Banking

Raising Zelle: Furious P2P users take banks to court

Five years after Zelle’s launch, banks are getting hit by a flurry of class actions from consumers who say they aren’t properly protected from scams that make use of the peer-to-peer service.

The lawsuits, which involve a growing number of institutions from Bank of America to Navy Federal Credit Union, underscore the rising popularity of Zelle — which saw a strong increase in adoption during the pandemic — and its use by scammers who target consumers unaware of its risks.

Zelle is advertised as a speedy P2P service for friends and family, and is primarily accessed through a bank or credit union’s website or mobile app. Typical Zelle P2P payments are treated like cash — once the money’s gone, it’s gone, and it’s up to the consumer to make sure the funds went to the right place. 

Because Zelle is connected to the victim’s bank, scammers can trick consumers into believing there are protections in place similar to those for credit and debit cards. But P2P losses are not necessarily covered by existing regulations or bank policies.

The latest wave of lawsuits and confusion about liability for P2P fraud also suggest much work is needed to shore up security and accountability around irrevocable account-to-account transfers.

“There are a lot of vulnerabilities on the consumer side of P2P payments and it raises some questions about whether the broader ecosystem is ready for real-time payments,” said Ben Jackson, chief operating officer at the Innovative Payments Association, a trade group for emerging payment technology providers.

Experts say U.S. financial regulators will eventually need to extend consumer protections to P2P services, though it’s unclear what shape they might take.

“There is no protection for consumers who want to repudiate payments with these P2P services — the onus is on the settlement banks, and this will likely result in some kind of enforcement eventually,” said Richard Crone, a principal with Crone Consulting.

Early Warning Services, the bank-owned coalition that launched Zelle in 2017, advertises the P2P service’s speed — transactions typically settle in minutes — and urges users to be sure they’re paying only people they know and trust.

The message of immediacy and finality resonated with fraudsters, who pose as bank agents, landlords or other parties reaching out to consumers to demand reimbursement for bogus payments and services. 

Class-action plaintiffs claim that banks and Early Warning failed to provide appropriate warnings and protections regarding those scams.

Earl Warning was not available to comment on the lawsuits, nor were most of the banks named as defendants. 

TD Bank, named in one class-action lawsuit about Zelle scams, said it cannot comment on pending litigation.

The suit involving Bank of America was filed late last month in California federal court, alleging the bank failed to tell consumers about major security risks for which there is “virtually no recourse.”

The plaintiff in the BofA case allegedly lost $2,500 on the Zelle app and $2,450 through Venmo in 2020 when he received a fake check as part of a bogus employment scheme and scammers tricked him into “repaying” them the funds via separate payments through Zelle and Venmo.

BofA deducted $4,950 from his account plus a $12 fee for returned items, according to the lawsuit, which claims the plaintiff never agreed to the provisions of the Zelle user agreement displayed on its website. The suit contends BofA is required by the Consumer Financial Protection Bureau to cover unauthorized fraudulent transactions under the Electronic Funds Transfer Act and Regulation E.

In a different case involving Wells Fargo, a class action was filed June 1 in federal court in Seattle against Wells Fargo and Early Warning, alleging that the companies failed to warn customers of the fraud risks of using Zelle.

The plaintiff in that lawsuit, a Wells Fargo customer, claims he was caught in a scam after a criminal posing as a Wells Fargo employee tricked him into sending funds to rectify unauthorized transactions. The bank initially refused to refund the money, but eventually reimbursed the plaintiff for $3,500 in losses. The lawsuit proposed a class of all U.S. customers whose Zelle-related fraud losses were not permanently credited in full within 45 days of reporting the dispute.

Wells Fargo declined to comment on this specific litigation, but sent an emailed statement that said: “As a company we have been actively working to raise awareness to help people avoid becoming the victims of scams, including through alerts in online and mobile banking sessions, customer emails, and social media posts. We are continually improving our security measures and expanding customer education efforts, and the combination is resulting in a significant decline in cases.”

Capital One Financial is named in a different class action, filed early this month in federal court in Miami, alleging that the bank failed in its promise to help customers victimized by Zelle scams.

The primary plaintiff, a Capital One customer, was tricked into sending $2,000 to a scammer pretending to be a landlord. After detecting the scam later that day, the plaintiff called the bank to stop payment, but the next day his account was debited for the full amount and the bank refused to reimburse him for his losses. 

The suit seeks relief for other victims of Zelle fraud, claiming that Capital One erroneously advertised Zelle as a secure product and failed to protect customers’ funds.

Navy Federal Credit Union has been targeted by another class action involving Zelle, claiming the institution failed to inform account holders they won’t be reimbursed for financial losses from fraud related to Zelle.

In a suit filed in New Jersey, the plaintiff accuses Navy Federal of breach of contract, including breach of the covenant of good faith and fair dealing, and violation of the New Jersey Consumer Fraud Act.

In a different twist on the problem, TD Bank was named in a class action filed June 3 in federal court for the Southern District of Florida claiming that the bank failed to notify customers that Zelle carries “extreme and undisclosed risk of expensive bank fees.”

In the 25-page suit, lawyers allege that TD Bank advertises Zelle as “totally free” and makes no mention of overdraft and other fees users may incur, citing the experience of a Miami-based plaintiff who racked up two $35 overdraft/NSF fees as a result of using Zelle.

News of these issues with Zelle prompted Sens. Elizabeth Warren, D-Mass., and Robert Menendez, D-N.J., to write a letter to Early Warning Services warning that fraud on the Zelle platform is widespread. Schemes tricking consumers into sending money to criminals include “romance scammers” and “cryptocurrency con artists,” the senators’ letter said.

The letter asked Early Warning Services to explain its fraud policies and procedures for determining who is eligible for refunds from fraud and scams.

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