Sen. Blumenthal Says Financial Institutions Must Take Responsibility for Zelle Fraud

Democrat charges Zelle evades any role in helping defrauded consumers

Financial institutions must assume more responsibility for helping people who are defrauded by Zelle and other peer-to-peer payment systems, Sen. Richard Blumenthal, D-Conn., chairman of the Homeland Security and Governmental Affairs Permanent Investigations Subcommittee said Tuesday.

“The banks of America have a dirty little secret,” he said, as he opened a hearing focusing on Zelle and allegations of fraud. Zelle and the financial institutions that participate in the Zelle Network contend that there is little they can do when someone is a victim of fraud.

“By the time a consumer knows that they’ve been scammed, it’s too late to do anything about it,” Blumenthal said.

Zelle, the largest peer-to-peer payment service, is owned by the nation’s largest banks but it is used by credit unions, community banks and minority depository institutions. In a letter to the subcommittee, Jim Nussle, president/CEO of America’s Credit Unions pointed out that those institutions comprise more than 95% of the financial institutions that participate in the Zelle Network.

“For credit unions that do not have the resources of larger financial institutions, Zelle levels the playing field with respect to customer payment choices,” Nussle wrote. For that reason, he does not think credit unions should have added liability for this type of fraud.

Nussle argued that consumer vulnerability to fraud “is most often the result of sophisticated social engineering; scams that exploit weaknesses in human judgment as opposed to the secure foundation of payments processing infrastructure.”

Nussle said that credit unions have warned their members about scams that use peer-to-peer services but added that credit unions have a limited capacity to absorb fraud losses. He commented that the Electronic Funds Transfer Act attempts to strike a balance between a financial institution’s responsibility to prevent fraud and an individual’s responsibility to exercise sound financial judgment.

“To effectively combat fraud while providing members with convenient and affordable payment options, credit unions must have confidence that longstanding limits on financial institution liability will not suddenly change when conduct outside the industry’s control evokes political concern,” he wrote, adding, “A financial institution does not evade responsibility when it recognizes a lawful distinction between what is authorized versus unauthorized.”