Scottsdale-based operator of Zelle, banks sued by federal government

The Scottsdale-based operator of Zelle and three of the banks that co-own it are being sued by the federal government, alleging failure to protect consumers from fraud.

The Consumer Financial Protection Bureau on Friday sued Early Warning Services, which operates the peer-to-peer money transfer network Zelle. It is also suing Bank of America, JPMorgan Chase and Wells Fargo, three of the seven banks that co-own Early Warning Services.

The suit alleges that customers of the three banks have lost more than $870 million over the seven years the network has been in operation because the banks rushed the network to market to compete with similar services, such as Venmo and Cash App, without to implement effective security measures.

“The nation’s largest banks felt threatened by competing payment apps, so they rushed to shelve Zelle,” CFPB Director Rohit Chopra said in a statement. “By their failure to put proper security measures in place, Zelle became a gold mine for scammers, often leaving victims to fend for themselves.”

The suit alleges that Zelle had limited methods of identity verification, which allowed fraudsters and other bad actors to create accounts quickly, and allowed consumers’ accounts to be linked to fraudsters’ accounts, allowing fraudsters to receive money intended for consumers. It also claims Early Warning Services and the banks named in the suit were too slow to limit and track criminals who created multiple accounts across different banks, allowing them to carry out repeated fraud. Defendant banks also ignored complaints that could have prevented further fraud and failed to properly investigate complaints, according to the suit.

The suit alleges that significant problems, including evidence of fraud, became apparent shortly after Zelle’s launch, but the defendants have taken no meaningful action for years.

According to the suit, Zelle has more than 143 million users, and in the first half of 2024, users transferred $481 billion using the platform.

Zelle issued a statement arguing that the Consumer Financial Protection Bureau’s case undermines Zelle and will empower criminals and hurt small businesses and local banks.

“The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle,” Zelle spokeswoman Jane Khodos said in a statement. “Zelle leads the fight against fraud and fraud and has industry-leading refund policies that go beyond the law. The CFPB’s misguided crackdown will embolden criminals, cost consumers more in fees, stifle small businesses, and make it harder for thousands of local banks and credit unions to compete. Zelle is being invoked by 143 million registered US consumers and small businesses, and we are fully prepared to defend this frivolous lawsuit to ensure that their service does not suffer.”

In its statement, Zelle officials said its transaction volume increased 27% in 2023, and reports of fraud and scams fell nearly 50%, meaning 99.95% of payments were sent without reports of fraud or fraud.

Reach the reporter at [email protected]. Follow her on X, formerly Twitter @CorinaVanek.

This article originally appeared on the Arizona Republic: Zelle’s Scottsdale-based operator is being sued. Here’s what you need to know