CFPB Unfairly Targets Zelle

As part of a last-gasp effort by the Biden administration to punish legal businesses it disapproves of, the Consumer Financial Protection Bureau has sued the operators of popular banking app Zelle and three of its charter banks for "allowing fraud to fester" on the app. This is another instance of the Bureau stretching the definition of its powers and is wholly unwarranted in any event.

The Bureau justifies its action by saying that, "Under the Consumer Financial Protection Act [Dodd-Frank], the CFPB has the authority to take action against institutions violating consumer financial protection laws, including engaging in unfair, deceptive, or abusive acts and practices." It is difficult to say how improper use of Zelle's platform could be regarded as meeting the legal definition of unfair, deceptive, or abusive. What the Bureau is really annoyed at is that scammers have used payment apps as a vehicle for payment of monies they have scammed out of people.

It is the scammers who are the villains here, not the app or the banks. Scammers also persuade people to write checks, but the banks that issue the checks are not responsible for the scam. The same applies to payment apps. As the Banking Policy Institute puts it, "A customer placed a down payment with a contractor for work on a home improvement project but the contractor never showed up to complete the work. The customer was clearly defrauded, but the bank is not nor should be liable."

Indeed, if the banks are fined over this then they are as much victims of the scammers as the people who make the payments. As the Zelle operators note, if the Bureau has its way it will incentivize scammers and fraudsters to make false claims against banks - "by requiring financial institutions to pay for the actions of criminals, thousands of financial institutions that provide Zelle - including many community and minority-owned banks and credit unions - will be forced to choose between offering Zelle or increasing fees for consumers to move money and pay everyday expenses." As usual, it will be small banks and their customers who pay the price for this overly aggressive enforcement action.

It is not as if the banks have done nothing to deploy security features to Zelle. Research shows that out of the four major payment apps (PayPal, Cash App, Venmo and Zelle), Zelle has the lowest share of disputed payments, including for fraud and that 9 out of 10 customers who complained were happy with the way the banks handled their disputes.

The Bureau alleges that the banks "rushed" Zelle into operation because they were concerned about competition from new entrants like the other payment apps. This is an odd way to describe the banks deploying new technology to meet consumer demand. If the banks are found liable on this score, it will have a chilling effect on financial technology innovation. Indeed, the logic behind this appears similar to that of Operation Choke Point - if fraudsters use certain industries to commit fraud, then those industries must be punished. This time, it is innovation that is choked off.

The incoming administration should drop this case and instead use a formal rulemaking to properly define "abusive," as my former colleague Daniel Press recommended back in 2019.

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