When It Comes to Payment Platforms, Who Should Be Left Holding the Bag?

Regardless of the size of your credit union, the fact that “Venmo” has already become a verb – “I will Venmo you the money” – is a sure sign that your members expect this service as part of their basic banking services. This is why one of the top 10 issues that yours truly predicted credit unions would have to confront this year was figuring out their legal obligations in relation to third-party payment platforms such as Zelle and Venmo. Unfortunately, the erstwhile Electronic Funds Transfer Act and its accompanying Regulation E has been outpaced by the technology. The resulting confusion is costing credit unions money for which they should not be responsible (by the way, this prediction was slightly better than my prediction of a San Francisco 49er/Cincinnati Bengal Superbowl).

A recent decision involving Navy Federal Credit Union ($156.6 billion, Vienna, Va.) is one of the first to provide some much-needed guidance in this area. See Wilkins v. Navy Fed Credit Union, No. 22-2916 (SDW)(ESK), 2023 BL 15815 (D.N.J. Jan. 18, 2023), Court Opinion. Navy Federal had a retired member who decided she was going to keep up with the times by signing up with Venmo. To use this and similar services, you provide a third-party with access to your debit card and, in return, the third-party will facilitate transfers out of your debit card by using an email request. This member received a phone call from her local New Jersey power company, warning her that she would lose her power if she did not make immediate payment. At their request, she immediately Venmoed funds to the utility.

Unfortunately, the phone calls were a con. During the pandemic, New Jersey power companies were not threatening to cut off customers. The member contacted her credit union, explained the situation and stated that she wanted her money back. The credit union explained that she is not entitled to be reimbursed for the funds. The member ultimately brought a class action lawsuit against the credit union, arguing that it was violating the Electronic Funds Transfer Act by not reimbursing her for the funds, and has committed a deceptive act by failing to provide her notice that she has less legal protection when she uses Venmo than if she were simply using her debit card.

Who’s right and who’s wrong? This was the question recently decided by a federal court in New Jersey, and the decision was a firm victory for financial institutions. In a nutshell, the court ruled that there was nothing unauthorized about the transaction, which led to this lawsuit. The member admitted that she knowingly authorized the use of Venmo. In making this ruling, the court underscored an important concept that credit unions should not lose sight of. Regulation E makes financial institutions presumptively responsible for the unauthorized use of electronic access devices. However, simply because an access device is used to facilitate fraud, it doesn’t mean the transaction was unauthorized, it means that the member made a mistake.

While the decision was a potentially important one, the ultimate landscape of this area of the law is continuing to evolve. There are other lawsuits still pending, and this case is of limited precedential value since it is “unpublished.” This is a somewhat antiquated concept, dating back to the dark ages of 25 years ago when the only way lawyers could access a case was for it to be read in one of those voluminous volumes of cases that are now gathering dust in law libraries everywhere.

More importantly, the courts are not the only venue seeking to figure out who should be on the hook for fraudulent activity involving payment platforms. Zelle is reportedly developing its own regulations in this area, which will delineate through contracts the steps that participating financial institutions will have to take when dealing with claims of fraud. In addition, the CFPB has issued a series of Q&As delineating its interpretation of responsibilities in this area.

All this is taking place as more and more of your members continue to transfer more and more of their money over their cell phones. According to the American Banker, total Zelle transactions during the quarter that ended June 30 rose 29%, to $155 billion, from a year earlier. You would be well-advised to keep a close eye on this area of the law and to review your account agreements and disclosures to maximize the protections afforded to you and your members.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.