Earlier this week, bank executives expressed concerns at a Senate hearing about a proposal to expand provisions of the Electronic Funds Transfer Act. The proposal, introduced by Connecticut Senator Richard Blumenthal, aims to extend the Regulation E provisions of the 2016 law to transactions authorized by consumers after they are deceived. The executives argued that this move would not address the root causes of fraud and could instead encourage customers to exploit loopholes in the rules.

Regulation E requires banks to reimburse customers for fraudulent or unauthorized transactions, such as when hackers access a bank account and transfer funds. Blumenthal wants to extend this provision to transfers that consumers authorize after being induced by scammers.

Blumenthal, a Democrat, called for this change during a Tuesday evening hearing of the Senate Committee on Homeland Security and Governmental Affairs.

For years, lawmakers and consumer advocates have urged Zelle, a peer-to-peer payment service, to improve fraud protection and take more steps to combat scams and ensure consumers receive full reimbursements. A report released in 2022 by Senator Elizabeth Warren's office found widespread fraud on the Zelle network. Tuesday's hearing was the second Senate hearing this year involving fraud or scams on the Zelle network.

Blumenthal said that if a scammer tricks someone into transferring money under false pretenses—for example, a scammer posing as a police officer tells a consumer to send money for a relative's bail—the consumer should receive a refund.

Scammers also often build relationships with unsuspecting consumers—whether romantic or professional—and then request money through payment networks like Zelle. Zelle is a peer-to-peer payment channel operated by Early Warning Services, which is owned by banks.

Testifying on Tuesday included executives from JP Morgan Chase, Bank of America, Wells Fargo, and Early Warning Services. Adam Vancini, executive vice president and head of payments for consumer, small, and business banking at Wells Fargo, said that extending Regulation E to authorized transfers would encourage customers to game the system by falsely claiming they were scammed.

"I think we need to be thoughtful and consider unintended consequences," he said at the hearing.

A report released Tuesday by the Homeland Security Committee noted that customers of these three banks rarely received reimbursements after being scammed. The report showed that in 2020, the most recent year for which statistics were available, JP Morgan received more than 41,000 customer reports of scams but reimbursed only three transactions; Wells Fargo received more than 21,000 scam reports that year but made no reimbursements.

Executives from JP Morgan and Wells Fargo told Blumenthal that each claim is investigated individually.

Melissa Feldsher, head of payments and lending innovation and loyalty at JP Morgan, said that working with law enforcement and stopping scams before consumers transfer money is a better solution.

"The best way to protect customers from fraud and scams is to first stop criminals from carrying out their schemes," she said.

Blumenthal did not back down and continued to advocate for expanding the scope of Regulation E.

"Reimbursement is crucial," Blumenthal said. When banks are required to reimburse scam victims, "you have a financial incentive to implement stronger measures" to combat scams.

Blumenthal noted that a report released Tuesday by his office includes recommendations encouraging banks and payment networks to share information in real time with law enforcement to better combat fraud and scams.

Cameron Fowler, CEO of Early Warning Services, and the bank executives who testified on Tuesday said they are already alerting customers to potential scams, flagging suspicious transactions, and urging customers to confirm that recipients are trustworthy.

However, Blumenthal pointed out that these safeguards do little if consumers are tricked into believing a relative is in danger or if scammers convince victims they are trustworthy.

Fowler mentioned that Zelle modified its rules in June to reimburse scam victims in certain cases and said the network reimbursed in 90% of such cases. But Blumenthal noted that Zelle only considers scams that meet strict criteria, such as those involving criminals impersonating government officials or police.

Fowler also emphasized the overall integrity of the system, insisting that transferring money via Zelle is safer than paying with cash.

"99.9% of Zelle transactions receive no fraud or scam reports," he said, repeating a statement company spokespeople have previously made in response to critics like Warren.