Should banks bear the burden of Zelle scams?

Zelle scams have been drawing a lot of attention lately. has an article in the American Banker, Inside a Zelle fraud that almost lost a Florida consumer $3,500 (behind paywall but available on Lexis); she also discusses it on the Banking with Interest podcast. The Electronic Fund Transfers Act enables consumers to shift most of the loss for unauthorized transactions to banks but what if the transfer is one that the consumer authorized because they were scammed?

One traditional approach to loss allocation rules is to put the loss on the party who can avoid it at lowest cost so that that party has an incentive to take steps to avoid the loss. Individual consumers can avoid their own losses by being extremely careful but even fairly careful consumers can be deceived, as demonstrated by Penny Crosman’s article. And individual consumers can’t protect other consumers. This is also a special problem for cognitively impaired consumers, something many consumers become as they age.

Are banks the party who can prevent the loss from occurring for the lowest cost? Maybe. For a Zelle fraud to succeed, the fraudster has to have a bank account at an institution that accepts Zelle. But the fraudster is unlikely to use that bank account after receiving a transfer from a scammed consumer there because of the risk that the consumer reported the scam to the police. So fraudsters probably open new accounts frequently and use new accounts more frequently than older ones. At least some banks already vet newly-opened bank accounts through screening companies like ChexSystems. In fact, Zelle’s owner, Early Warning, also operates one such screening company. That makes me wonder if some of the losses could be avoided by blocking Zelle transfers to new accounts to which Early Warning’s screening system doesn’t give a clean bill of health (I would expect a clean report if, for example, a longtime customer of one bank moves and so switches their account to another bank).

Now, I don’t know how expensive that would be. Maybe the cost of imposing such requirements would be prohibitive, though I doubt it. But banks get many public benefits, like federal deposit insurance. So it seems fair to exact something in return, like asking them to take steps to prevent Zelle scams from succeeding. That might deter banks from agreeing to receive payments via Zelle, but because the banks wouldn’t take a risk as to long established accounts and because customers want to be able to use Zelle, banks would probably continue to accept Zelle payments, at least as to long-established accounts. And of course, there may be other ways to prevent Zelle scams at lower cost that bankers who know more than I do could adopt. All this is to say that lawmakers should explore whether to put the loss on banks.


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