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U.S. banks are failing to reimburse for instant payment fraud

A U.S. senator’s investigation reveals that major U.S. banks rarely reimburse instant payment service fraud

Antifraud action - November 04, 2022

Under U.S. law, if an online bank account is hijacked, the financial institution must reverse any unauthorized transactions, and therefore reimburse the victim. The reality is that the situation is far more complex.

Senator Elizabeth Warren has just released an investigative report on fraud at Zelle, a peer-to-peer digital payment service used by many U.S. financial institutions.

The report makes a clear distinction between cases where hackers take control of the account and make transfers themselves (fraud) and cases where they trick a user into making a payment to an account that belongs to them (scam).

In the latter case, there is no law requiring the bank to pay the money back. However, based on data from three banks, Elizabeth Warren notes that of the “35,848 scam cases, involving more than $25.9 million in payments,” the banks reimbursed customers in “3,473 of the cases (representing nearly 10 percent of the scam claims) and paid out only $2.9 million.”

“The fact that banks are paying back victims of authorized payment scams at all is something worth noting,” points out Trace Fooshee, strategic advisor in the fight against money laundering at Aite-Novarica.

“This is money they are paying out of their own pockets, almost entirely as a show of goodwill. One could argue that paying back all the victims would be a good strategy, especially in the current climate, but there is no requirement for the banks to do so, until Congress changes the law,” adds the analyst.

In the event of a hacker takeover of Zelle, however, recent guidance from the Consumer Financial Protection Bureau (CPFB) makes it clear that banks should provide full refunds to consumers.

However, according to the senator’s report, “the four banks that provided complete data sets reported that they reimbursed only 47 percent of the dollar amount of fraud claims.”

“Many banks have reported that they are still not meeting reimbursement standards. As a result, I imagine the CFPB will come down hard on them with fines and we will see a change in policy,” Trace Fooshee hopes.

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