It's never been easier to send money to someone without having to write a check or forking over cash. Mobile payment apps have exploded in popularity in recent years but as with any new technology, convenience comes with a price.
Venmo, the mobile payment service owned by PayPal, is especially common among millennials. But some users complain about how funds transferred through the app don't go directly from bank account to bank account. Instead, they sit in Venmo's third-party digital wallet—which is not insured by the FDIC—and users must manually transfer the funds into their bank accounts, which can take up to three business days.
(The Federal Trade Commission actually filed a complaint against PayPal in 2016; the organization alleged that Venmo did not provide adequate disclosures indicating that transfers to external bank accounts were subject to review and could be frozen. The FTC and PayPal reached a settlement regarding the complaint on Tuesday.)
"We've taken steps to significantly strengthen our privacy and data security practices. The company will continue to invest heavily in programs designed to create better user understanding and to enhance privacy," PayPal said in a statement.
Enter Zelle, a person-to-person mobile payments platform developed by more than 30 major American banks. The service offers a standalone app that users can download to their smartphones, but it's also integrated within the mobile banking apps of major participating banks, including Bank of America, Chase, Citi and Wells Fargo. Many consumers who already have their banks' mobile apps can start using Zelle right away. Zelle reports it was used to transfer $75 million in 2017.
How Zelle Works
Unlike Venmo, money transferred using Zelle moves directly from one bank account to another. Most banking transfers between accounts require account numbers to initiate transactions, and these transactions can take up to several business days. Zelle eliminates this need, allowing users to transfer funds from one checking account to another in a matter of minutes.
To initiate a transfer, you simply need the email address or phone number of the person you're sending money to. Zelle sends the recipient a text or email indicating there's a payment waiting for them, along with a link to accept it. If the recipient's bank is a participating partner, the recipient simply needs to register for the service through their bank's website or mobile app with an email address or phone number.
Once registered, the recipient can accept the payment; it is typically transferred into the recipient's account within a matter of minutes (first-time users may have to wait up to three days). If the recipient's bank is not a participating member, they can still receive the funds by downloading the Zelle mobile app, register with an email or phone number, and enter a debit card to receive the funds.
Potential Drawbacks of Zelle
Zelle is relatively easy to navigate, though some banks offer better mobile app integration than others. The company also touts security, because the idea is that your bank is already protecting your personal financial data. Because the funds never sit in a third-party location, your money is always insured.
However, Zelle's quickness in transferring funds also makes it a prime target for criminals, some experts warn.
"If you are scammed out of Zelle-bucks, they're gone. If you buy something online and send the money via Zelle, and the thing never arrives, you are screwed," writes Bob Sullivan, an Ask Experian contributor, author, and consumer advocate. "No consumer-friendly Reg E to fall back on. No dispute process. Not even any eBay-like resolution system. The money is just vaporware."
Indeed, Zelle does not have the safety features PayPal offers, including protection against being charged for something that consumers didn't purchase, or for not receiving an item that they paid for.
That's what makes Zelle attractive to scammers. Say you want to buy something online, and the seller requests payment through Zelle. The buyer can transfer money through the service within minutes—and the seller can simply accept the funds, pull up stakes by shutting down their bank account and simply disappear, leaving the buyer out their money.
TechCrunch highlights numerous instances in which such scams have occurred. Zelle offers no recourse, other than suggesting that users only transfer money to people they personally know. You can work with your individual bank if you're using Zelle through their website or app, but the process to recover money may be lengthy similar to if you're the victim of check fraud.
"With this move from physical to digital exchange, we remind consumers to only use Zelle for transacting with people they know and trust," said Lou Anne Alexander, president of the payments group at Early Warning, the company behind Zelle. "We continue to work together with our financial institution partners to promote safe digital banking behavior, while simultaneously working to monitor for fraud on transactions taking place on the network."
A spokesperson from Chase, one of the banks that partners with Zelle, added that "consumers should always confirm that the person they're paying is someone they know and trust, the same way they would a wire or cashier's check."
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