Last year, we blogged that Zelle was considering possible solutions for P2P customers on the Zelle Network who were the victims of scams.  In an August 30, 2023 press release, Zelle announced that it was initiating new safety measures.  It stated:

All banks and credit unions on the Zelle Network® must implement Risk Insights for Zelle®. This free service gives institutions recipient risk attributes to assess potentially high-risk transactions and ultimately reduce fraud and scams.  In addition, the network has a new consumer reimbursement benefit for specific scam types.

While the press release did not provide specific details about the reimbursement benefit, we have since learned that Zelle has changed its Network Rules to require financial institutions that transfer funds on the Zelle Network to reverse transfers for senders who are victims of certain scams.

According to Ben Chance, Chief Fraud Risk Officer at Early Warning Services, LLC (EWS), which operates the Zelle Network, in an interview with Reuters, “EWS has implemented a mechanism that allows banks to claw back funds from the recipient’s account and return them to the sender.”  This mechanism is more efficient than the current prevalent bank-to-bank indemnity process used to claw back funds.  The current process requires the sending bank to track down an appropriate contact at the receiving bank with the authority to agree to the return the funds in exchange for an indemnification from the sending bank for all claims related to the return and hope that sufficient funds are available in the receiving account to send back to the sending bank.

With more than 80% of U.S. demand deposit accounts accepting Zelle, this change will provide relief for some customers scammed through Zelle.  The new safety measure likely requires the scammed customers to act before the fraudsters have withdrawn the funds from the Zelle transfers so money is available to claw back.  Moreover, the Risk Insights feature and reversal request may prevent the fraudster’s account from receiving future Zelle transfers.

The new safety measure was likely motivated by increasing regulatory pressure from the CFPB, FDIC, and Senator Elizabeth Warren (D-Mass.).  In December 2021, the CFPB updated its Electronic Fund Transfers FAQs by adding new questions focused on P2P payment providers and P2P transfers.  The FDIC’s March 2022 edition of Consumer Compliance Supervisory Highlights addressed fraudulent P2P payments and recommended that banks mitigate risk by: (1) reviewing account agreements and disclosures (including those with P2P payment providers) to ensure they do not attempt to limit consumers’ rights under Regulation E, and (2) implementing effective fraud detection and prevention measures, such as monitoring geographic data, spending patterns, merchant data, and IP addresses, to help detect potential fraudulent activity.

In October 2022, Senator Warren released a report titled “Facilitating Fraud: How Consumers Defrauded on Zelle are Left High and Dry by the Banks that Created It,” finding that P2P fraud is increasing, banks are not repaying customers for the vast majority of fraudulent inducement cases, and banks are not repaying customers for all “unauthorized” payments.  In December 2022, Senator Warren wrote to Zelle asking questions about its fraud policy changes under consideration.  Additionally, in March 2023, five Democratic Senators urged the federal banking agencies to protect customers from scams conducted through Zelle.

Zelle’s new safety measures exceed regulatory requirements and protect consumers who authorized the Zelle transactions from harm.  Currently, consumer-authorized transactions where a consumer is scammed into sending money to a fraudster are not considered “unauthorized electronic fund transfers” covered by the Regulation E protections for unauthorized transfers because the consumer initiated the transfer.

We are not aware of other P2P payments providers (such as CashApp, PayPal, Google Wallet, and Venmo) taking similar action to protect consumers from scams, but such providers are likely to face enormous regulatory pressure to follow suit.  Senator Warren in a statement to Reuters did not address the other P2P payment providers and instead “urge[d] the [CFPB] to keep the pressure on Zelle to protect consumers from bad actors.”  As the CFPB recently issued a proposed rule to supervise providers of digital wallets and payment apps, we can expect the pressure to expand to other P2P payment providers.

Last month, Zelle launched its education campaign on payment safety in partnership with the Better Business Bureau.  The education campaign recommends the following safety tips to consumers to prevent fraud losses:

• Stay calm;
• Don’t reply directly;
• Check the email address or URL more closely;
• Go to the source or get help;
• Never give personal information over the phone, especially if the call is unexpected;
• Never pay over the phone, especially if the call is unsolicited;
• Never allow remote access to your computer if somebody offers tech support;
• Search BBB Scam Tracker; and
• Report any scam activity to BBB Scam Tracker.

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