Why Zelle Fraud is So Pervasive — and How to Tackle It

Officials have been cautioning the public about a scam that preys on unsuspecting victims who make electronic withdrawals from their bank accounts.

By the end of 2021, it became clear that Zelle scammers were using the popular Peer-to-Peer (P2P) money transfer service to commit bank fraud on Wells Fargo and Bank of America customers. A group of investigative reporters found that the scammers were using a technique called spoofing, which involves changing the number that appears on Caller ID to trick their targets.

Today we will study the Zelle controversy in more depth, and suggest some effective solutions.

What is the Zelle App?

Launched in June 2017 and operated by Early Warning Services, Zelle offers instant digital money transfers. The New York Times claims that the app — formerly known as clearXchange — is the most widely used money transfer service in the US, adopted by over 1,400 banks and credit unions. In fact, the Zelle name is not that well-known relative to the popularity of the service, since it is included by default in many popular banking apps.

Consumers reportedly sent close to $500 billion via the Zelle app last year. Immediate payments are a big draw with Zelle, as traditional bank transfers and credit or debit card transactions take some time to fully clear. The pace of transfers (Zelle is faster than Venmo and other rivals) has made the app an appealing target for scammers across the US. All Zelle users need is the other person’s email address or mobile number to transfer funds.

The Scam and How It Works

Using your account information (typically sourced from a data breach or phishing attack), scammers pose as your bank’s fraud department, sending you a text alleging that your account has been compromised. They then follow up with a phone call in an attempt to gain access to your account. At this point, they push targets for the two-factor authentication code that they need to extract funds.

In many account takeover cases, the victim has never even heard of Zelle, and they didn’t realize that their money could be transferred in this way.

What leaves a particularly bitter taste for consumers is the fact that some banks are apparently denying refunds for these fraudulent transfers. One of the standout Zelle fraud issues is that once the money has been transferred, there’s little the customer can do to get their funds back. That’s surprising, considering that the money transfer service is owned and operated by some of the country’s largest banks.

Incidentally, these banks (Capital One, Bank of America, JPMorgan Chase, Truist, PNC, U.S. Bank, and Wells Fargo) also make money by charging bank fees on Zelle transfers or attempted transfers. Industry experts claim that several credit unions were struck by the scam the very same month they rolled out Zelle.

Meanwhile, the Consumer Financial Protection Bureau (CFCB) has confirmed that consumers who fall victim to unauthorized transactions are entitled to Regulation E protection, which means that banks are obliged to return the stolen funds. In fact, the CFCB revealed late last year that it was running a probe into fast, person-to-person payments systems in the United States.

Industry Failings

Consumer Watchdog has warned that banks are throwing up their hands and denying responsibility due to the fact that the customer authenticated the payment. The consumer rights body says that the banking industry needs to work harder and quicker to figure out the nature of these scams, informing and updating the wider public on associated risks, and taking a more advanced policing role.

Bank of America has shifted its position on refunds, at least for some customers (confirming that it considers each case individually), following some damning high profile TV coverage exploring common Zelle issues. Journalists from KGO-TV found that the Federal Electronic Fund Transfer Act stipulates that banks and other financial institutions must reimburse consumers for fraudulent money transfers.

It has recently emerged that defrauded consumers who were unable to secure a refund from their bank (as well as those who used Zelle and were subjected to bank fees as a consequence) may be eligible to join a free class action lawsuit investigation. If you were scammed on Zelle, we suggest searching online for experienced legal experts. Many specialists will handle your case for free on contingency.

There are a few other Zelle scams doing the rounds. Some involve sales of counterfeit concert tickets, fake prizes, tech support, charity, and get-rich-quick scams, fictional pedigree dogs and other pets, and cryptocurrency. For regular users of Zelle, fraud protection is very much on the radar thanks to the widespread press coverage — and many have been exploring alternative services. However, it is clear that the banking industry is struggling to get on top of the payment fraud epidemic.

Reinventing Payment Technology

The crucial issue for banks and credit unions is that this is not merely a Zelle scam — it is an industry-wide payments technology issue that encompasses apps like PayPal, Cash App, Venmo, prepaid cards, and any other form factor that enables cybercriminals to facilitate funds movement from an unsuspecting target. The rules are vaguely termed and it could take regulators many years to properly address the details and protect their customers.

The CFCB has urged banks to reimburse funds in cases where the victim’s phone is stolen. However, the body hasn’t fully established who is responsible in fraud cases where the customer is involved in the transaction by physically pushing the button.

What is needed is a completely new, trust-scoring approach to fraud prevention — and the latest blockchain innovations make that possible.

Smart Contract Protocols

LeisurePay’s own smart contract technologies help vendors square up to the fraud problem. Using our decentralized smart contract protocol (built using Binance Smart Chain), LeisurePay allows customers to log into a portal to apply for a refund request or question a recent charge. They are given an ID, enabling a trust scoring system. If fraud takes place at an alarmingly high level, consumers receive a correspondingly lower score.

In our open Dispute Resolution Center, the consumer has a 20% vote weighting, the merchant 20%, and the bank 60%. The bank’s vote is decided by six validators, each with 10% of the allotted weight. These validators are selected from a qualified and experienced roster of claims assessors, and they take a small fee from each case they take on.

Blockchain’s Upcoming Role in Fighting Fraud

Industry experts expect blockchain technology to help greatly with fraud detection, partly because it enables the sharing of information in real-time. In addition, all participants in a blockchain have visibility over each transaction, whether genuine or circumspect.

Blockchain offers an un-editable record of transactions, complete with end-to-end encryption. It also addresses privacy concerns in a more convincing way than traditional computer systems — by anonymizing data and demanding permissions to limit access.

That’s particularly vital when it comes to addressing payment fraud; the FBI has emphasized the relative anonymity of P2P payment apps as a driver in their surging popularity among cyber criminals over the last year or so.

Blockchain solutions are unlikely to be the silver bullet for fraud, but they should help to greatly reduce it — as well as play an important role in safeguarding personal data online, the theft of which is a key to most instances of payments fraud. We also expect networks to become more scalable and interoperable in the near future.

Like the Internet of the early-1990s, it’s early days for blockchain development. Popular services like PayPal, Apple Pay, and Stripe took many years to achieve popularity and mainstream adoption, and the same trend applies here. Researchers have found that a quarter of Americans are still unsure what blockchain technology is or how it works.

Nevertheless, the financial services industry clearly believes in blockchain’s capacity to build a more robust financial system — and it is willing to invest a considerable amount of time and money working towards that goal.

We welcome you to contact LeisurePay with any questions you have about blockchain, our own smart contract protocol, or other fraud prevention solutions.

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