Can Zelle's fraud-refund plan rebuild trust in its network?

The banks that operate Zelle may soon have a new plan to refund consumers who fall victim to fraud on the P2P network, a move designed to shore up confidence in the eyes of the government, consumers and merchants. 

JPMorgan Chase, Wells Fargo, Bank of America and other financial institutions are potentially forming a new plan to refund consumers who are scammed on the Zelle network. Zelle, which is operated by the financial security company Early Warning, faces legal pressure from consumers who claim they are victims of fraud and possible government action from the Consumer Financial Protection Bureau, which could boost bank liability for fraud on the P2P network.  

"Early Warning's whole mission and core competency is preventing fraud," said Richard Crone, a payments consultant, referencing the financial security company that operates Zelle. "They have to nail this. The essence of that is in their name." 

The Wall Street Journal on Monday reported the P2P networks' work on the new refund policy, citing unnamed sources. Chase, Bank of America and Wells Fargo did not return requests for comment by deadline. The plan specifically focuses on instances where a consumer was tricked into sending funds to a fraudster; it wouldn't provide the full range of protections that credit cards do, such as the ability to request a chargeback, the article states. 

Zelle in hands

"Payments where Zelle users were duped into making fraudulent payments have captured headlines and regulators' and lawmakers' attention," said Eric Grover, a principal at Intrepid Ventures. "Chase and the other banks are trying to get ahead of the problem and to forestall lawmakers and regulators imposing a solution on them." 

Under the pending refund policy, if a bank determines a user was duped into sending money to another bank, the receiving bank's account would send the money back to the victim's bank. The victim's bank would then reimburse the consumer. The policy wouldn't cover mistaken payments that result from typos or cover payments for items consumers claim to have received in error. Early Warning and the banks are reportedly in late-stage discussions, which includes testing the pending system's security. 

The roughly 1,800 financial institutions on the Zelle network usually have their own reimbursement practice, making the Zelle initiative an attempt to standardize refund policies. The Journal's report said the planned refund policy, which could be in place early in 2023, would also include a participation requirement for financial institutions that are already on Zelle, meaning banks that don't buy in could be suspended from the network.  

Refunds for Zelle-adjacent fraud have become a source of controversy. Some banks that own Zelle reimburse less than half of the fraud claims from consumers, according to Sen. Elizabeth Warren, D-Mass., who contends reimbursement rates range from 14% to 82% of fraud claims. These rates could lead to enforcement actions under the Electronic Fund Transfer Act. 

Estimates of fraud on Zelle vary widely. Warren has said Zelle-related fraud on Wells Fargo accounts is more than 2.5 times the rate of other banks, while Early Warning contends almost all payments are processed securely. 

"Our team devotes significant time and resources to protecting consumers every day and has done so since the launch of Zelle in 2017," Early Warning's public relations office said in an emailed statement on Monday, adding part of Zelle's work includes collaborating with financial institution participants to evolve network-wide rules to enhance the value of Zelle for all consumers. "As a result, more than 99.9% of Zelle payments have been sent without any report of fraud or scams." 

Zelle also said it's important for consumers to only pay people they know and trust and treat Zelle as if it were cash. "Zelle does not offer purchase protection," the statement said.

Zelle has additionally run programs over the past year to reduce fraud through education.  Zelle, which launched in 2017, reported in September that it processes $1.6 billion in payments per day, or $1 million per minute. The network has grown, with total transactions in the most recent quarter rising 27%, to 554 million, over the prior year.

Other companies that offer P2P platforms, such as PayPal's Venmo and Square's Cash App, use them as a way to cross-sell other financial services to both consumers and merchants. Fiserv, for example, offers PayPal and Venmo as part of its Clover point of sale system; and Square has enabled its merchants to accept Cash App payments. 

"Zelle and the P2P fintechs are very competitive," said Marco Salazar, director of payments at Javelin Strategy & Research. "This is about building confidence in the network. It's a way to make the fraud claim process seamless when you are working with Zelle." 

Zelle is also considering a retail payment network that would be an alternative to the card networks. And Early Warning plans to expand Zelle's use of QR codes, which are in pilot with a handful of financial institutions, to help reduce misdirected payments.

"This is an important step for preparing Zelle for mass merchant acceptance and the increased competition signaled by the general release of Venmo on Amazon," Crone said, adding Zelle must first address transaction repudiation, chargebacks and disputes from fraudsters and friendly fraud. "With the success of Venmo on Amazon, the owners of Zelle can't ignore the opportunity of expanding their network with full-fledged merchant acceptance in the same way."

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