In a significant policy shift, banks using the payment app Zelle have started compensating victims of imposter frauds in response to worries about consumer protection expressed by US politicians and the federal consumer watchdog.

According to Early Warning Services (EWS), the banks' company that owns Zelle, 2,100 financial firms on the peer-to-peer network, which is owned by seven banks, including JPMorgan Chase and Bank of America, started reversing transfers as of June 30 for customers who were tricked into sending money to scammers posing as representatives of a bank, government agency, or existing service provider.

According to Ben Chance, chief fraud risk officer at EWS, that is "well above existing legal and regulatory requirements." 

Federal regulations mandate that banks pay back consumers for payments made without their consent-by hackers, for example-but not when the clients initiate the transfer.

(Photo : by Roy Rochlin/Getty Images for Zelle)
NEW YORK, NEW YORK - JULY 19: (L-R) Farnoosh Torabi and Michelle Buteau speak onstage during Summer with Zelle® at Midnight Theatre on July 19, 2023 in New York City

No Announcement of New Imposter Scam Refund Policy

Although Zelle announced on August 30 that it has implemented a new reimbursement benefit for "specific scam types," a representative stated the company had not previously released information about its new imposter scam refund policy because of concerns that doing so might incite fraudsters to submit fictitious claims.

The new policy is a significant departure from the previous one, which was implemented last year after bankers, notably Jamie Dimon, the CEO of JPMorgan, persuaded lawmakers that it was irrational to force banks to reimburse payments that their clients had been duped into authorizing.

After launching in 2017, Zelle has grown to rank among the biggest peer-to-peer payment networks in the United States in terms of total payments.

Senate Investigation into Zelle Scams Unveiled After New York Times Report

The New York Times investigation from March 2022, which revealed that scammers were thriving on Zelle, attracted the attention of senators who often criticize large banks, including Senator Elizabeth Warren.

After predicting that Zelle consumers had lost $440 million to various forms of fraud in 2021 alone, she and other politicians launched a probe.

Warren informed Dimon and other bank CEOs during a Senate hearing last year that they had made the "perfect weapon" for thieves but had abandoned their clients. According to EWS, Zelle is available to more than 100 million individuals who have bank accounts in the United States.

The Federal Trade Commission reports that, of all payment methods used in the United States in 2022, impersonator fraud was the most often reported scam, resulting in losses of $2.6 billion.

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Zelle Adopts New Anti-Fraud Measures Amidst Banking Concerns

Banks are concerned that paying for approved transactions could lead to increased fraud and expose them to possible billion-dollar losses.

Chance stated that EWS has put in place a system that enables banks to take money out of the recipient's account and give it back to the sender, rather than forcing lenders to refund clients.

Additionally, according to Chance, lenders on Zelle must now put in place a mechanism that alerts them to transfers that have questionable characteristics, such a payment to an account that has never made a transaction on the Zelle network. He claimed that this year has witnessed "a step-change reduction" in the number of fraud and scam cases at Zelle, but he would not elaborate.

Chance added that EWS has been interacting with legislators on the necessity of a "holistic approach" to thwarting frauds, which includes pushing for increased funding for law enforcement.

According to a source with knowledge of the situation, Zelle's modifications have so far pleased the Consumer Financial Protection Bureau (CFPB), which was considering forcing lenders to compensate scammers in response to criticism from Warren and other politicians.

In response, a CFPB representative stated that the organization is trying to safeguard consumers "including by ensuring that financial institutions are living up to their investigation and error-resolution obligations." The spokesperson did not address Zelle or proposed rule changes.

In response, a CFPB representative stated that the organization is trying to safeguard consumers "including by ensuring that financial institutions are living up to their investigation and error-resolution obligations." The spokesperson did not address Zelle or proposed rule changes.

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