Payment service Zelle is 'rampant with fraud and theft, and few customers are getting refunded,' Elizabeth Warren warns in her latest crackdown on banking tech

• Zelle is "rampant with fraud and theft," according to a new report from Sen. Elizabeth Warren.
• The service repaid less than $3 million for over $200 million in fraud in 2021 and early 2022, she said.
• The senator urged regulators to expand their oversight and crack down on fraud through Zelle.

It turns out that Zelle is a minefield of scams, and Senator Elizabeth Warren wants users to have the same protections they get at brick-and-mortar banks. 

Users of the popular online money transfer platform are vulnerable to surging fraud, according to a report that the Massachusetts senator released on Monday. The report is based on data that four of the seven banks that run Zelle sent to Warren, the first such report of its kind. Fraud claims for this year are expected to surpass $255 million, the banks told Warren, nearly triple what they were in 2020. 

"Zelle is rampant with fraud and theft, and few customers are getting refunded — potentially violating federal laws and consumer rules," Warren said. 

The report found that banks are not repaying the vast majority of cases where customers were tricked into making fraudulent transactions over Zelle, only reimbursing 9.6% of scam claims and 11% of the cash total overall. That's less than $3 million in payments for over $200 million in fraud throughout 2021 and the first half of 2022, the banks said.

The report also revealed that Zelle only reimbursed consumers for 47% of the dollar amount of cases in which they reported unauthorized Zelle payments in 2021 and the first half of 2022.

The findings prove the Consumer Financial Protection Bureau "must move quickly to strengthen and improve rules that prevent consumers from being safe on Zelle," Warren said, adding banks must also reimburse those who had money stolen or were defrauded through the service.

"Tens of millions of consumers use Zelle without incident, with more than 99.9% of payments completed without any report of fraud or scam," Early Warning Services, LLC, the network operator of Zelle, told Insider in a statement. The statement went on to say that the platforms usage has grown from "247 million transactions in 2017 to 1.8 billion in 2021, while the proportion of fraud and scams has steadily decreased. In addition to our seven owners, we currently have more than 1700 banks and credit unions of all sizes offering Zelle in their app."

The report came after months of pressure from Warren. In April, she opened an investigation of Zelle and its owner — the seven banks that make up Early Warning Services, LLC: Bank of America, Capital One, JPMorgan Chase, PNC, Truist, U.S. Bank, and Wells Fargo. In September, four of the banks in the consortium agreed to provide information, even as others, such as JP Morgan Chase, refused to.

The release also arrives amid a new phase of oversight on new banking services. The CFPB — which Warren proposed in 2007 —  said in September that it plans to start regulating "buy now, pay later" companies like Affirm, Klarna, and Afterpay amid concerns that the business model risks rapid accumulation of debt. The service allows shoppers to take on short-term — and typically interest-free — loans on purchases. Widespread adoption of BNPL options allows today's shoppers to use it for everything from a new TV to individual clothing items. 

The BNPL sector emerged before the pandemic made landfall in the US, but the boom in online shopping and goods spending propelled the space to new heights throughout 2020. The option is most popular with younger shoppers, which poses the risk of letting Americans rack up loan balances on spending that's long been relegated to immediate payments or credit-card bills. The CFPB also noted that, since BNPL companies do not give data to credit reporting agencies, lenders could extend credit to shoppers without knowledge of potential liabilities.

The agency is due to issue guidance that treats BNPL firms in a similar manner to credit card companies, according to the September report. 

Warren's report represents the latest step in her efforts to have regulation keep up with an ever-changing financial industry. With BNPL and Zelle squarely in the CFPB's crosshairs, the newest kids on the banking-sector block could be in for a rude awakening after years of stellar growth.

"Fraud and theft on Zelle are widespread and growing, with consumers losing millions each year," the senator said. "Regulators should step in to ensure a fair and consistent process for everyone."