New York Attorney General Sues Zelle Over Consumer Fraud Claims

New York Attorney General Letitia James has filed a lawsuit against the electronic payment platform Zelle, citing significant security lapses that have allegedly led to over $1 billion in consumer fraud. The lawsuit, submitted in a Manhattan state court on September 27, 2023, comes in the wake of the U.S. Consumer Financial Protection Bureau’s (CFPB) decision to discontinue a similar case earlier this year.

Zelle, launched in 2017, competes with popular apps like PayPal’s Venmo and Block’s Cash App. It is operated by Early Warning Services, a company owned by seven major U.S. banks, including Bank of America, JPMorgan Chase, and Wells Fargo. According to James, the banks and Early Warning Services have been aware of Zelle’s vulnerability to fraud for years but failed to implement essential safety measures. The lawsuit accuses them of neglecting consumer complaints while allowing fraudsters to exploit the platform.

Fraudulent activities on Zelle include hacking into user accounts, unauthorized fund transfers, and scams involving impersonation of banks and utility companies. One notable case involved a victim who was threatened with an electricity shut-off unless he paid Con Edison $1,477 via Zelle to an account labeled “Coned Billing.” James described the situation as “rampant” fraud, suggesting a serious lack of oversight from the platform and its banking partners.

The lawsuit seeks to compel Zelle to enhance its anti-fraud protections and provide restitution to affected consumers. In a statement, James emphasized, “No one should be left to fend for themselves after falling victim to a scam.”

As of now, Early Warning Services has not issued a comment regarding the lawsuit, and the banks involved have not been named as defendants in this case. James previously took action against Capital One in May for allegedly misleading savings depositors and settled claims against MoneyGram over remittance transfer issues in June.

The CFPB’s withdrawal of similar enforcement actions earlier this year has raised questions about regulatory commitment to consumer protection in the digital payment landscape. As digital transactions continue to grow in popularity, the outcome of this lawsuit could set a significant precedent for accountability and security within the industry.