CFPB sues JPMorgan Chase, Bank of America and Wells Fargo over Zelle fraud

The Consumer Financial Protection Bureau on Friday indicted the operator of the Zelle payment network and the three U.S. banks that dominate transactions on it, alleging that the companies failed to properly investigate fraud complaints or provide refunds to victims.

The CFPB said customers of the three banks — JPMorgan Chase, Bank of America And Wells Fargo – have lost more than $870 million since Zelle launched in 2017.

Zelle, a peer-to-peer payment network operated by the bank’s fintech company Early Warning Services, enables instant payments to other consumers and businesses and has quickly become the largest such service in the country. At the same time, Democratic lawmakers have stepped up criticism of the banks in recent years for the financial crimes taking place on Zelle.

“The nation’s largest banks felt threatened by competing payment apps, so they rushed to release Zelle,” CFPB Director Rohit Chopra said in a statement. “By failing to implement proper security measures, Zelle became a goldmine for fraudsters, while victims were often left to fend for themselves.”

The lawsuit is the latest move by the CFPB in the waning days of the Biden administration. Many of the measures the country has taken, including steps to limit late fees on credit cards and overdrafts, have been fiercely opposed by banks and their trade associations. Companies have found success in pushing back against regulators by choosing legal venues that are known to be friendly to challenging federal oversight.

JPMorgan even said in August that it was considering a lawsuit against the CFPB if the regulator wanted to punish the bank for its role in the Zelle network.

The CFPB wants to force the banks to stop their alleged unlawful practices around Zelle and pay an unspecified amount in fines, the CFPB said.

The vast majority of activity in Zelle is quiet. Of the $806 billion that flowed through the network last year, only $166 million in transactions were disputed as fraud by customers of JPMorgan, Bank of America and Wells Fargo, the three largest players on the platform.

But the three banks collectively reimbursed only 38% of those claims, according to a July Senate report report which looked at disputed unauthorized transactions.

Banks say they investigate every fraud claim, but often find that what customers say was fraud was technically a scam where customers authorized payments. In those cases, banks are generally not obliged to make customers healthy.

The CFPB alleged that Zelle’s “limited identity verification methods” allowed criminals to infiltrate the network, allowing them to divert payments and move between member banks that did not share information between institutions.

The agency also said banks have failed to properly investigate complaints about Zelle activities and consistently report fraud activity.

“The banks have failed to fix glaring deficiencies in their systems while hundreds of thousands of customers filed fraud complaints,” Chopra told reporters on a call Friday. “The banks knew their customers’ money was being stolen, but because they were not bearing the costs of these losses themselves, they made efforts to resolve the problems.”

Zelle is the preferred way for cybercriminals to extract money because it is faster than other transfer options, said Tom Peacock, director of global fraud intelligence at cybersecurity firm BioCatch.

Early Warning Services said in a statement on Friday that it was prepared to defend itself against this “meritless lawsuit.”

“Zelle is leading the fight against scams and fraud and has an industry-leading refund policy that goes above and beyond the law,” said Early Warning Services spokeswoman Jane Khodos. “The CFPB’s misguided attacks will embolden criminals, cost consumers more fees, stifle small businesses and make it harder for thousands of community banks and credit unions to compete.”

In addition, the $870 million figure cited by the CFPB for fraud losses is misleading because it includes incidents where the bank discovered that there was no fraud but errors or false claims, Early Warning Services said.

Early Warning Services has said that while transaction volumes rose in 2023, reports of scams and fraud fell almost 50%, and that only a small portion of payment volumes are disputed as fraud.