Powerless Against Financial Scams, The CFPB Scapegoats The Big Banks

Economist Gordon Tullock (1922-2014) once quipped that there was an easy way to create safer conditions on American roads: rather than install seatbelts and air bags, attach a rather sharp, driver-facing spear to the steering wheel of each automobile. Tullock’s famous quip comes to mind as the Consumer Financial Protection Bureau (CFPB) continues in its ongoing efforts to abolish financial scams that its bureaucrats apparently lack the skills to rid society of on their own.

As you’re reading this, the owners of wildly popular digital payments system Zelle (including J.P. Morgan, Bank of America, and Wells Fargo) face a lawsuit from the CFPB. The suit alleges that the financial institutions employing Zelle have caused Americans to lose hundreds of millions of dollars via scams hatched on it. Supposedly Zelle’s “shoddy safeguards” have proven a magnet for criminals who have been luring the technologically inept onto Zelle ahead of relieving them of their money.

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The CFPB’s solution is to make banks cover the losses of the customers scammed on Zelle. Which is the CFPB’s unwitting assertion that it will abolish Zelle in order to not eradicate financial scams. Such is the consequence of price controls. Always and everywhere.

With Zelle, it’s useful to point out that banks aren’t in the business of losing money. Yet that’s precisely what CFPB is asking them to do with its price control wrapped inside a rule. If banks are forced to cover the scams that take place on Zelle, they’ll quite simply cease offering Zelle. Scams erased? Not so fast.

Seemingly missed by the CFPB and its enablers in the House and Senate is that as opposed to a vehicle for banks to allow their customers to be scammed, Zelle was created as a solution to the problem of bank-account theft. Digital money transfer is much safer than checks in the mail, it’s faster, and it’s also cheaper.

Except that nothing is foolproof. Much as Zelle exists as a barrier to the theft of the banked, there’s always a way. Which is why banks have introduced all manner of prompts for Zelle users ahead of funds being transferred. With Zelle, the skilled within financial institutions can in a very real way hold the hands of those not so skilled. Yet still, mistakes happen. And they always will.

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What’s missed by the CFPB is that if it offloads the costs of human error on the very banks searching for all manner of ways to limit error, it will raise the cost of innovating away customer mistakes in the first place. Which is what the CFPB is doing with its lawsuit against the biggest banking names behind Zelle. If the cost of introducing Zelle, along with future versions of it will be too much, then efforts to protect customers will cease.

If so, the institutions still willing to be beaten up by the CFPB might consult the old wisdom of Tullock. How about putting the user of digital payments systems 100% on the hook for their errant money transfers?

If it’s too much Tullock, then that’s the point. Banks are presently going to great lengths to help their customers avoid financial scams, and they’re doing so free of the proverbial financial spear that Tullock jokingly recommended.

Good for banks, and their customers. Too bad the CFPB can’t see that its lawsuit will give bank customers the real Tullock, and in the worst way possible.