Any effort by Zelle's parent, Early Warning, to create
"I think it's safe to say that if receiving banks are required to reimburse victims of authorized payment fraud scams, it will negatively impact network participation, particularly among smaller banks who operate under tighter margins than larger banks and are much more sensitive to increases in fraud losses," said Trace Fooshee, a strategic advisor in Aite-Novarica's fraud and AML practice.
Reports that Zelle is in talks with banks to standardize refund practices for certain types of fraud come after a handful of high-profile
But thousands of smaller banks still on the fence about adopting Zelle are likely to be even more turned off now by the prospect of reimbursing consumers for potentially steep losses from user-initiated scams.
Zelle network participants with bigger budgets to spend on consumer education and awareness about P2P scams—and access to the latest technology to fight it—have an advantage over smaller banks that can't afford to invest as heavily in prevention and detection countermeasures, Fooshee said.
Although Early Warning says more than 80% of all U.S. bank accounts are part of Zelle's network, thousands of smaller banks and financial institutions accounting for
Early Warning said in an emailed statement that it isn't sharing specific details of its plans to protect confidentiality of its processes and to avoid tipping off fraudsters and scammers.
The P2P landscape is also shifting, as Zelle isn't the only instant P2P option available to smaller institutions.
Although Chuck is not as streamlined as Zelle — both participants in a P2P transaction must agree on a one-time password for each transaction before it's finalized — the solution is low-cost and participating banks are guaranteed of incurring no fraud costs.
Alloy Labs' CEO Jason Heinrichs said Zelle's scam-reimbursement plan, and its implied higher costs, would likely discourage more smaller banks from considering adopting Zelle. "This would be the final straw for them," Heinrichs said.
"We are really happy with the Chuck solution — our customers love it and usage is growing," said Julieann Thurlow, president and CEO of Reading Cooperative Bank, in Reading, Massachusetts. The $744 million-asset bank launched Chuck earlier this year after evaluating other P2P options, including Zelle, which Thurlow said was too costly.
Chesapeake Bank, a $1.3 billion institution in Kilmarnock, Virginia, which supports Zelle as a P2P option to customers, has seen "limited" fraud associated with scams and in most cases it involved purchases, such as puppies, that were never delivered, according to DJ Seeterlin, chief innovation strategy officer.
Chesapeake has reimbursed some customers caught in such scams after investigating the case.
"We have multiple controls in place to reduce the risk of these events, including extensive consumer education," Seeterlin said.
Chesapeake Bank routinely sees much higher levels of losses associated with Zelle through unauthorized fraud, such as account takeover, where reimbursements are covered through the bank by Regulation E, he said.
Seeterlin declined to comment on the potential effect of Zelle's scam-reimbursement plan, lacking further details.
Seacoast Bank, a $10.3 billion institution in Stuart, Florida, offers Zelle to its customers and the bank had no comment on a potential solution to mete out liability for reimbursing consumers caught in Zelle scams.
"We're always monitoring the risk of [offering Zelle] with the customer benefit it provides,"Amanda Martland, Seacoast's vice president of consumer marketing said via email.
The $5.8 billion-asset b1Bank, which operates more than 40 branches in Texas and Louisiana, with headquarters in Baton Rouge, still doesn't offer Zelle after evaluating it for the last five years.
"We've continuously weighed the cost of directly implementing Zelle against customer demand, and we still don't see a business case," said Keith Mansfield, chief operating officer.
The bank sees little P2P fraud in transactions that flow through b1Bank's systems monthly — including third-party Zelle transactions — where only "a tiny fraction" are Zelle versus P2P transactions b1Bank customers initiate via Square's Cash App, PayPal and Venmo, in that order, according to Mansfield.
Mansfield has been in discussions with fintechs proposing solutions that will enable b1Bank's users to initiate P2P transactions through a hub that will be engineered to sync with the faster-payments technologies like FedNow that are still in development.
"I sense we'll have a lot more options than Zelle when we decide to offer a P2P service directly through our app," Mansfield said.
It's true that criminals use other P2P services including PayPal, Venmo and Cash App to perpetrate scams, but because those are based on card and ACH rails and not necessarily instantly processed, participants have a longer track record with resolving fraud disputes, according to Aite-Novarica's Fooshee.
"Zelle's speed and convenience make it a more appealing target to fraudsters," he said.
According to Fooshee, Zelle this month began sharing details with banks about its plan for participating banks to resolve liability disputes and repay consumers caught in Zelle scams, but few details are available.
"I imagine the Fed is paying very close attention to how things are unfolding with Zelle, and I'm certain that is informing whether and how they build in some form of dispute-resolution policies and processes," Fooshee said.
If Chuck or other P2P solutions software providers are said to be developing catch on more widely, smaller financial institutions will have more paths to follow for P2P that's more in line with how they interact with their customers, said Steve Mott, a payments analyst and principal at BetterBuyDesign.
Many smaller banks have signed up to support FedNow's offering, which holds the potential to kill several birds with one stone, according to Mott.
"If [FedNow] could move its request for payment (RFP) option more quickly into supporting POS purchase options, with more direct access by consumers and merchants, this in turn could come to resemble a P2P offering that stands up to the fraud challenges and gives smaller banks more universal account access," Mott said.
Even the biggest banks are hedging their bets with Zelle, testing out the RFP approach developed by The Clearing House and RTP, that could in theory handle P2P along with point-of-service payments, bill payment and account loading, according to Mott.
