CFPB sues JPMorgan Chase, Financial institution of America and Wells Fargo over Zelle fraud
Rohit Chopra, Director of the CFPB, testifies during the Senate Committee on Banking, Housing and Urban Affairs hearing entitled “Semi-Annual Report of the Consumer Financial Protection Bureau to Congress” on November 30, 2023 in the Dirksen Building.
Tom Williams | Cq-roll Call, Inc. | Getty Images
The Consumer Financial Protection Bureau on Friday sued the operator of the Zelle payment network and the three U.S. banks that dominate transactions there, saying the firms failed to properly investigate fraud complaints or provide compensation 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 from the bank-owned fintech company Early Warning Services, enables instant payments to other consumers and businesses and has quickly become the largest service of its kind in the country. At the same time, Democratic lawmakers in recent years have stepped up criticism of banks for financial crimes committed on Zelle.
“The country’s largest banks felt threatened by competing payment apps and rushed to exclude Zelle,” CFPB Director Rohit Chopra said in a statement. “By failing to provide adequate security, 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 final days of the Biden administration. Many of the measures taken, including steps to cap late fees and overdraft fees on credit cards, were met with strong opposition from banks and their trade groups. Companies have been able to successfully prevail against regulators by choosing venues deemed appropriate for lawsuits challenging federal oversight.
In fact, JPMorgan said in August that it was considering litigation against the CFPB if the regulator tried to punish the bank for its role in the Zelle network.
The CFPB wants to force banks to stop their allegedly illegal practices around Zelle and pay unspecified penalties, it said.
“Obvious defects”
The vast majority of cell activity is uneventful. Of the $806 billion that flowed through the network last year, only $166 million in transactions were disputed as fraudulent by customers of JPMorgan, Bank of America and Wells Fargo, the three largest players on the platform.
But the three banks combined have reimbursed only 38% of those claims, according to a July Senate report examining disputed unauthorized transactions.
Banks say they investigate every allegation of fraud, but often find that what customers call a fraud was technically a scam in which customers authorized payments. In these cases, banks are generally not required to pay their customers in full.
The CFPB claimed that Zelle's “limited identity verification methods” allowed criminals to break into the network and redirect payments and move between member banks that did not share information between institutions.
In this photo taken in Brussels, Belgium, on December 10, 2023, the Zelle online banking logo is displayed on a smartphone with the Zelle website visible in the background.
Jonathan Raa | Photo only | Getty Images
The agency also said banks did not properly investigate complaints about Zelle activity and did not consistently report fraud activity.
“Banks have failed to address glaring deficiencies in their systems despite hundreds of thousands of customers filing fraud complaints,” Chopra told reporters on a call Friday. “Banks knew their customers’ money was being stolen, but because they were not bearing the cost of these losses themselves, they were reluctant to fix the problems.”
According to Tom Peacock, director of global fraud intelligence at cybersecurity firm BioCatch, Zelle is the preferred way for cybercriminals to withdraw funds because it is faster than other transfer options.
“Unfounded” and misleading
Early Warning Services said in a statement Friday that it is prepared to defend itself against this “meritless lawsuit.”
“Zelle is a leader in the fight against fraud and scams and has industry-leading reimbursement policies that go beyond the law,” said Jane Khodos, a spokeswoman for Early Warning Services. “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.”
Additionally, the CFPB's $870 million figure for fraud losses is misleading because it includes incidents that the bank determined were not fraud but errors or false statements, Early Warning said Services.
Early Warning Services said that while transaction volume increased in 2023, reports of scams and scams fell by almost 50% and that only a tiny fraction of payment volume is disputed as fraud.
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