Zelle's rocky rise in 2022

December 22, 2022 11:07 AM

Early Warning Services' Zelle has grown exponentially since its launch five years ago, as the ecosystem supporting its instant peer-to-peer payments network continues to expand beyond the seven banks that own it. More than 1,800 U.S. banks and credit unions — covering about 80% of all U.S bank accounts — now directly support Zelle via their own mobile apps.

Fraudsters took notice, inventing new ways to trick consumers into using Zelle's seamless approach to route payments to them, triggering a wave of class actions from consumers who lost money in seemingly credible scams. Lawmakers are now demanding answers from Zelle.

Although banks aren't technically liable for fraud associated with Zelle payments users directly authorized, Early Warning recently responded to rising pressure from consumers and their advocates, and began discussing a plan to standardize refunds for so-called user-authorized scams to stave off action by regulators.

Early Warning insists total fraud rates are less than 1% of its skyrocketing payment volume, and as momentum increases, some banks are said to be contemplating Zelle as a point-of-sale option for everyday purchases.

Frustrated consumers flooded the CFPB with comments about money stolen in fraud schemes using Zelle, an online payment system owned by seven banks.

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Zelle by the numbers

Zelle is driving transactions at a rate of more than $1.6 billion a day, or $1 million a minute, according to the most recent data Early Warning has released through the first half of 2022.

Total Zelle transactions during the quarter ended June 30 rose 29%, to $155 billion, from a year earlier — reaching almost double the volume of Venmo. The number of Zelle transactions during the quarter rose 27%, to 554 million, over the same period.

Disbursements and rent payment are among the fastest-growing Zelle use cases, and more users are relying on Zelle's speed to meet last-minute billing deadlines, according to Early Warning's data. The number of companies, including insurance providers, education and government agencies using Zelle to transfer funds to consumers increased 87% in the second quarter of 2022, compared to a year earlier.

The seven major banks that own Zelle include Bank of America, Capital One, JPMorgan Chase, PNC, Truist, U.S. Bancorp and Wells Fargo, and total participation continues to grow as many midsize and small banks sign on, covering about 20% of all U.S. financial institutions. Thousands of smaller financial institutions and credit unions continue to hold off on directly enabling Zelle, citing concerns about its cost.

Scams hooking Zelle users soar

The first hint of rising consumer fury over Zelle scams came in late 2021, when Zelle was featured as a top consumer complaint in the Consumer Financial Protection Bureau's inquiry into Big Tech payment systems that invited public comments. A large share of letters the agency received mentioned Zelle fraud.

Early Warning and its member banks said they have spent millions educating consumers about how to avoid scams. But reports of consumers targeted by fraudsters in scams continue piling up.

The typical scam begins when a Zelle customer receives a text that appears to be from their bank alerting them to an unauthorized payment. A phone call from a number that's often spoofed to appear to be the bank's number often follows, with a person posing as a bank representative on the other end who instructs the victim to transfer funds to another number.

A New York Times report in March spotlighted a growing number of cases where consumers were targeted by scammers using Zelle, and banks refused to reimburse them for losses because the users authorized the payments.

By the middle of 2022, dozens of class actions related to Zelle scams had been filed against institutions including Bank of America, TD Bank, Capital One Financial and Navy Federal Credit Union, among others.

Lawmakers threaten action

Under Zelle's rules, banks are only required to reimburse consumers for unauthorized transactions — and in many of these scams, the consumers are tricked into authorizing the payments themselves. But consumer advocates responding to the rise in Zelle scams have pointed out that the CFPB has authority to interpret the Electronic Funds Transfer Act rules in a way that could clarify that a payment is in error when a consumer mistakenly sends a payment to a scammer.

In April, lawmakers led by Sen. Elizabeth Warren, D-Mass., sent a letter to Early Warning, asking for details on the total amount of fraud associated with Zelle since its launch.

In October, Warren flagged Wells Fargo as a magnet for Zelle scams, claiming that the bank's customers are reporting fraud and scams on Zelle at a rate 2.5 times higher than other banks. Early Warning countered that fraud and scams account for only 0.1% of all Zelle transactions. In a letter that same month to the CFPB, Warren asked the agency to strengthen regulations governing banks' obligation to repay consumers defrauded on Zelle and other P2P platforms.

Zelle is crafting a plan to reimburse scam victims

Responding to growing pressure from lawmakers and consumer advocates, Early Warning reportedly began discussions with its network member banks about creating a standardized approach to determine banks' liability for scams and reimbursing consumers for losses.

Experts say under the refund policy Early Warning is crafting, if a bank determines a user was tricked into sending money to another bank, the receiving bank would return the funds to the victim's bank, and the victim's bank would reimburse the customer. Experts say adjudicating liability between banks could be challenging.

Among the thousands of smaller institutions and community banks that have still not adopted Zelle out of concern for its costs and fraud potential, several recently voiced their reluctance to join the network as long as rampant user-initiated Zelle scams continue.

As of this month, Early Warning said it's not ready to share specific details of its plans. It wants to protect confidentiality of its processes and to avoid tipping off fraudsters and scammers.

On Dec. 21, 2022, Elizabeth Warren sent a letter to Early Warning demanding the company provide details of its reimbursement plan to lawmakers by Jan. 9, 2023. Warren said in the letter she also plans to ask Early Warning to describe estimated costs to banks participating in the reimbursement plan and potential effects on both authorized and unauthorized fraud.

Zelle at the point of sale?

Apart from Zelle's headaches around user-initiated scams, its momentum for P2P payments has led to discussions about testing the acceptance of Zelle at the point of sale for everyday purchases.

Zelle already deploys QR codes enabling users to initiate payments to one another, and businesses collecting rent and other recurring payments from consumers are using these QR codes. It's not a stretch to see how more small businesses may use Zelle as a streamlined payment approach by displaying a QR code at the point of sale.

The Wall Street Journal in April reported that some of Zelle's bank owners were considering opening Zelle up more widely to merchants as an alternative payment acceptance option to debit or credit cards. Not all large banks are on board, according to reports.

Zelle is still the big kahuna in instant U.S bank payments, but in 2023 the Federal Reserve is slated to launch FedNow, an instant-payment service that aims to put banks of all sizes on a more level playing field. How Zelle copes with this competition will depend on its ability to address its latest challenges and emerging opportunities.