The Scottsdale-based operator of Zelle is being sued by the federal government against banks

Zelle’s Scottsdale-based operator and three of its co-owner banks are being sued by the federal government for failing to protect consumers from fraud.

The Consumer Financial Protection Bureau on Friday sued Early Warning Services, which operates the Zelle peer-to-peer money transfer network. Also being sued are Bank of America, JPMorgan Chase and Wells Fargo, three of the seven banks that co-own Early Warning Services.

The lawsuit alleges that customers of the three banks lost more than $870 million in the seven years the network was in operation because the banks rushed the network to market to compete with similar services like Venmo and Cash App to compete without effective security measures in place.

“The country’s largest banks felt threatened by competing payment apps and rushed to exclude Zelle,” CFPB Director Rohit Chopra said in a statement. “By failing to provide adequate security, Zelle became a goldmine for fraudsters, while victims were often left to fend for themselves.”

The lawsuit alleges that Zelle had limited identity verification methods that allowed fraudsters and other criminals to quickly create accounts, and that consumer accounts could be linked to fraudster accounts, allowing fraudsters to receive money intended for consumers. It also alleges that Early Warning Services and the banks named in the lawsuit were too slow to restrict and prosecute criminals who created multiple accounts at different banks, allowing them to repeatedly commit fraud. The defendant banks also ignored complaints that could have prevented further fraud and failed to properly investigate complaints, the lawsuit says.

The lawsuit alleges that significant problems, including evidence of fraud, became apparent shortly after Zelle was launched, but the defendants failed to take meaningful action for years.

According to the lawsuit, Zelle has more than 143 million users, and in the first half of 2024, users transferred $481 billion through the platform.

Zelle issued a statement claiming that the Consumer Financial Protection Bureau’s lawsuit undermines Zelle, empowers criminals and harms small businesses and community banks.

“The CFPB’s attacks on Zelle are legally and factually flawed, and the timing of this lawsuit appears to be driven by political factors unrelated to Zelle,” Zelle spokeswoman Jane Khodos said in a statement. “Zelle is a leader in the fight against fraud and scams and has industry-leading reimbursement policies that go beyond the law. The CFPB’s misguided attacks will embolden criminals, cost consumers more fees, stifle small businesses, and make it harder for thousands of community banks and credit unions to compete. Zelle is relied upon by 143 million registered American consumers and small businesses, and we are fully prepared to defend this baseless lawsuit to ensure their service does not suffer.”

In their statement, Zelle officials said transaction volume increased by 27% in 2023 and reports of scams and scams decreased by almost 50%, meaning 99.95% of payments were sent without reports of scams or scams became.

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This article originally appeared on Arizona Republic: Scottsdale-based operator of Zelle is being sued. Here’s what you should know