Last year, consumers and small businesses used the free peer to peer online payment platform called Zelle, to complete $806B worth of transactions. In 2023, three billion Zelle payments equated to $100 million of transaction activity....per hour. The Zelle platform owners are seven of our nation's largest banks. Those banks and over 2000 smaller banks and credit unions -- make Zelle available to customers for simple, instant, fund transfers. Unfortunately, there are countless bad actors preying on unsuspecting payers.
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In recent years, consumer watchdog groups, the Consumer Financial Protection Bureau (CFPB) and politicians like Elizabeth Warren, Sherrod Brown and Maxine Waters have targeted Zelle's operator, Early Warning Services, LLC (EWS) and large bank owners of the platform, for consumer losses due to fraud.
On December 20th, the CFPB announced it was suing EWS and the three largest banks that own Zelle for insufficient fraud detection, prevention and victim support. Their press release alleges that the defendant banks have been "...allowing repeat offenders to hop between banks."
Banks and credit unions, law enforcement, the press, our judicial system, industry trade groups, technology backbone companies and state and federal agencies dedicated to apprehending and prosecuting financial criminals are all powerful stakeholders with a role to play. No single party is responsible for "allowing" criminal activity to go unchecked.
Moreover, millions of individuals attracted to the convenience of online payment technology could dent victimization levels by using extra caution before sending money to an unknown counterparty. Unfortunately, much of this thinking gets lost within the 'Big Bad Banks' hype.
Scale of the Problem? Which problem?
The CFPB claims that the cumulative amount of Zelle-related fraud losses by consumers since 2017 is $870 million. EWS disputes that figure and notes that some claims turn out to be legitimate payments and other anomalous cases (like claims made by actual fraudsters trying to exploit the system) inflate the CFPB statistic.
Accurate or not, if the CFPB's cumulative figure of $870 million in losses is averaged over a seven year period and then rounded up, $125 million becomes the mean average of Zelle-related fraud losses, per year.
That's a lot of money, but the amount of peer to peer payment theft from Zelle transactions is small in comparison to other forms of financial crime in the US. Consider pandemic-relief which now cumulatively has surpassed over $200B in fraudulent payments, or money laundering which the Treasury Department estimates at over $300B per year. Insurance fraud also amounts to over $300B per year.
What about the actual frequency of transaction problems experienced by Zelle users? Zelle maintains that less than one tenth of one percent of payments are reported as scams -- over 99.9% are not.
Platforms like Venmo, Chime and Zelle are used to transfer funds after one makes a disbursement electronically and irretrievably to someone they've trusted ipso facto. Whom should pay damages when fraud occurs, isn't always clear.
Singled Out For Negligence
Articles like this one by CNN foist more attention on banks than criminals with pointed reminders like this one: "The big banks that run Zelle in particular “rarely” reimburse customers duped by scammers...".
If I physically mail a donation check to a fake charity and discover I've been scammed; should I expect reimbursement from my bank and the US postal service that transported my payment? There's a disproportionate amount of political and media attention on the big banks regarding online payment fraud because:
1. Large financial institutions are easy to blame and doing so won't cost Pols many votes. Hauling large bank CEOs before a congressional committee makes great television. Zealous bank scapegoating also happened after the Great Recession, as I wrote in this space 14 years ago. The more prevalent crime categories mentioned above, are only obscure and ugly reminders of the times we live in -- until we're robbed as individuals -- like a victim of payment fraud. That's when we get loud, call law enforcement, file complaints, alert reporters, contact our Congressman and so on.
2. While financial crimes like insurance fraud, fraudulent relief payments and the like are much larger in scale and impact law-abiding society as a whole, the victimized group of those crimes is one huge, diffuse body called the American public. Americans as a whole typically don't demand reform in Washington until they're catalyzed by seismic developments like 9/11, the Great Recession, a 100 year pandemic, or a tidal wave of illegal migration. There is no such macro event affecting a critical mass to mobilize voters about online payment fraud. Yet, high profile lawsuits and Capitol Hill hearings keep the media buzzing about the issue anyway.
Consumer Education
Sometimes lawmakers and regulators don't make distinctions between victims of sophisticated criminal schemes or weak controls at legitimate entities, versus cases of unfortunate or even reckless consumer choices. There's clearly a need for more consumer education, so individuals can protect themselves with added knowledge.
The American Bankers Association has an educational toolset to help customers recognize scams and fraud risks called, "Banks Never Ask That". Enhanced public education efforts like that one won't completely eradicate the problem, but they reduce the amount of opportunity fraudsters currently enjoy when consumers heed best practices. Perhaps the CFPB, for its part, could also devote more resources to its public education programs.
Summary
Theft harms innocent people whether a victim succumbs to a scam over the phone, in person, or from a bogus website. Who should pay for enterprise-wide "remedies" and individual damages, isn't always clear. Unfortunately, political grandstanding often displaces thoughtful policy debates about constructive measures to combat complicated problems like online payment fraud.
Of course, banks and credit unions that have fallen short on customer support after a payer suffered an online payment loss due to fraud, should be held to account. However, lousy service is not tantamount to fraud complicity. In cases after customer-facing bank employees behave indifferently (or worse) to fraud victims -- those employees and/or their supervisors ought to be disciplined or fired, but even those actions won't reveal systemic vulnerabilities, or mitigate future frauds.
Stronger multi party action on the root problem will help Americans suffer fewer losses from online payment fraud. Multi party action means common goals collectively pursued by all powerful stakeholders involved to: a) lock up more cyber criminals with application of stiffer sentences b) increase consumer fraud awareness throughout the financial ecosystem and c) stop the circular firing squad in public and turn their sights on the bad guys. Nobody said any of this will be easy.