In Zelle’s national advertising campaign, the bank-run P-to-P network spotlights consumers paying a personal trainer, a babysitter and a neighbor. It sets an expectation that Zelle can be used like a credit card, and scammers have figured out how to exploit this trust.

Experts suggest that Early Warning, which operates Zelle, needs to sharpen its message defining the product's limitations, since its built-in protections make the app more like a checkbook than a credit card. On top of that, banks can take a bigger role in blocking fraud as they seek to grow Zelle as a platform.

“Financial institutions need to have real-time fraud detection systems on their end, and not just rely on controls from Zelle and Early Warning,” said Genevieve Gimbert, a partner at PwC who is head of fraud management consulting.

Mobile money fraud
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An unknown number of consumers has fallen prey to a scam reported by TechCrunch last week, detailing how scammers advertise concert tickets on Craigslist while requesting payment via Zelle. As if the consumer had mailed an envelope full of cash, once the payment is in the scammer's hands it's gone for good — and the scammer has closed the recipient bank account to further limit Early Warning's options.

Consumers who fall for the scam likely assumed funds sent via Zelle are guaranteed by their bank like any other purchase. Some banks reportedly are refunding money to consumers who complain, but it’s unlikely banks will make up for continuous losses, given the potential for engineered scams — and that’s not what Early Warning, which operates Zelle, envisions.

Zelle is positioned as a replacement for cash and checks, and in the fourth quarter of last year it moved $22 billion, helped by the support of major banks that are separately advertising Zelle on TV, in print ads, online and inside bank branches.

“With this move from physical to digital exchange, we remind consumers to only use Zelle for transacting with people they know and trust,” said Lou Anne Alexander, Early Warning’s group president of payments.

But because banks are separately promoting Zelle as an alternative to popular P-to-P services like Venmo and PayPal, consumers don’t necessarily grasp that Zelle isn’t like a typical card payment where transactions have broad protections. And it isn’t clear exactly what banks can do to reinforce that concept without confusing customers or losing their trust.

“We continue to work together with our financial institution partners to promote safe digital banking behavior, while simultaneously working to monitor for fraud on transactions taking place on the network,” Alexander said.

Zelle's participating banks are aware of the potential for scams and advise consumers to be wary about who they send money to.

"Consumers should always confirm that the person they're paying is someone they know and trust, the same way they would a wire or cashier's check," said Elizabeth Seymour, executive director of external communications at JPMorgan Chase & Co.

Bank of America said in a statement that it's committed to ensuring consumers are aware of potential scams and reminding them Zelle is for sending funds to friends, family, or people they know. Citi and U.S. Bank referred questions about Zelle scams to Early Warning, and Capital One did not reply to a query about Zelle scams by deadline.

Banks' stance on consumer due diligence may not be enough in the long term as word spreads about how scammers misuse Zelle.

“I do believe that the banks will need to get in front of the fraud issue with Zelle, even though banks should not have to police or refund consumers when they’re the victims of a P-to-P transaction gone bad,” said Sarah Grotta, director of debit and alternative products at Mercator Advisory Group.

Grotta points out that banks aren’t on the hook whenever a consumer fails to receive goods they paid for with cash or a check, but when it comes to electronic forms of payment, different expectations have evolved. Apple Pay, for example, marketed itself as a major use case for tokenization when it launched in 2014, setting an expectation that mobile payments carry the latest protections.

“The difference between P-to-P and mobile payment apps is starting to blur,” Grotta said, noting that banks will have to be very clear in their promotions and disclosures about where protections exist, and where they are not available, with P-to-P accounts.

It’s hardly surprising consumers are confused given the messages in the TV spot Zelle aired during the Super Bowl, with wording that implies transactions are “backed by the bank” and that “Zelle is for everybody,” said Richard Crone, president of Crone Consulting LLC.

The key problem is that unlike Venmo — which has been deeply rooted in social media since its inception — Zelle has the imprimatur of banks with none of the social scaffolding to buffer consumers from unwittingly transacting with strangers, Crone said.

“The fraud issues, combined with the problems associated with bank provisioning of the standalone Zelle app, have the potential to be a Tylenol tampering-level public relations crisis for Early Warning,” Crone said.

If Early Warning doesn’t make the distinctions between consumer responsibility and bank liability clearer, Zelle could also end up driving more business to PayPal and its Venmo subsidiary with its multimillion-dollar advertising campaigns that will inevitably raise awareness for P-to-P as a whole, according to Crone.

Banks will need to adjust their risk models in response to Zelle and the acceleration of payments, PwC's Gimbert warns.

“With the rollout of faster payments, it leaves new vulnerabilities for fraudsters to exploit, and Zelle is a good example of this, where we’re expecting to see more fraud,” she said.

But concern about Zelle becoming a channel for runaway fraud is probably somewhat overblown, Gimbert says.

“When Zelle launched, banks saw a tremendous amount of fraud, but they worked together with Early Warning to make changes to eliminate a lot of that, and the trajectory to keep fraud under control looks pretty good now,” she said. "Banks now need to step up their own efforts to block fraud on P-to-P services."

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