Zelle and America’s biggest banks are being sued for putting your funds at risk

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Edgar Cervantes / Android Authority

TL;DR

The CFPB has filed a lawsuit against Zelle and three major US banks, alleging that they failed to adequately protect consumers from fraud. The lawsuit claims that these financial institutions rushed Zelle to market without proper safeguards, resulting in substantial consumer losses. Zelle has responded by stating that the lawsuit is legally and factually flawed, asserting its industry-leading fraud prevention policies.

The Consumer Financial Protection Bureau (CFPB) has launched a lawsuit against Zelle, the popular peer-to-peer payment service, and three of its biggest backers: Bank of America, JPMorgan Chase, and Wells Fargo. The core issue is allegations that Zelle didn’t do enough to shield users from financial scams.

Zelle, known for its lightning-fast money transfers, has become a staple for millions of Americans. However, the CFPB’s investigation paints a less rosy picture, suggesting that the platform’s rapid rise came at the expense of basic security measures.

According to the lawsuit, the banks behind Zelle, including the three named, rushed the service to market to compete with rivals like Venmo and Cash App without adequately protecting consumers. As a result, the CFPB claims, Americans have lost more than $870 million to fraudulent activity since Zelle’s launch seven years ago.

What the CFPB says CFPB Director Rohit Chopra didn’t hold back in his strongly worded statement. “Zelle was marketed as ‘safe’ and ‘secure’ to customers who naturally trusted their banks,” Chopra wrote, “but the banks failed to fix glaring flaws in their systems even as hundreds of thousands of customers filed complaints about fraud.”

He went on to describe the network as “a goldmine for criminals,” noting that “they didn’t track or stop suspicious activity across banks, so when one bank detected fraud and closed an account, nothing stopped the criminal from hopping to another bank and starting fresh.”

The lawsuit details instances where fraudsters hijacked accounts using stolen one-time passcodes or swiped phones with banking apps installed, draining funds before anyone could react.

The CFPB claims that when victims reported these thefts, they were often met with denials and told to try to recover the money from the fraudsters themselves.

The agency highlighted that many people provided police reports but were denied help anyway. Chopra emphasized that the issue goes beyond mere technological innovation, pointing to the fundamental obligation of financial institutions to safeguard their customers’ money.

Zelle’s response to the lawsuit Zelle, which is used by 143 million enrolled American consumers and small businesses, is pushing back hard. In a statement, Zelle spokesperson Jane Khodos called the lawsuit “legally and factually flawed,” arguing it was politically motivated. The company believes the CFPB’s lawsuit “will embolden criminals” and discourage caution among consumers.

Zelle points out that in 2023, even as transactions rose by 27%, reports of scams and fraud fell nearly 50%, resulting in 99.95% of payments going through without a hitch.

This legal battle could also have real implications for small businesses and community banks. Zelle says that if these financial institutions are forced to cover every kind of unauthorized loss, no matter the circumstances, the added financial burden could drive up fees or even push smaller players out of the market.

“Thousands of financial institutions that provide Zelle – including many community and minority-owned banks and credit unions – will be forced to choose between offering Zelle or increasing fees for consumers,” Khodos explained.

The outcome of this legal battle could significantly impact how digital payment services operate and how consumers are protected in the increasingly digital financial landscape. Regardless, with electronic transactions becoming the new normal, consumers should remain watchful.

Even the most secure platforms can be targets for evolving scams, and the latest protections might not always keep up with clever criminals. Whether you’re sending $20 to a friend or paying a contractor for a job well done, it’s smart to stay alert, double-check requests for money, and never share sensitive information with anyone you don’t trust.

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