The Consumer Financial Protection Bureau (CFPB) recently sued EWS (who operates Zelle payments) and the major bank owners – Bank of America, JPMorgan Chase, and Wells Fargo. According to a statement published by the CFPBin Zelle fraud case, the operators failed to protect consumers from fraud perpetrated on the Zelle payment platform.

CFPB, a government agency with the primary goal of protecting consumer interest by offering financial protection, said in a statement published on their website that customers using banking services from the said operators had lost over $870 million to fraud. This data shows records from the inception of Zelle seven years ago.

In the lawsuit filed by the CFPB, the agency alleges that Zelle and its banking partners failed to implement any solid measures to safeguard consumers from fraud. With this lawsuit, CFPB focuses on ending the “unlawful conduct,” offering financial redress to all the affected consumers, and seeking fines or sanctions through the lawsuit.

Key Takeaways

• CFPB’s Legal Action and Allegations: The CFPB has sued JPMorgan Chase, Bank of America, Wells Fargo, and Early Warning Services (EWS), alleging negligence in protecting consumers from fraud on the Zelle payment platform. The lawsuit highlights nearly $870 million in consumer losses since Zelle’s launch in 2017, citing fraud prevention, identity verification, and customer support failures.
• Regulatory Concerns and Bank Reactions: The lawsuit accuses the defendants of violating the Electronic Fund Transfer Act and Regulation E by failing to safeguard consumers adequately. Banks, however, argue against the claims, describing the regulatory action as politically motivated and exceeding CFPB’s authority, with Zelle asserting that it employs leading fraud prevention measures.
• Consumer Advocacy and Industry Criticism: Consumer protection groups support CFPB’s focus on addressing systemic fraud issues, while the Consumer Bankers Association (CBA) defends the banks, highlighting Zelle’s comparatively lower fraud rates and criticizing the CFPB for what it deems an overly broad regulatory approach.
• Call for Broader Fraud Prevention Collaboration: The CBA and banks stress the importance of a multi-sector approach to combat fraud, advocating for cooperation between financial institutions, regulatory bodies, and other industries. They emphasize their proactive measures, including multi-factor authentication and AI-driven fraud detection, while opposing regulatory measures they see as disproportionate or restrictive.

CFPB Accuses Major Banks and Zelle Operator of Negligence in Addressing Zelle Fraud Risks

The CFPB has initiated legal action against three of the largest banks in the United States – JPMorgan Chase, Bank of America, and Wells Fargo – along with EWS, operator of one of largest P2P apps, Zelle. The lawsuit alleges the banks and EWS to “enable” fraud through the Zelle payment network.

It is important to note that EWS or Early Warning Services LLC is co-owned by these banks.

The center of the allegations in the lawsuit is that these banks and EWS failed to implement adequate measures to protect and prevent widespread fraud in the payments network. As mentioned, the figures reported (which almost touched a billion dollars) in the lawsuit showcase the drastic ignorance by the “leading” and “trusted” banks in the US. The CFPB has taken a dig at the banks for not acting and even addressing the ongoing widespread fraud on the network, despite having the means and obligations to do so under the Electronic Fund Transfer Act and Regulation E, which require financial institutions to investigate and resolve errors in electronic fund transfers.

CFPB Director Rohit Chopra stated that this situation involves financial institutions meeting their fundamental responsibilities to safeguard customer funds and assist fraud victims in recouping their losses. He criticized the banks for violating the law by operating a payment system that facilitated fraud and failing to support the affected customers.

Chopra criticized the banks for favoring quick service at the expense of security. He explained that the country’s major banks quickly launched Zelle, feeling pressure from rival payment applications. However, their lack of adequate security measures made Zelle an attractive target for fraudsters.

According to the lawsuit, the parties failed to offer standard fraud detection and protection measures, which were the direct outcome of thousands of consumers losing millions of dollars since the launch of Zelle in 2017. The lawsuit highlights these key lapses:

• Failure to Track and Restrict Fraudsters: The lawsuit criticizes Early Warning Services and the defendant banks for not acting swiftly to restrict and track criminals exploiting the system. It was noted that banks did not share information about known fraudulent transactions, allowing repeat offenders to exploit multiple institutions.
• Inadequate Identity Verification: The CFPB claims that Zelle’s limited identity verification methods allowed fraudsters to easily create accounts and target users, linking victims’ tokens to fraudulent accounts and redirecting intended payments.
• Neglecting Red Flags: Despite numerous fraud complaints, the banks reportedly failed to use this information effectively to prevent further fraudulent activities and did not consistently report fraud incidents as required by the Zelle Network’s rules.
• Inadequate Consumer Support: The banks are also accused of failing to properly investigate and resolve customer complaints about fraud, which is required under the Electronic Fund Transfer Act and Regulation E.

The CFPB’s legal action aims to stop these unlawful practices, secure redress for affected consumers, and enforce penalties against the institutions involved. The agency has investigated payment networks like Zelle since 2021 to address these systemic issues.​

Zelle, in response, has defended its practices, stating that the lawsuit’s claims are baseless and asserting that the platform has industry-leading fraud prevention measures in place. The company argues that the legal action is politically motivated and not based on factual evidence of the network’s operations.

Zelle has expressed its readiness to challenge what it describes as an unfounded lawsuit robustly. In its defense, Zelle claims that the allegations made by the CFPB are both legally and factually incorrect, suggesting that the lawsuit’s timing might be influenced by political motivations that do not pertain to the company’s operations.

