Victims of cash app scams should be reimbursed by banks, says watchdog

Banks need to take more responsibility for protecting the victims of cash app scams, says a US finance watchdog. There have been a growing number of scams involving instant cash transfer apps, like Zelle and Venmo …

Background

Usage of cash transfer apps took off big-time during the height of the pandemic, when people were reluctant to use ATMs. Usage of Zelle, for example, hit 1.8 billion transactions in 2021 – double the number in 2019.

But with increased usage has come increasing numbers of scams. One common one is a phone call which claims to be from the victim’s bank, telling them they urgently need to transfer their money out of their account after unauthorized transactions were discovered. One method used makes it appear that the victim is transferring money to their own phone number, when that is not the case.

The law at present says that the banks which own these cash apps are only responsible for transactions not authorized by the customer. That means that if someone is tricked into transferring money to a scammer, the victim has no claim against the apps or the banks which own them.

Victims of cash app scams should be reimbursed

The Wall Street Journal reports that the financial watchdog Consumer Financial Protection Bureau (CFPB) thinks that should change.

Under new guidance the bureau is preparing to release in the coming weeks, banks could face heightened requirements around certain scams that have become more prevalent on these platforms, these people said, such as when a customer is tricked into sending money to a scammer pretending to be a representative of his or her bank.

The coming guidance hasn’t been completed and could change. It appears aimed primarily at a spate of complaints related to Zelle but would likely apply to any other payments service that connects directly to a consumer’s bank account, such as Venmo.

The thinking is that if banks are at risk of having to reimburse losses, then they will put in place better protection systems to detect and block cash app scams.

That could require a bank to conduct more investigations of such transactions—and to compensate more customers for their losses.

“Reports and consumer complaints of payments scams have risen sharply, and financial fraud can be devastating for victims,” said Sam Gilford, a spokesman for the consumer bureau. “The CFPB is working to prevent further harm, including by ensuring that financial institutions are living up to their investigation and error-resolution obligations.”

Zelle parent EWS LLC – which is owned by seven large banks – says that detecting scams is already a priority.

“As a network, we are constantly adapting consumer protection measures to address the dynamic and evolving threat of fraud,” it said in a statement. “In addition to our efforts, we encourage measures that reduce the ability of fraudsters to perpetrate these scams and arm consumers with educational resources that will help them protect themselves from fraudsters.”

Banks are expected to fight the planned regulatory change, arguing that they will be forced to increase fees to cover the costs.