Banks on the payment app Zelle have started refunding victims of imposter scams in response to concerns raised by U.S. lawmakers and the federal consumer watchdog. This marks a significant policy change. The 2,100 financial firms on Zelle, owned by seven banks including JPMorgan Chase and Bank of America, have begun reversing transfers for customers who were tricked into sending money to scammers claiming to be from a government agency, bank, or existing service provider. Early Warning Services (EWS), the company that owns Zelle, confirmed this. Ben Chance, the chief fraud risk officer at EWS, stated that this exceeds existing legal and regulatory requirements.
According to federal rules, banks are required to reimburse customers for unauthorized payments made by hackers, but not when customers themselves make the transfer. While Zelle introduced a new reimbursement benefit for specific scam types in August, it did not provide details on its new imposter scam refund policy due to concerns that it might encourage false scam claims. However, the recent policy change represents a significant shift from last year when bankers, including JPMorgan CEO Jamie Dimon, argued against requiring banks to refund transfers that customers were tricked into approving.
Zelle, which became one of the largest U.S. peer-to-peer payments networks since its launch in 2017, faced scrutiny after a New York Times report highlighted the prevalence of scams on its platform. Senator Elizabeth Warren and other lawmakers initiated an investigation, estimating that Zelle users lost $440 million to fraud in 2021 alone. During a Senate hearing, Warren criticized bank CEOs for creating a “perfect weapon” for criminals and failing to support their customers. EWS reported that over 100 million people with U.S. bank accounts have access to Zelle.
Impersonator fraud was the most-reported scam in the U.S. in 2022, resulting in $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 leave them liable for potentially billions of dollars. Instead of requiring lenders to reimburse customers, EWS has implemented a mechanism that allows banks to recover funds from the recipient’s account and return them to the sender. Additionally, Zelle now requires lenders to use a tool that flags transfers with risky attributes.
EWS has been engaging with policymakers to combat scams comprehensively, including advocating for more dedicated law enforcement resources. The Consumer Financial Protection Bureau (CFPB), under pressure from Warren and other lawmakers, considered compelling lenders to reimburse scams. However, Zelle’s recent changes have satisfied the agency. Zelle’s platform changes have been welcomed by Warren, who urged the CFPB to continue pressuring Zelle to protect consumers.
Zelle has consistently argued that its fraud and scam rates are low. In 2022, it processed $629 billion worth of payments, with 99.9% of transfers made without any fraud or scam reports. Zelle competes with other peer-to-peer payment platforms like PayPal and Venmo, which review situations case-by-case and offer a purchase-protection program for eligible transactions. Experts note that comparing fraud and scam rates across platforms is challenging due to varying classifications.
Zelle’s policy reversal reflects the increasing market pressure on banks to enhance their standard of care. However, experts believe that regulations mandating imposter fraud protections would be more beneficial for customers, as lenders’ policies may be unclear or not followed as promised. While Zelle’s policy change is a positive step, there is currently no private remedy if banks fail to reimburse customers.
Payment fraud is expected to be a topic of discussion when bank CEOs appear before the Senate next month. Industry experts believe that the banks can now present a positive story, as Zelle has proactively addressed consumer issues and harm without regulation or legislation. Lindsey Johnson, CEO of the Consumer Bankers Association, commended the banks for their actions.
In conclusion, banks on Zelle have started refunding victims of imposter scams, addressing concerns raised by U.S. lawmakers and the federal consumer watchdog. This policy change exceeds existing requirements and reflects a shift from the banks’ previous stance. Zelle’s platform changes have been welcomed by policymakers and consumer advocates, although regulations mandating fraud protections would provide more clarity and accountability. The market pressure on banks to improve their standard of care has influenced this policy reversal.
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