Sen. Warren says big banks fail to prevent 'rampant' fraud on payment platform Zelle, urges CFPB to tighten regulations

Key Points
  • Sen. Elizabeth Warren, D-Mass., sent a letter to Consumer Financial Protection Bureau urging tighter regulations to root out fraud on payment platform Zelle.
  • Warren said her investigation into Zelle found that the big banks that use the platform have not fully refunded the "vast majority" of customers defrauded on the platform.
  • The senator asked CFPB Director Rohit Chopra to amend the Electronic Fund Transfers Act to protect consumers on peer-to-peer platforms.
U.S. Senator Elizabeth Warren (D-MA) speaks to reporters about codifying gay marriage on Capitol Hill in Washington, September 15, 2022.
Evelyn Hockstein | Reuters

Sen. Elizabeth Warren is urging the Consumer Financial Protection Bureau to strengthen rules governing Zelle, as she raises concerns about what she called growing fraud on the payment platform.

In a letter to CFPB Director Rohit Chopra, the Massachusetts Democrat also said big banks may have violated federal law by failing to fully refund the "vast majority" of defrauded customers. Warren, a member of the Senate Banking, Housing and Urban Affairs Committee, released the findings as part of a report earlier this month.

"My investigation, which is based on previously non-public information obtained from the banks that own and run the platform, shows that Zelle is increasingly becoming a tool of bad actors who use the platform to defraud consumers, while the big banks that own Zelle do little to stop them or provide recourse to their consumers," Warren wrote in the letter.

Warren urged the CFPB to use its rule-making authority under the Dodd-Frank Act to amend Regulation E of the Electronic Fund Transfers Act "to increase consumer protection and interpret the guidelines surrounding peer-to-peer platforms."

"The rising volume of fraud and scams — combined with banks' failure to make consumers whole in more than 90% of authorized scam cases and nearly 50% of unauthorized fraud cases — is a violation of banks' responsibilities to their consumers and is not consistent with the goals of Regulation E," she wrote.

Zelle and its parent company, Early Warning Services LLC, are owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank and Wells Fargo. Consumers use the platform to directly transfer money between banking accounts, similar to how other peer-to-peer platforms like Cash App and Venmo function.

In a statement to CNBC, Early Warning Services said, "Tens of millions of consumers safely use Zelle, with more than 99.9% of payments sent without any report of fraud or scams. Any external analysis done is incomplete and does not reflect the efforts and data reported by more than 1,700 financial institutions on the Zelle Network."

CNBC contacted the seven financial firms for comment. Bank of America directed CNBC to Early Warning Services, while JPMorgan and PNC Bank declined to comment.

Jim Seitz, a spokesperson for Wells Fargo, said 99.94% of transactions through Zelle in 2022 occurred without incident and that the bank's fraud and scam rates are consistent with the industry. "We don't believe the numbers in a recent report are done on a comparable basis, and therefore the analysis is misleading and inaccurate," Seitz said. "We welcome the opportunity to have a constructive discussion about wholistic Zelle data and industry trends — not just that of 3 banks."

Warren's letter follows an April letter to Early Warning Services — also signed by Sens. Robert Menendez, D-N.J., and Jack Reed, D-R.I. — inquiring about its procedures to address fraud.

The senator said her investigation found big banks have promoted Zelle as a safe payment option, yet the number of consumer fraud and scam claims has climbed since 2020.

PNC Bank reported 8,848 customer claims in 2020, and reports may top 12,000 in 2022, according to Warren's report. U.S. Bank said it received 14,886 claims on Zelle in 2020, but now it is on pace to reach nearly 45,000 this year.

Truist reported 9,455 fraud and scam claims on Zelle in 2020 and 22,045 in 2021, according to the senator. But claims are expected to dip slightly to roughly 20,000 in 2022.

Bank of America reported its number of claims rose from 49,652 in 2020 to 131,509 in 2021, Warren's report said. Its customers are on track to make 160,977 scam and fraud claims on Zelle in 2022.

The value of the scam and fraud claims received by PNC, Truist, U.S. Bank and Bank of America exceeded $90 million in 2020. The value of claims is expected to rise to $255 million this year, according to the report.

Warren said she also found that most of the time big banks are not repaying customers involved in the 190,000 cases in 2021 and the first half of 2022 where consumers said they were scammed into making payments through Zelle. The fraudulent payments reached $213 million in that time period.

Of the three banks that provided full data sets, customers were repaid in only 9.6% of scam claims, amounting to $2.9 million, according to the report. That amount represented 11% of total payments.

The inaction is a possible violation of the Electronic Fund Transfer Act and CFPB's Regulation E, Warren said. Both require that banks repay customers for unauthorized account withdrawals.

Data provided by banks show that consumers who reported unauthorized payments on Zelle in 2021 and the first half of 2022 were reimbursed for 47% of the dollar amount, Warren said.

Several other banks, including JPMorgan Chase and Wells Fargo, refused to release key fraud information, Warren said. The data that Wells Fargo released revealed that customers reported fraud and scams on Zelle at a nearly 2.5 times higher rate in 2022 than in 2019.

"And that is more than twice as high for Wells customers compared to customers of other banks," Warren wrote.