phone numbers or email addresses tied to the United States) can be used and reassigned between different banks. The agency states that scammers can take advantage of this by connecting the victim’s number or email to the perpetrator’s deposit account, causing payments intended for the consumer to go to the scammer’s account.
The lawsuit accuses Zelle and the banks of allowing repeat offenders to jump between financial institutions with impunity. “The banks did not share information about known fraudulent transactions with other banks in the network,” the CFPB wrote. “As a result, bad actors could carry out repeated fraud schemes at multiple institutions before being detected, if at all.”
The CFPB also alleges that the defendant banks failed to heed red flags to prevent further fraud, failed to consistently or timely report incidents, failed to adequately investigate customer complaints, and failed to take appropriate action.
On Friday, Zelle cast the government’s lawsuit as a political coup that would help criminals and force them to collect fees. “The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle,” Zelle spokesperson Jane Khodos wrote in a statement. “Zelle leads the fight against scams and fraud and has industry-leading refund policies that go beyond the law. The CFPB’s misguided attacks will embolden criminals, cost consumers more in fees, stifle small businesses, and make it difficult for thousands of community banks and credit unions to compete.”
In September, JPMorgan Chase wrote in a quarterly presentation (via CNBC) that would consider counter-litigation if the CFPB took action against the bank for its role in Zelle.
last month, Washington Post reported that President-elect Donald Trump and congressional Republicans plan to limit the funding and powers of the CFPB, aligning with the agendas of large financial institutions. Elon Musk and Vivek Ramaswamy, his advisers on “government efficiency,” have said they want to eliminate the agency, which was created in 2011 in response to the 2007-2008 financial crisis and resulting recession.
Eliminating the agency would require a vote in Congress that would likely fail, given Republicans’ slim majorities. But they could do what Trump did in his first term: appoint a new director to effectively slow or stop regulatory actions. patella the agency while they are in charge.
