Zelle clamps down on fraud: Customers who fall for imposter scams on payment app now receiving refunds after banks came under pressure from lawmakers

Banks on the payment app Zelle have begun refunding victims of imposter scams in a major industry-wide policy change, officials confirmed today.

Customers who are duped into sending money to fraudsters claiming to be from a government agency, bank or existing service provider on the app have been quietly reimbursed since June 30.

The move follows significant pressure from US lawmakers and the federal consumer watchdog to improve fraud protections for Americans. 

It initially attracted pushback from major banks, with JPMorgan CEO Jamie Dimon telling lawmakers it would be unreasonable to refund transfers customers were tricked into approving. 

Federal rules currently require banks to refund customers for fraudulent payments which were made without their authorization such as by hackers. But this does not apply to customers who make the transfer themselves.

Zella is a peer-to-peer network owned by seven banks including JPMorgan Chase and Bank of America under the umbrella company Early Warning Services (EWS).

Ben Chance, chief fraud risk officer at EWS, told Reuters the latest policy goes 'well above existing legal and regulatory requirements.'

While Zelle disclosed August 30 that it had introduced a new reimbursement benefit for 'specific scam types,' it has not previously provided details on its new imposter scam refund policy due to worries doing so might encourage criminals to make false scam claims, a spokesperson said.

Following its launch in 2017, Zelle grew to become one of the largest U.S. peer-to-peer payments networks by total payments. A March 2022 New York Times report that scams were flourishing on Zelle caught the attention of lawmakers frequently critical of big banks, including Senator Elizabeth Warren.

She and other lawmakers started an investigation, estimating that Zelle users had lost $440 million to all types of fraud in 2021 alone. 

During a Senate hearing last year, Warren told Dimon and other bank CEOs that they had created a 'perfect weapon' for criminals but had not stood by their customers. 

More than 100 million people, all with U.S. bank accounts, have access to Zelle, according to EWS.

Impersonator fraud was the most-reported scam in 2022 across all payment methods in the U.S., accounting for $2.6 billion in losses, according to the Federal Trade Commission.

Banks worry that covering the cost of authorized transactions will encourage more fraud and put them on the hook for potentially billions of dollars. 

Instead of requiring lenders to reimburse customers, EWS has implemented a mechanism that allows banks to claw back funds from the recipient's account and return them to the sender, said Chance.

He added lenders on Zelle are also now required to implement a tool that flags transfers with risky attributes, such as a payment to an account that has never transacted on the Zelle network. 

'We have had a strong set of controls since the launch of the network, and as part of our journey we have continued to evolve those controls... to keep pace with what we see is going on in the marketplace,' Chance said. 

Under pressure from Warren and other lawmakers, the Consumer Financial Protection Bureau (CFPB) considered compelling lenders to reimburse scams, but Zelle's changes have so far satisfied the agency, a person familiar with the matter told Reuters/

A CFPB spokesperson declined to comment on Zelle or potential rule changes, but said the agency is working to protect customers 'including by ensuring that financial institutions are living up to their investigation and error-resolution obligations.'

JPMorgan, Bank of America and Zelle's five other owner banks declined to comment.

'Zelle's platform changes are long overdue,' said Warren in a statement.  'The CFPB is standing with consumers, and I urge the agency to keep the pressure on Zelle to protect consumers from bad actors.'

Zelle has long argued its fraud and scam rates are low.

It processed $629 billion worth of payments in 2022, according to the network, with 99.9% of transfers made without a fraud or scam report.