What just happened? Electronic payment platform Zelle has been sued by New York Attorney General Letitia James over allegations that its lack of critical safety features has enabled scammers to steal over $1 billion from US consumers. The move comes just months after the Federal Consumer Financial Protection Bureau (CFPB) dropped a similar case against the company's parent.
The latest lawsuit targets Early Warning Services, LLC (EWS). Zelle's parent firm is owned by seven of the largest banks in the US: Bank of America, Capital One, JPMorgan Chase, PNC, Truist, US Bank, and Wells Fargo.
James said that the company and the banks knew for years that the platform was a haven for fraudsters and that it failed to implement basic protections. It's also claimed that EWS sometimes ignored customers' complaints, and failed to require banks to reimburse customers while allowing the criminals to stay on Zelle.
It led to "rampant" fraud on the platform that Zelle often refused to address despite being marketed as a safe alternative to cash and checks and "backed by the banks."
Zelle is popular with fraudsters because it allows instant, irreversible bank-to-bank transfers with no buyer protection, making it easy for scammers to cash out before victims realize they've been deceived. Its integration into major banks' apps gives it a sense of legitimacy that lowers people's guard, while the lack of a dispute system for authorized payments means victims rarely get their money back. Scams often involve convincing users to send money for non-existent goods.
James notes that "scammers could sign up through a quick registration process that lacked important verification steps, allowing them to utilize misleading email addresses such as those associated with trusted businesses or government entities."
"EWS does not require participating banks to display any information about a recipient, other than first name, to a Zelle user when transferring funds," the suit adds. "As a result, a Zelle user at risk to an ongoing fraud often lacks access to additional information that might enable them to avoid future losses, such as the recipient's last name or how long the recipient has been using Zelle."
This isn't the first time Zelle has faced this type of lawsuit. EWS was sued by the CFPB in December last year over claims it was rushed to market without implementing effective fraud safeguards. It also alleges that banks failed to adequately investigate reports of fraud and consumers were repeatedly denied refunds.
The CFPB's lawsuit was dismissed without prejudice in March, part of a broader rollback of enforcement under the new Trump administration.
The new suit alleges that EWS broke state laws. It seeks to require Zelle to beef up anti-fraud protections, and pay restitution and damages to defrauded New Yorkers.
Zelle said more than 99.95% of transactions it handles are completed without reported fraud, leading the industry. It added that scams begin when criminals trick people into sending money, rather than on the platform itself, and holding it liable could lead to higher fees for consumers.