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Zelle, the popular payment app, is under fire for how it handles (or rather, doesn't handle) the fraud and scams that have exploded on the platform in recent years.
The New York Times called out Zelle in two reports earlier this year. This caught the attention of US senators, who pressed the CEOs of the country's big banks that own the platform in hearings last month and launched an investigation into the service.
Here's the deal: On Monday, Senator Elizabeth Warren's office said its investigation into Zelle showed that fraud and theft are not only rampant, but getting worse. And since people report fraudulent transactions, banks are only refunding a small fraction of scammed customers.
“Large banks own and profit from Zelle, but are failing to satisfy their customers due to authorized and unauthorized fraudulent activities on the platform, despite their claims that it is safe,” Warren's office wrote.
Key things to know:
- Zelle (rhymes with “tell”) was created in 2017 as the banking industry’s answer to Venmo and Cash App.
- The fintechs behind these apps were doing what big banks hadn't been able to do for decades – transferring money to your friend who just paid for dinner easily, for free and quickly.
- Then the big banks got together and created Zelle, which was lame and hardly anyone used it until around 2020 when digital payments took off in response to the pandemic.
- Zelle is now by far the largest peer-to-peer payment system in America. Last year, according to Zelle, transactions totaled US$490 billion, an increase of 59% from the previous year. (Venmo, owned by PayPal, its closest rival, turned over $$230 billion.)
- The service is operated by Early Warning Systems, a fintech owned by seven of the largest US banks.
Naturally, where the internet and money collide is where scammers get to work.
Zelle's size and accessibility — it's built into participating banks' apps — make it the "tool of choice for fraudsters and other bad actors," according to the report from Warren's office.
Among the investigation's key findings, which corroborate anecdotal evidence reported by the Times:
- Banks are not refunding 90% in cases where customers were tricked into making payments on Zelle.
- An estimated US$440 million was lost by Zelle users through fraud and scams in 2021. But banks “appear to have not provided sufficient resources to their customers.”
- “Authorized” versus “Unauthorized:” Under a federal rule known as Regulation E, banks are technically only responsible for covering fraudulent activity when it involves “unauthorized” transactions. Say, when someone steals your credit card and makes purchases without your permission. But if someone persuades you to send US$500 through a phishing scheme, banks consider this “authorized” and will not refund those funds.
- BUT... Banking data reviewed by Warren's office suggests that even most unauthorized cases go unpaid. For example: PNC Bank indicated that its customers reported 10,683 cases of unauthorized payments totaling more than US$ 10.6 million. It reimbursed only 1,495 cases, totaling US$ 1.46 million.
Zelle attempted to downplay the report and did not specifically address Warren's allegations on Monday. In a statement, the company said: “Tens of millions of consumers use Zelle without incident, with more than 99.9% of payments completed without any reports of fraud or scams,” adding that the proportion of fraud and scams has steadily declined as that your user numbers have gone up.
The Bank Policy Institute, a banking industry group, also disputed Warren's findings and said Zelle's rivals, Venmo and CashApp, receive more reports of disputed transactions.
“Zelle is the most secure peer-to-peer network,” it said in a statement on Monday. “For any real discussion about online fraud, the focus belongs elsewhere.”
BOTTOM LINE
It's kind of crazy to remember how someone moved money between friends before the advent of payment apps. Did I really carry money with me? On the first of every month I would take out my little checkbook and literally write my share of the rent on a magical piece of paper and then hand it to my roommates? Wild. It wouldn't surprise me if the original idea for a payments app came from a restaurant server who was fed up with splitting bills unevenly across eight different cards.
But that's the pre-internet world that Regulation E was made for. It's a 1978 rule that only received a 21st century electronic payments update from the Consumer Financial Protection Bureau late last year. It wasn't made for the world of instant payments, and I could hardly imagine how easy the internet would make it to steal people's money.
Warren's report on Zelle could pressure regulators, including the CFPB, to update their guidance.
