Zelle fraud is on the rise—and many victims are denied refunds

Cell fraud is on the rise - and many victims are being denied refunds

When seven of America’s largest banks realized that their customers loved using apps to send instant peer-to-peer payments, they launched Zelle in 2017 through a joint venture called Early Warning Services and quickly began making billions of dollars in payments annually to process. By 2021, Zelle was processing almost twice as many payments as Venmo, but as the volume of Zelle payments increased, so did rumors of increasing fraud. Scammed Zelle users complained to the New York Times thatzelle didn’t always refund customers who reported stolen money.

Suspicious after anecdotal reports piled up, one of banking’s toughest policymakers, Senator Elizabeth Warren (D-MA), launched an investigation. It requested data from all seven major banks: JPMorgan Chase, Wells Fargo, US Bank, PNC, Capital One, Bank of America and Truist. Only four banks complied with the request. However, Warren’s report, released this week, shows that even half of the data she sought was enough to show that “fraud is increasing on cell” and that “banks are failing to refund the vast majority of consumers who have been scammed and their promises.” breach their customers and potentially violate federal law.”

According to Warren’s analysis of data shared by US Bank, PNC, Bank of America and Truist, these four banks alone are “on track to receive over $255 million in fraud and fraud claims in 2022.” , a dramatic increase from $90 million in 2020.

Most of these lawsuits — totaling more than 190,000 cases challenging $213 million in payments in 2021 and the half of 2022 — have involved customers tricked by scammers into making fraudulent payments. Only three banks provided Warren with complete data showing they have paid back cheated customers less than 10 percent of the time.

According to Warren’s report, the banks rely on federal laws — the Electronic Fund Transfer Act and the Consumer Financial Protection Bureau’s (CFPB) “Regulation E” — that “require banks to pay customers back when funds are illegally withdrawn from their accounts without authorization.” .” But crucially, banks don’t have to pay when people authorize such payments, which is happening here, even if the payments are made to scammers. Now, Warren is urging the CFPB to clarify Regulation E so that banks must recognize this method of attacking consumers as fraudulent and unauthorized.

Even more troubling is Warren’s contention that banks may also be breaking the law by not refunding unauthorized fraudulent charges. Warren says the three banks that shared data revealed they only reimbursed consumers 47 percent of the unauthorized payments they should be legally required to reimburse.

A spokesman for Early Warning Services did not comment on the allegations of violating federal law, but told Ars that where Warren sees an increase in fraudulent activity year-over-year, Early Warning Services sees a decrease in fraudulent activity in proportion to its growing user base .

“Tens of millions of consumers are using Zelle without incident, with more than 99.9 percent of payments completing without reporting fraud or fraud,” spokesperson for Early Warning Services told Ars. “Zell’s usage has increased significantly since its inception, from 247 million transactions in 2017 to 1.8 billion in 2021, while the proportion of scams and fraud has steadily decreased.”

Common scams banks don’t have to refund

Warren reports that banks are letting consumers know that Zelle has a zero-liability policy for fraud — but that banks know that Zelle’s policy excludes increasingly common scams dubbed “spoofing” and “me-to-me” – fraud are known.

In spoofing, scammers “use the name or trademark of a reputable entity to initiate a fraudulent payment.” Cases of “me-to-me” fraud involve “using a consumer’s own contact information to disguise a payment” to a scammer’s account, leading the consumer to believe they are sending a payment to their own account, although this is not the case. In either case, banks are not legally required to compensate consumers who make claims of fraudulent activity, as consumers initiate payments.

Both types of scams happened simultaneously to a Wells Fargo customer who told The New York Times that the scammer linked his own bank account to the customer’s account and then called the customer from a number listed as valid on the customer’s cell phone call from Wells Fargo. Posing as a Wells Fargo agent, the scammer tricked the customer into sending a $500 payment to their own phone number before the customer became suspicious and disconnected. Wells Fargo later “repeatedly denied” the customer’s claims of fraudulent activity on its cell app.

For some cell users, the cost of cheating can be much higher. Warren reported that consumers in Massachusetts, Georgia, Illinois, and California have reported thousands of dollars in losses from these scams, and “in many cases, consumers have reported losses that could significantly impact their small business and even wipe out all of their savings.” “.

According to Warren, Zelle distinguishes between fraud – unauthorized charges that are recoverable – and fraud – authorized charges that are fraudulently induced. Banks have argued that fraud claims can be more difficult to verify; They say what is needed is not more bank regulation, but better cooperation between banks and law enforcement when investigating fraud.

Without data from all 1,700 banks and credit unions using Cell, it’s difficult to see the full extent of the problem. Since 2021, CFPB has collected hundreds of fraud cases. Some banks reported data to Warren showing overall fraud activity, which the banks deemed authorized and therefore non-recoverable, which occurred in 2021 and six months into 2022. Data from Truist reported 7,223 fraud cases involving payments in excess of $5.4 million, US Bank reported 21,794 cases in excess of $13.6 million, and PNC reported 6,831 cases involving nearly $6.9 million . Chase, Wells Fargo, and Capital One have not provided Warren with this requested data.

With Regulation E currently vague, not all banks agree on how to deal with spoofing and “me-to-me” fraud. Some banks, such as Truist, specifically do not include authorized fraud activity in the cell’s zero liability policy, but other banks reportedly reimburse some fraud activity. Chase Head of US Government Relations Michelle Mesack told Warren in a letter to Ars that Chase reimburses “me-to-me” fraud “even though it would be considered an authorized transaction under Regulation E.”

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