Bank of America said Zelle was ‘safe.’ But users lost thousands to fraud, lawsuit claims
Bank of America is the latest major bank to face legal challenges for its use of Zelle, a digital payment network it helped create and market to consumers.
The Charlotte-based bank is the subject of a federal class action lawsuit filed in North Carolina’s Western District this month. The complaint, filed by law firms in Charlotte and San Diego, claims the bank marketed Zelle services as easy, safe and secure in large part because it was “backed by banks.”
Instead, the lawsuit argues, Zelle comes with a high risk of fraud for consumers and little chance of being paid back by the bank if customers get scammed.
“In order to encourage and expand the use of Zelle… (Bank of America) began embedding Zelle into every customer’s online account, and aggressively advertised it to its customers as ‘safe,’ ‘secure,’ and ‘easy,’’’ the lawsuit states. “But Zelle is neither safe nor secure.”
Zelle functions similarly to money transfer services like PayPal or Venmo. In 2017, it was created by seven of the country’s largest banks, including Bank of America, through a company called Early Warning Services. Now, it’s the country’s most widely used transfer service, with more than double Venmo’s payment volumes, MarketWatch reported in October.
But in recent months, the service has faced growing criticism. Lawmakers have pressed Zelle’s leaders for answers on how they plan to deal with rising rates of fraud. Capital One and TD Bank have faced similar legal challenges regarding their use of the payment network. Both suits said the banks marketed Zelle as safe without sufficiently warning customers about fraud risks.
Bank of America on Monday declined to comment on the lawsuit it faces or its allegations.
What the lawsuit says
Because Zelle is automatically connected to a customer’s bank account, “criminals can quickly, clandestinely and irreversibly move money out of the BOA account once they gain access to it,” the lawsuit said.
The lawsuit said Zelle is different from other payment networks such as Venmo or PayPal because it transfers money directly from bank account to bank account without any entity in between. For example, when Venmo users receive funds, it’s first reflected as a balance on the app. Users then opt to transfer that balance to their bank account.
“Normally, gaining access to your online account would not result in immediate financial harm. However, with Zelle embedded, the fraudsters can immediately drain the bank account,” the lawsuit stated. “Criminals have turned to Zelle as their favorite service because transfers are immediate and unrecoverable, and a fraudster can become a Zelle user (and money transfer recipient) without revealing their true identity.”
One plaintiff older than 70, Nancy Georgion from South Carolina, claimed she received a call from someone impersonating a Bank of America employee investigating suspicious transactions. The lawsuit said fraudsters deceived Georgion into providing her account information before stealing $2,000 through Zelle transfers. Georgion never used Zelle before, the complaint said.
The lawsuit says Bank of America denied her fraud claims because an internal investigation found the transfer was not an unauthorized transaction.
Scammers sometimes don’t need passwords to hack into an account, the lawsuit said, using phone or text scams to get a verification code that allows them to complete the password reset process.
Lawyers claimed Bank of America is aware of rampant fraud on Zelle, but “does nothing, in large part because (the bank) has an enormous financial incentive to push Zelle on its customers and encourage them to use it.”
Plaintiffs seek damages equivalent to the money they lost in Zelle scams, legal fees and punitive and other damages.
It’s not the first time the bank has been sued over its marketing of Zelle. Over the summer, a suit filed in Mecklenburg County Superior Court claimed Bank of America didn’t sufficiently warn customers using the service could incur “huge amounts” in overdraft and insufficient fund fees.
Criticism from Capitol Hill
Democratic lawmakers have grown increasingly critical of Zelle in recent months — particularly Sen. Elizabeth Warren, a member of the Senate’s banking committee from Massachusetts.
In a September Senate hearing, Warren chided bank leaders for not responding to her request for data on the number of fraudulent Zelle transactions reported.
“You built the system, you profit from every transaction on the system, and you tell people that it is safe. But when someone is defrauded, you claim that’s the customer’s problem,” she told the CEOs during the hearing. “I want to know exactly how big this problem is.”
Last month, Warren released a report evaluating the data her office received. The senator said data showed Zelle fraud was “rampant” and growing. Banks aren’t refunding the “vast majority” of customers, Warren said.
On Oct. 27, Warren sent a letter to the Consumer Financial Protection Bureau urging the agency to strengthen regulation of fraudulent activity on Zelle and banks’ obligation to protect consumers from its impact.
In written testimony for September’s hearing, Bank of America CEO Brian Moynihan said fewer than 3 in 10,000 Zelle transfers at Bank of America last year resulted in customers making fraud and scam claims.
“When users do submit (fraud) claims, the bank investigates thoroughly and provides appropriate customer compensation consistent with its regulatory obligations, and in some cases beyond those obligations consistent with bank policy,” he said.
This story was originally published November 22, 2022 at 6:00 AM with the headline "Bank of America said Zelle was ‘safe.’ But users lost thousands to fraud, lawsuit claims."
