Dive Brief:

• New York Attorney General Letitia James filed a lawsuit Wednesday against Early Warning Services, alleging that the bank-owned payments company allowed fraud on its Zelle network for several years, costing consumers more than $1 billion in losses.
• The complaint, in New York state court, said that Zelle “has been teeming with fraudsters who have stolen staggering sums from consumers” since the banks began offering the Zelle payments system in 2017.
• “This is nothing more than a copycat of the Consumer Financial Protection Bureau lawsuit that was dismissed in March,” a spokesperson for Early Warning said in an email Wednesday. “Despite the Attorney General’s assertions, they did not conduct an investigation of Zelle.” The spokesperson also reiterated that 99.95% of transactions on Zelle occur without any fraud or scam reports.

Dive Insight:

The New York lawsuit revives litigation over an issue – fraud on Zelle and what Early Warning has done to address it – that the CFPB abandoned at the federal level in March.

In the complaint, James’ office offers a litany of consumer complaints over fraudulent activity they faced on Zelle, with redactions throughout the lawsuit as the AG spelled out how EWS and banks handled fraud. Her office alleges that the company had plans to implement safeguards, but then waited years to do so.

“EWS knew from the beginning that key features of the Zelle network made it uniquely susceptible to fraud, and yet it failed to adopt basic safeguards to address these glaring flaws or enforce any meaningful anti-fraud rules on its partner banks,” the attorney general’s office said in a press release accompanying the lawsuit.

The agency withdrew the December 2024 lawsuit against Early Warning, based in Scottsdale, Arizona, and its three largest bank owners as the Trump administration began massively shrinking the CFPB’s mission and staffing. The federal agency had alleged in the lawsuit that EWS and the three banks failed to protect users from fraud and scams and didn’t do enough to help victims recover their money.

Zelle customers at the three largest bank owners, JPMorgan Chase, Bank of America and Wells Fargo, lost a total of $870 million to fraud on the peer-to-peer network over seven years, the CFPB said in its lawsuit.

Last month, congressional Democrats led by Massachusetts Sen. Elizabeth Warren wrote to EWS’ owner banks, seeking information about how Zelle monitors and addresses fraud on the platform.

The New York AG seeks to force EWS to “maintain the basic network safeguards and any other antifraud measures that are necessary to protect consumers and limit consumer harm from fraudulent activity.” 

The lawsuit also seeks restitution for defrauded New York consumers who reported losses to EWS or its participating banks, and the disgorgement of profits gained from any fraudulent practices.