New York’s attorney general has revived another high-profile consumer-protection case that the nation’s financial watchdog abandoned earlier this year. And like the first, this one involves big names and an eye-catching dollar figure.
Attorney General Letitia James is suing the parent company of the Zelle payment platform, alleging that it failed for years to set up anti-fraud features, which she says allowed scammers to steal more than $1 billion from users.
The lawsuit, filed on Aug. 13 in New York state court, marks the second time this year that James has dusted off claims previously made — and then dropped — by the Consumer Financial Protection Bureau, which has dismissed at least 22 pending cases since the Trump administration began its effort to gut the agency. She sued Capital One in May, accusing the bank of “cheating” depositors out of millions of dollars in interest payments by creating confusion over savings rates, after the CFPB dropped a similar lawsuit.
Senior CFPB officials say they aren’t opposed to New York taking up these cases. In fact, they welcome the states to do more of the lifting when it comes to consumer-protection issues.
“We want to rightsize this agency so it’s not this behemoth nanny state,” says a senior CFPB official. “There are lots of state regulators, there are lots of state attorneys general that should be doing this work and that are doing this work. Great. We’re not going to second-guess their choice if they want to pursue it at the state level.”
The Zelle lawsuit seeks restitution and damages for New Yorkers who lost money to fraud while using the platform between 2017 and 2023, spanning from its launch date until James says proper safety measures were implemented. The lawsuit also asks the court to require that the platform maintains necessary safeguards to protect users and limit fraud.
A Zelle spokesperson says the lawsuit misplaces the blame, arguing that the New York attorney general instead should be focused on going after the scammers and fraud networks that are targeting consumers.
“The bottom line is the lawsuit ignores the root of the problem,” the spokesperson says.
Consumer groups applauded the action, saying that states will likely need to play a larger role in protecting Americans from fraud and deceptive financial practices.
“This is a really important step,” says Adam Rust, director of financial services for the Consumer Federation of America. “Seeing a state take up the mantle for the CFPB is encouraging.”
Here’s what you should know about the lawsuit.
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What Is Zelle Accused of Doing?
The lawsuit is filed against Zelle’s parent company, Early Warning Services, which itself is owned by a group of the largest U.S. banks that includes JPMorgan Chase, Bank of America, Wells Fargo and others. Launched in 2017 to compete with peer-to-peer payment services such as Venmo and Cash App, Zelle is built into many banks’ mobile apps.
New York’s attorney general says Early Warning Services rushed Zelle to market without proper safety features in place to protect users. She says the registration process lacked the necessary verification steps, allowing scammers to set up accounts with misleading email addresses that appeared to be tied to businesses or government agencies.
For example, someone might have received a message from what appeared to be their utility company warning them that their power was at risk of being shut off unless they paid a bill by transferring money. The customer would be directed to send funds to a Zelle account with a name that closely resembled that of the utility.
When users began complaining to their banks about cases of fraud involving Zelle transfers, the lawsuit says, those reports weren’t always addressed in a timely manner, allowing the same scammers to fool multiple users before they were removed from the network.
The attorney general says Zelle proposed safety enhancements in 2019 but didn’t end up implementing them until 2023, an accusation Zelle disputes.
“The AG’s claim we only introduced consumer protections in 2023 is flat-out wrong,” says the Zelle spokesperson. “Zelle is not ‘teeming’ or ‘infiltrated’ with fraudsters. We have always had robust consumer-protection safeguards in place, with continuous, layered countermeasures that we evolve year after year to address the dynamic nature of the fraud and scam tactics perpetrated by criminals.”
The spokesperson says 99.95% of transactions on Zelle are completed with no report of fraud.
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How the Lawsuit Could Play Out
While it’s possible the case could end in a settlement, the legal fight here will likely take a long time to play out, says Eric Chaffee, a business law professor at Case Western Reserve University’s School of Law.
“In suits that involve instances where both sides have a substantial amount of money, it means that there is going to be a lot of maneuvering before you end up with a resolution ever being reached,” he says.
Chaffee says James — like most attorneys general — probably wouldn’t file the lawsuit if she didn’t feel confident in a favorable outcome.
“Usually there is some incentive to make sure that they are relatively strong because people who are in those types of positions do not want to be embarrassed by losing cases,” he says.
However, he says proving fraud in cases such as this one can often be complex.
“There are a lot of different ways that Zelle’s parent company can try to poke holes in the legal argument,” says Chaffee. “Bad things sometimes happen in life. It doesn’t mean there always should be a legal solution to them. With that said, there is concern that there was not earlier implementation of the internal controls to prevent fraud.”
Experts say Zelle will likely point out that scams don’t begin on the platform and argue that asking banks or payments platforms to reimburse customers every time they fall for a scam could ultimately encourage more fraud claims. They also say Zelle may question why New York is suing for $1 billion in losses to its residents when the CFPB lawsuit claimed consumers nationwide lost $870 million.
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Who Might Ultimately Get a Payout from NY’s Zelle Lawsuit?
New York’s attorney general is suing Zelle in New York state court, accusing it of violating New York law and seeking restitution specifically for affected New Yorkers. So any potential payout from a settlement or ruling would likely be limited to that state’s consumers.
Any New York residents who lost money to scammers through Zelle between 2017 and 2023 can still report their claims using the New York attorney general’s fraud complaint form. Those who previously reported fraud complaints through that site or through channels such as the Better Business Bureau or the CFPB would also most likely be in line for a potential payout. Zelle and its participating banks would also probably be asked to provide a list of consumers who reported being victims of fraud, experts say.
Chaffee says he expects the lawsuit to generate enough publicity that many affected consumers will hear of it and file reports if they haven’t already.
“This is going to be high profile, so it’s likely that they are going to be able to find a substantial number of people who are interested in whatever the outcome of this litigation happens to be,” he says.
Other Potential Impacts
So far, New York has led the charge of states taking on a more aggressive consumer-protection role to make up for a weakened CFPB.
“It’s likely at least some states will step up and step in in place of the CFPB to defend their residents,” says Rust. “For now, it’s not clear which ones, but it seems like that’s going to happen, as you can already see by the examples in New York.”
Experts say this scenario may end up creating a checkerboard of regulations across the U.S. in which some states — typically those controlled by Democrats — regulate financial institutions and businesses more aggressively than others. While this situation would appear to potentially benefit businesses, Chaffee says that’s not necessarily the case. It can actually lead to businesses adhering to the requirements of the most regulated states to avoid complications.
“When you have a patchwork of regulation, in many instances what the business will do is to ultimately pursue the highest level of regulation or the most strenuous level of regulation,” says Chaffee.
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New York’s $1 Billion Lawsuit Against Zelle: What You Should Know originally appeared on usnews.com
