After scammers spent years siphoning hundreds of millions from Zelle users by impersonating people to authorize fraudulent payments, lawmakers are terrified to discover in fall 2022 that the “vast majority” of defrauded Zelle users never got their money back. To regulators, Zelle appears to be shirking responsibility for policing the increasing fraudulent activity on its payments platform.
But now, Zelle has changed its mind and is working hard to protect users from malicious scams. On Monday, Zelle confirmed that at the end of June, the payment app finally started refunding users targeted by fraudsters.
According to Reuters, This is possible because Zelle’s network operator, Early Warning Services (EWS), found a solution that lets Zelle’s network of 2,100 financial institutions off the hook for chargeback transactions where “potentially thousands billions of dollars” can be stolen by hackers. Instead of expecting financial partners to print the money to cover this fraudulent activity, Zelle simply “implemented a process that allows banks to recover funds from the recipient’s account and return them to the sender.”
“As an operator of Zelle, we regularly review and update our terms of service and technical practices to improve the customer experience and combat the pervasive nature of fraud and scams,” an EWS spokesperson told Ars. “By May 30, 2023, our bank and credit union participants must reimburse customers for relevant thumb scams, such as when a scammer impersonates a bank to trick a user into sending money with Zelle. Change that ensures stability on our network and goes beyond legal requirements.”
This is the first time EWS has provided details on its new policy to reimburse victims of the Zelle scam, Reuters reported. It’s a major policy change that Reuters says is likely to save banks and payment services from tougher regulatory interventions that would require refunds for every scam victim. (Currently, the US only requires banks to refund any fraudulent payments made without customers’ consent.)
The chief fraud risk officer at EWS, Ben Chance, also told Reuters that Zelle’s new policy “goes well beyond existing legal and regulatory requirements.”
It’s unclear whether regulators will be content leaving this issue to banks and payment apps, though. There may be too many people using payment applications to ignore the gaps in the laws intended to protect against financial fraud. Between 2018 and 2022, peer-to-peer (P2P) payments will quadruple in the US, the The Consumer Financial Protection Bureau (CFPB) reportedand by 2027, P2P payments “could reach $1.6 trillion.”
Meanwhile, as P2P payments have proliferated, these thumb scams have become “the most reported scam,” targeting users “across all payment methods,” the Federal Trade Commission (FTC) reported. In total, the FTC says that scam victims lost $2.6 billion last year alone.
The CFPB is pushing for new rules that would require lenders to repay fraud victims, but a person familiar with the matter told Reuters that the CFPB may no longer consider the new protections, because Zelle’s recent changes “have satisfied the home – the agency. However, Senator Elizabeth Warren (D-Mass.) – who heads the study into the Zelle imposter scams—told Reuters it was unlikely to stop monitoring the situation anytime soon.
“Zeelle platform changes are long overdue,” Warren said. “The CFPB stands with consumers, and I urge the agency to keep up the pressure on Zelle to protect consumers from bad actors.”