Wells Fargo, JPMorgan Chase, and Bank of America are facing a lawsuit from the Consumer Financial Protection Bureau (CFPB) over alleged fraud involving the Zelle payment app. According to the lawsuit filed on Friday, the three banks and other large banks jointly launched Zelle in 2017 but failed to establish adequate consumer protections to counter popular payment apps like Venmo. The complaint says this led to more than $870 million in fraud-related losses over the past seven years.

The complaint says tens of thousands of customers at the three banks reported being scammed, but in most cases their refund requests were denied, and they were even told to contact the scammers directly to recover their losses. The CFPB noted that last year, these three banks accounted for 73% of Zelle activity. In a statement, the CFPB emphasized that Zelle lacks effective safeguards, allowing scammers to open accounts using multiple email addresses and phone numbers, causing trouble for consumers. Although Zelle said it had taken "very effective preventive measures" and that reported fraud cases fell by nearly 50% in 2023, the bureau's lawsuit still received support from the Consumer Law Center.

Early Warning Services, the operator of Zelle, quickly pushed back, saying the lawsuit has a "weak legal and factual basis" and arguing that the case could "incentivize" criminals to file false fraud claims, further driving up service costs and hurting credit unions and minority-owned banks that use Zelle.

We have also covered Zelle and third-party money transfer services before. From my personal experience, Zelle's fraud controls are stricter than PayPal's, and the controls seem to be set differently by each bank. For example, when I use Zelle with my US Bank checking account, even a slightly larger amount can easily get held for a long time (probably triggering manual review). With Chase and BofA, things are smoother. Of course, if fraud protection measures are strengthened as the CFPB wants, costs will inevitably rise, so if transfer fees are increased, Zelle's competitiveness would be significantly reduced.