CFPB may require banks to reimburse victims of the Zelle scam

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Regulators are considering a rule change that would help victims of fraud

How much responsibility do banks have to protect customers from scams? Federal regulators are reportedly preparing new rules that would hold financial institutions more accountable.

The Wall Street Journal cites unnamed sources who say the Consumer Financial Protection Bureau (CFPB) will require banks to compensate customers who were victims of the so-called “Zelle scam.”

Zelle is a peer-to-peer payment system offered to consumers through their financial institutions. Zelle works like Venmo and other payment systems, allowing users to send money from their bank accounts to friends and family.

As we previously reported, criminals are using Zelle to drain victims’ bank accounts. Like many scams, this one is based on the claim that the scammer is trying to protect the victim from fraud.

The victim receives a text that appears to be from their bank asking if they attempted a Zelle transaction. Regardless of how they answer, the target next receives a phone call from the scammer, who spoofs the number so it shows up as coming from the target’s bank. 

The victim will then receive a set of instructions that ultimately winds up compromising their bank account information. The scammers use the information to withdraw funds and make off with their victims’ money.

Increased accountability

The Journal reports that the CFPB will issue new guidance in the next few weeks to increase banks’ accountability for scams that have become more common on banking platforms. According to the Journal sources, the guidance is not in its final form and could change before it is issued.

While it is aimed at the Zelle scam, the sources say it would likely apply to criminal schemes that employ other payment services that connect to customers’ bank accounts.

It turns out that scammers love money transfer services like Zelle. When robbing a victim, the criminal needs to be sure the victim’s money can’t be retrieved or traced. That’s why they favor payment systems such as gift cards. However, consumers are finally becoming wise to the absurdity of a legitimate business asking to be paid using Target gift cards.

‘Favorite of fraudsters’

According to a recent report in the Detroit Free Press, about 18 million people have suffered "widespread fraud" on money transfer apps. The newspaper cites a letter sent to Zelle's network operator Early Warning Services by three members of the U.S. Senate.

"Zelle’s biggest draw — the immediacy of its transfers — also makes scams more effective and 'a favorite of fraudsters,' as consumers have no option to cancel a transaction even moments after authorizing it," the lawmakers wrote. 

Early Warning Services says it has numerous security features in place to prevent fraudulent use of the app.

“In addition to our efforts, we encourage measures that reduce the ability of fraudsters to perpetrate these scams and arm consumers with educational resources that will help them protect themselves from fraudsters,” the company said in a statement.

To date, Zelle has maintained a distinction between “fraud” and “scams” that affects whether a victim can recoup lost money. If the victim did not authorize a transaction, then the theft is fraud and the victim can usually be reimbursed. It’s a different story if the victim acts on instructions from a scammer.

“Even if you were tricked or persuaded into authorizing a payment for a good or service someone said they were going to provide, but they didn’t fulfill it, this would be considered a scam," Zelle says on its website. “Because you authorized the payment, you may not be able to get your money back.”

According to the Journal report, it's that very policy that may come under intense scrutiny from federal regulators.

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