“Given this uncertain landscape and banks’ abdication of responsibility, regulatory clarity is needed to further protect Zelle users,” the researchers wrote in the report, noting that the CFPB has regulatory authority over peer-to-peer platforms, including Zelle. .
Related
Banks attracted to Web3 technology, but restricted by lack of rules
Richard Walker, a new partner at Bain & Co. and co-lead of digital strategies for financial services has plenty of advice for his clients on how to leverage the blockchain-based concepts of Web3 and the metaverse. But a lack of regulation, he says, is slowing adoption by the industry's biggest players.
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“Our customers are largely awaiting clarification,” he says.
Web3, which Walker defines as “a decentralized, democratized environment with a native currency and native ownership of digital rights,” has attracted growing interest from investors since the cryptocurrency bull run peaked in November 2021. A Bain research report found Private companies' investments in Web3 technology exceeded US$ 80 billion, with US$ 48 billion going directly to financial markets infrastructure.
From wallets to payments, brokers and exchanges, the financial services sector, says Walker, is perfectly prepared for the introduction of blockchain technology. The industry “is really building the fundamental rails and assets,” he adds.
Interested in reading more? Subscribe to Forbes' CryptoAsset and Blockchain Advisor here.
Prior to his July appointment at Bain, Walker spent 12 years at Deloitte Touche Tohmatsu working in the digital assets division (although the Bain press release announcing his new role referred to his former employer as “another global business consultancy”). At Deloitte, he worked on different uses of cryptocurrencies. At Bain, Walker says he is focusing on “creating optionality introduction strategies” for financial services to implement Web3 technology.
Walker's work at Bain primarily concerns implementing metaverse practices and Web3 applications, such as non-fungible tokens (NFTs), for bank customers and employees.
Big names in the financial sector have already started, albeit cautiously, to adopt so-called Web3 applications in addition to cryptocurrencies. JP Morgan, a Bain client, has been leading the way, issuing NFTs to attendees of its first cryptocurrency economics forum in December.
Walker emphasizes that despite regulatory uncertainty, major financial institutions are still interested in innovations in a decentralized internet. One example is the implementation of commemorative NFTs. While no clear regulatory framework has been established for the status of NFTs, the US Securities and Exchange Commission is investigating token creators and cryptocurrency exchanges over possible securities fraud. According to the Howey test used by the SEC, a security is defined as “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” While not all NFTs are securities, the lack of legal definition of those that are makes institutional investors uneasy.
The simplest solution? Make them free. JP Morgan used what the cryptocurrency world calls an airdrop – a transfer of NFTs to participants' cryptocurrency wallets. Other financial firms have adopted similar approaches. Bank of AmericaBAC, the first bank to issue commemorative NFTs, and wealth manager VanEck also have NFT collections that serve as certificates of participation or membership, avoiding the regulatory cloud surrounding sales.
This, however, has not stopped holders from listing their NFTs on secondary trading sites like OpenSea. After JP Morgan issued its collection, one owner listed a token for sale at 420ETH (or US $ 1.8 million at the time). According to data from PolygonScan, the token sold for US$ 131.75 in December.
Other banks, such as Goldman Sachs and Japanese giant Sumitomo Mitsui, are interested in NFT technology, but have not gone beyond announcing that they are exploring asset tokenization and implementation of NFTs.
These different approaches come down to the risk tolerance of different banks, Walker says. “An organization that is at the end of life of a core banking platform needs to update its technology anyway,” he says. “They may opt for a real-time digital banking platform that allows them to migrate more quickly to some of the types of Web3 capabilities than a bank that is mid-cycle with its platform investment.”
The path may not be direct or clear for the next 10 years of blockchain technology or its use in financial services. But Walker says he's confident that every little initiative, pilot, test and implementation is leading to increased adoption.
“Clearly there will be intermediate stages of transformation and adoption,” he says. “Every week there are small movements that are forming the basis of big changes.”
