One of Zelle's planned responses to the threat of fraud connected to its network is to form a new and universal refund program for victims. But making that happen may pose a huge challenge in its own right.
In theory, it sounds simple. The policy would standardize reimbursement policies in 2023, so that if a bank finds that a user was tricked into a false P2P transfer on Zelle, the receiving bank's account would send the funds back to the victim's bank to reimburse the consumer. The program would cover fraudulent transfers, but would not cover erroneous payment due to typos or products purchased in error.
The details are where this gets complicated. The step that involves the receiving bank returning a disputed payment could also include a requirement that the bank cover at least part of the cost of the return, according to Trace Fooshee, a strategic advisor in Aite-Novarica's Fraud & AML practice.
"The amount of effort required to devise and deploy such a program is potentially enormous," Fooshee said.
Early Warning, which operates Zelle, is reportedly working on a
"While this would be a welcome safety measure that would do much to mitigate reputational risk and to disrupt the criminal rings perpetrating the fraud, it would also represent an additional cost of participating on the network," Foshee said, adding that could be expensive for smaller banks. "It's a story of being between a consumer reputational risk 'rock' and a network participation 'hard place.'"
The Consumer Financial Protection Bureau could put more pressure on banks to take responsibility for scams that result from a crook redirecting a P2P payment or tricking a consumer into sending a payment to the wrong location.
The rules governing P2P fraud date to the 1970s and weren't designed for mobile apps and other modern payment products, creating confusion over liability for digital payments and complicating efforts to build a refund policy that spans thousands of financial institutions.
"It's not hard to see why this is one of the most challenging puzzles facing fraud executives and the members of senior management that they counsel," Foshee said.
While fraudsters using the Zelle network to commit payment crime have made news this past year, estimates of the amount of fraud connected to the network vary. Sen. Elizabeth Warren, D-Mass., says fraud levels are more than double the rate for other bank payments.
Zelle did not provide comment on a potential refund policy or work on a new program, saying part of its work includes collaborating with its financial institution partners to evolve their rules, and more than 99.9% of payments have been sent without reports of fraud or scams.
Zelle's refund policy, which is reportedly in the discussion phase with banks on the Zelle platform, would also require work to update existing anti-fraud technology or implement something new.
It is possible to add a verification check when a new recipient is added to a system like Zelle, according to Aaron Lazor, CEO of MyChargeBack.
"No personal information would need to be presented by Zelle," Lazor said. "It would just need to notify the sender if the name and associated email or phone number match a current profile."
But there are other challenges, since most existing daily transfer limits for individual banks do not deter crooks who steal relatively small amounts. More than 70% of the consumers who use MyChargeBack to manage payment dispute claims are contesting transactions of $3,000 or less.
"Banks don't typically have the resources to go after the small fry who sign up using a fake or stolen identity," Lazor said. "MyChargeBack has the background and know-how to analyze these types of situations and follow-up with the beneficiary. Most consumers do not."
Zelle is attempting to get on top of the fraud issue as it expands. Like many P2P apps, Zelle plans to use the enrolled base and payment function as a springboard to add other products, such as
"Before Zelle can expand to the point of sale they must first address transaction repudiation, chargebacks and disputes, not only from bona fide nefarious actors but "friendly fraud" for payments not recognized from consumers," said Richard Crone, a payments consultant.
When Early Warning acquired Zelle, it added new identifiers to its proprietary database: pre-validated cell phone numbers, email addresses and the unique identifiers accumulated from the mobile banking apps of each cell phone, according to Crone, adding this gives Zelle and Early Warning more power to prevent fraud through controls such as advanced authentication techniques and biometrics.
Early Warning's challenge is that it needs to get all the mobile banking platforms, such as Q2, Alkami, FIS, Fiserv and others, on board with using a common set of procedures, policies and processes for preventing and validating the transactions in advance in order to thwart fraud.
"But they also need to develop their artificial intelligence algorithms to accommodate submission of claims, just as JPMorgan Chase and many credit and debit account issuers do for 'submitting' a transaction dispute, chargeback and return items," Crone said.
