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, almost three billion Zelle payments equated to $100 million of transaction activity per hour. The Zelle platform owners are seven of the nation's largest banks. Those banks -- and over 2000 smaller banks and credit unions -- make Zelle available to customers who choose to use it for simple, instant payment transfers. Unfortunately, there are countless bad actors trying to prey on unsuspecting payers.
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In recent years, consumer watchdog groups, regulators and politicians like Elizabeth Warren, Sherrod Brown and Maxine Waters have targeted Zelle's operator, Early Warning Services, LLC (EWS) and the large bank owners of the platform, for consumer losses due to fraud.
Last week, the CFPB announced it was suing the three largest banks that own Zelle -- and EWS -- for what the bureau deems as insufficient fraud detection and prevention systems. A CFPB-published characterization against the defendants alleges that they have been "...allowing repeat offenders to hop between banks." The banks and credit unions, law enforcement, the press, our judicial system, industry trade groups and all state and federal agencies dedicated to apprehending and prosecuting financial criminals are all stakeholders with a role to play. No single party is responsible for "allowing" this criminal activity to go unchecked. Moreover, millions of individuals attracted to the convenience of online payment technology can dent victimization levels by using extra caution before sending money to an unknown counterparty. Unfortunately, much of this thinking gets lost in all of the Big Bad Banks hype.
Scale of the 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 maintains 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 their statistic.
Either way, if the CFPB's cumulative figure of $870 million in losses is averaged over a seven year period and then rounded up, one arrives at $125 million as the average amount 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 pales 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 which affects us in the form of higher premiums, also amounts to over $300B per year.
What about the actual frequency of problems experienced by Zelle users? Zelle reports that less than one tenth of one percent of payments are reported as scams -- over 99.9% are not. Payment platforms like Venmo, Chime and Zelle are the mechanisms used to transfer funds after one chooses to make a disbursement electronically and irretrievably to someone they've trusted. Who should pay damages when bonafide fraud occurs after funds leave the sender's account, isn't as simple as some believe.
Singled Out For Negligence
Big banks are easy to blame and doing so won't cost Pols as many votes as ignoring a more populist cause. Hauling bank CEOs before a congressional committee also makes great television. None of this is new. Zealous bank scapegoating happened after the Great Recession too, as I wrote in this space 14 years ago.
Articles like this one by CNN foist more attention on banks than criminals with pointed reminders like: "The big banks that run Zelle in particular “rarely” reimburse customers duped by scammers...". Correct and if I 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?
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 a huge, diffuse body called the American public.
The statistically larger crime categories mentioned above are only an obscure and ugly reminder 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.
Americans as a whole typically don't demand reform in Washington until they're mobilized into large voting blocs after fallout from 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 payment fraud yet, let alone broad agreement on reform measures, but high profile lawsuits and Capitol Hill hearings still keep the media buzzing about the big banks anyway.
End the Circular Firing Squad and Work Together
Some lawmakers and regulators seem reluctant to make distinctions between victims of sophisticated criminal schemes enabled by 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 a program and educational toolset to help bank 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 could reduce the amount of opportunity internet fraudsters currently enjoy. The CFPB could also devote more resources to public education and less on headline-grabbing litigation.
At the End of the Day
Theft harms people whether a victim succumbs to a scam over the phone, in person, or from a bogus website. Who should pay for systemic "remedies" and individual damages, isn't always clear. Unfortunately, political grandstanding often displaces thoughtful policy debates and constructive measures to combat complicated problems.
After everything else has been tried; stronger multi party action on the root problem will help Americans suffer fewer losses from payment fraud. That multi party action means two common goals collectively pursued by all powerful stakeholders: a) lock up more cybercriminals and b) increase consumer fraud awareness throughout the financial ecosystem.
