US senators take a closer look at Zelle’s fraud procedures, potentially shaping future P2P payment regulation

The news: US Sens. Elizabeth Warren (D-MA) and Robert Menendez (D-NJ) sent a letter to Zelle operator Early Warning Services for clarity on how the peer-to-peer (P2P) payments app handles fraud.

What’s in the letter? Warren and Menendez noted reports of Zelle fraud cases and asked whether Zelle and the banks that own the service are doing enough to mitigate the problem. Early Warning Services is owned by seven major banks, including Bank of America and JPMorgan.

Warren and Menedez gave Zelle a May 9 deadline to answer questions related to the following:

  • Zelle’s fraud prevention, mitigation, and refund procedures
  • The firm’s relationship with banks regarding fraud reimbursements
  • Whether Regulation E of the Electronic Fund Transfers Act—which outlines the regulatory framework for money transfer firms—applies to fraud cases on Zelle
  • The number and dollar value of fraud cases and refunds in the last five years and whether Zelle notified the appropriate authorities in such cases

Why it matters: Zelle has surged in popularity thanks to its fast transaction speeds (it typically delivers payments in minutes) and its direct integration with bank apps—and because it's free for consumers. Zelle had 27.9 million US users in 2018, and that figure is expected to hit 61.6 million this year, per Insider Intelligence forecasts. The P2P provider is on track to process $531.01 billion in US transaction volume in 2022, according to our forecasts.

  • But fraud has become a major issue for Zelle and other P2P payment apps like Venmo and Cash App. A common Zelle scam involves fraudsters posing as bank fraud investigators and then tricking users into funneling cash to them, per the New York Times.
  • Regulatory gray areas make it hard to determine whether Zelle or the victim’s bank is responsible for compensating defrauded customers, which has created challenges in refunding fraud victims.
  • Zelle has taken steps to mitigate its fraud issue: Earlier this month, it launched Authentify, an identity verification service. But Warren and Menedez may be looking to get to the heart of the issue and potentially implement a more robust fraud detection and mitigation procedure for Zelle and its partner banks. They could also introduce heavier regulation in the broader P2P payments space.

The big takeaway: While Zelle’s popularity is undeniable, the fraud occurring on its platform may potentially threaten future growth prospects.

Warren and Menedez’s information request could shape future US guidelines and regulations for P2P apps—like recent UK regulation that stipulates stronger payment authentication. New rules could minimize the risk of fraud on these platforms and help strengthen customer trust in P2P apps, boosting adoption and use.

"Behind the Numbers" Podcast