Whereas EWS criticized the CFPB’s recent actions, claiming they could unintentionally support criminal activities, increase consumer fees, hinder small businesses, and challenge the competitive ability of many community banks and credit unions.

In its own statement, Bank of America reported that over 99.95% of Zelle transactions are completed without any problems, criticizing the CFPB’s attempts to introduce substantial new costs for the more than 2,200 banks and credit unions that provide Zelle services to their customers at no extra charge.

Additionally, JPMorgan Chase has accused the CFPB of exceeding its regulatory authority by holding banks responsible for the actions of criminals, including those involved in romance scams. The bank described this move as a clear “regulation by enforcement” case, arguing that it bypasses the standard rulemaking process that typically guides such regulatory actions.

Consumer Banking Association Defending Banks

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The Consumer Bankers Association (CBA) has openly expressed concerns regarding the Consumer Financial Protection Bureau’s (CFPB) recent regulations on digital payments. The association has specifically pointed out the CFPB’s oversight as overly broad, surpassing what they consider to be the legislative boundaries set by Congress. They particularly highlight the CFPB’s scrutiny of Zelle, a payment platform operated by banks, noting that it records fewer fraud cases than other platforms.

The CBA acknowledges the importance of consumer protection but suggests that the CFPB’s current regulatory path might be unnecessarily stringent and not aligned with legislative intentions.

In a recent statement, CBA President Lindsey Johnson emphasized the banking industry’s commitment to safeguarding customers against fraud, pointing out that combating such threats requires a collective effort beyond just the banking sector. Johnson also criticized the CFPB for its focus on a bank-owned platform, which reports significantly fewer fraud incidents than other platforms, suggesting that the CFPB’s approach may be unfairly targeted.

Additionally, the CBA has underscored its proactive steps toward securing customer transactions, including implementing multi-factor authentication, chip-enabled cards, and AI-driven technology to identify and mitigate fraud risks. They stress the need for a multi-sector effort to effectively combat fraud, extending beyond just the financial industry to include cooperation from government bodies and other sectors.

Recent communications from the CBA advocate for a regulatory approach that avoids placing undue burdens on bank-owned payment systems and promotes cooperative regulatory development that includes significant input from the financial sector. They seek a more equitable regulatory framework that does not hinder bank-operated services while maintaining robust consumer protections.

About Bank of America

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Bank of America, N.A. is a subsidiary of Bank of America Corporation, with its main office in Charlotte, North Carolina. This significant financial institution provides various banking, investment, asset management, and risk management products and services. It manages around 3,700 retail financial centers and 15,000 ATMs across the U.S. and supports 58 million digital users.

On an international scale, it serves corporations, governments, and individual clients, and it plays a key role in wealth management and corporate and investment banking. As of mid-2024, Bank of America reported more than $2.5 trillion in total assets and is listed on the New York Stock Exchange under the NYSE: BAC ticker. The bank serves approximately 69 million U.S. consumer and small business customers, underlining its strong influence in the financial markets in the U.S. and globally.

About JPMorgan Chase Bank

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JPMorgan Chase Bank, N.A., a subsidiary of JPMorgan Chase & Co., is based in Columbus, Ohio, and is the largest bank in the United States. As of mid-2024, it holds more than $3.5 trillion in total assets. The bank’s operations are divided into several segments: Consumer & Community Banking, Commercial & Investment Bank, and Asset & Wealth Management. It provides various financial services worldwide, including banking, asset management, and investment services.

JPMorgan Chase is recognized for its extensive market presence. He offers services to a broad spectrum of clients, including individual consumers, large corporations, and government entities, with a strong emphasis on innovation and customer service.

About Wells Fargo Bank

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Wells Fargo Bank, N.A., a Wells Fargo & Company subsidiary, operates in Sioux Falls, South Dakota. As a prominent U.S. bank, it reported consolidated total assets of around $1.9 trillion by mid-2024. The bank is organized into several primary segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.

Together, these divisions provide a comprehensive suite of financial products and services aimed at individual and corporate clients, covering a range from personal and business loans to asset management and investment services.

About Early Warning Services

Early Warning Services, LLC, based in Scottsdale, Arizona, plays a vital role in financial technology and consumer reporting. Established in 1990, this private company is well-known for developing and managing the Zelle network, a key digital payment system. It is jointly owned by seven major U.S. banks: Capital One, Bank of America, PNC Bank, JPMorgan Chase, U.S. Bank, Truist, and Wells Fargo.

The company offers a variety of fraud prevention and payment solutions to more than 2,500 financial institutions, improving the security of transactions for banks and their customers. In addition to Zelle, Early Warning Services has created other innovative technologies, such as Paze, a digital wallet to revolutionize e-commerce payments. With a focus on innovation and collaboration, Early Warning Services is essential in modern banking, facilitating secure and efficient financial transactions.

About Zelle

Zelle, managed by Early Warning Services, enables quick electronic money transfers using linked email addresses or U.S. mobile phone numbers, often called “tokens.” Users can link multiple tokens to various banking institutions, allowing for swift bank transfers.

Conclusion

The lawsuit filed by the CFPB against major banks and the operator of Zelle underscores growing concerns about the responsibility of financial institutions to protect consumers from fraud. While the CFPB seeks accountability and redress for affected customers, the banks and Zelle argue that the allegations are either exaggerated or politically motivated.

This case highlights the ongoing tension between regulatory agencies and financial institutions over balancing security, operational efficiency, and compliance. The outcome of this legal action could set important precedents for how digital payment systems address fraud and consumer protection in the evolving financial landscape.