Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB), testified before the Senate Committee on Banking, Housing, and Urban Affairs in late November 2023, addressing ongoing financial consumer protection issues. Just weeks later, the CFPB escalated its efforts by filing a lawsuit against Zelle, a prominent peer-to-peer payment network, and its three largest operators—JP Morgan Chase, Bank of America, and Wells Fargo—alleging a failure to address fraud and adequately compensate victims.
The lawsuit marks a significant move in the CFPB’s broader campaign to hold financial institutions accountable for fraud-related customer losses. According to the bureau, customers of the three banks have collectively lost over $870 million since Zelle began operations in 2017.
Zelle, operated by Early Warning Services, a fintech firm owned by major banks, facilitates instant payments between individuals and businesses. It has become the largest peer-to-peer payment platform in the United States. However, critics, including Democratic lawmakers, have increasingly scrutinized its rapid growth, linking it to rising incidents of financial scams.
“The largest banks in the country, feeling threatened by competing payment apps, rushed to launch Zelle without adequate safeguards,” said CFPB Director Rohit Chopra in a statement. “The result is a platform that has become a haven for scammers, often leaving victims with no recourse.”
This lawsuit adds to a series of actions the CFPB has undertaken during the Biden administration, such as crackdowns on credit card late fees and overdraft charges. Many of these measures have faced strong resistance from banks and their industry groups, which often counteract regulatory efforts by pursuing legal challenges in favorable jurisdictions.
Notably, JPMorgan Chase signaled in August 2023 that it might resort to litigation against the CFPB if the regulator moved to penalize the bank for its involvement in Zelle’s operations.
The CFPB’s lawsuit seeks to compel the banks to halt what it alleges are illegal practices tied to Zelle and to impose financial penalties.
Systemic flaws in fraud prevention
While the vast majority of Zelle transactions are completed without incident, fraud within the platform remains a persistent issue. In 2022, Zelle processed $806 billion in payments, of which $166 million were flagged as fraudulent transactions by the customers of JPMorgan Chase, Bank of America, and Wells Fargo. However, according to a Senate report published in July 2023, these banks reimbursed just 38% of those fraud claims.
Banks have maintained that they thoroughly investigate all reports of fraud. However, they contend that many incidents involve scams where customers voluntarily authorized payments under false pretenses, rather than unauthorized transactions. In such cases, current regulations do not obligate banks to reimburse customers.
The CFPB, however, argued that Zelle’s inadequate identity verification methods have enabled criminals to exploit the platform. It alleged that these flaws allow fraudsters to divert payments and move funds between banks that fail to share critical fraud-related information.
The bureau also accused the banks of neglecting to properly investigate fraud complaints and failing to consistently report fraudulent activities.
“Despite receiving hundreds of thousands of complaints, banks have ignored glaring weaknesses in their systems,” Chopra said during a press briefing. “They were fully aware that criminals were stealing money from their customers but chose to delay addressing these issues because they didn’t want to absorb the costs.”
Tom Peacock, director of Global Fraud Intelligence at cybersecurity firm BioCatch, noted that Zelle’s speed makes it an attractive tool for cybercriminals. “Because transactions happen so quickly, scammers favor Zelle over other payment methods,” he explained.
Pushback from Zelle and its operators
Early Warning Services, the company behind Zelle, dismissed the CFPB’s claims, calling the lawsuit “without merit.” The company defended its fraud prevention measures, emphasizing that its policies exceed legal requirements and set an industry standard.
“Zelle is at the forefront of combating scams and fraudulent activity,” said Jane Khodos, a spokesperson for Early Warning Services. “The CFPB’s misleading accusations will only embolden criminals, increase costs for consumers, and hurt competition for community banks and credit unions.”
The company also disputed the CFPB’s claim of $870 million in fraud-related losses, arguing that this figure includes cases where banks determined fraud was not involved, such as errors or disputes stemming from customer misunderstandings.
Early Warning Services further highlighted that while Zelle’s transaction volumes have grown in 2023, reports of fraud and scams have declined by nearly 50%. The company maintained that only a minimal percentage of its overall payment volume is contested as fraudulent.
Broader implications
The CFPB’s lawsuit underscores growing regulatory scrutiny of peer-to-peer payment platforms amid their widespread adoption. Services like Zelle, which facilitate quick and seamless transactions, have become integral to modern banking but remain vulnerable to exploitation.
The outcome of this legal battle could have far-reaching consequences for financial institutions and consumers. If successful, the CFPB’s action may lead to stricter regulations on payment platforms, stronger fraud prevention measures, and greater accountability for banks. Conversely, financial institutions may increase operational costs, potentially passing those expenses on to consumers.
As the CFPB attempts to push for greater consumer protection, its efforts will likely continue to face significant resistance from the banking industry, which has historically resisted regulatory changes that could impact profitability.
For now, the lawsuit against Zelle and its associated banks serves as a stark reminder of the challenges in balancing innovation, consumer convenience, and robust fraud prevention in the evolving financial landscape.
