Letitia James is once again ramping up the lawfare machine from her perch as New York Attorney General. This time, rather than pursuing presidential candidates or thwarting DOGE cuts to the bureaucracy, she’s directing legal firepower at fraudsters using peer-to-peer finance apps, specifically Zelle.
Oddly, it’s not the well-documented networks of scammers and fraudsters using finance apps to lure unsuspecting New Yorkers into financial oblivion that are getting the bulk of James’ ire, but bankers. In a lawsuit filed last week, James is suing the banking consortium that owns Zelle—made up of Bank of America, Capital One, JPMorgan Chase, and others, for failing to catch more instances of consumer fraud.
While every New Yorker would love to take on the big banks in court, such a lawsuit does nothing to protect or even defend consumers against fraud, and it may ultimately harm them.
By mandating more restrictions and guardrails on how Zelle and other payment apps scrutinize payments, AG James will effectively force the tech app to raise fees, impose transaction limits, and generally erode the customer experience used by countless Americans. The bulk of punishment will befall the financial rails rather than the scammers themselves.
As any banking customer knows, scrutiny of payments is already quite high. Verification and authentication requests, security protocols, and extensive fraud monitoring set a high barrier for customers sending their own money in transactions ranging from pricey home repairs to inexpensive visits to the farmers' market.
The more complex the process, the more consumers will just forgo purchases they’d planned to make.
Due to federal regulations such as the Bank Secrecy Act, institutions are required to collect, log, and verify data on all parties involved in transactions exceeding certain amounts, thereby flagging suspicious activity in a national database.
In 2024, 27.5 million of these reports were filed with the Financial Crimes Enforcement Network (FinCEN), although fewer than 15 percent merited further review by investigators. Compliance with financial crime regulations already costs institutions nearly $61 billion in the US and Canada, in addition to the billions they spend on anti-fraud technology.
While existing rules already impose plenty of costs and compliance on these kinds of financial services, James’ lawsuit seeks to ramp that up even more.
With increased compliance and investment in addressing anti-money laundering and fraud provisions, banks and financial institutions will have to “derisk” or “debank” clients who trigger more red flags on their accounts.
In December of last year, the U.S. House Weaponization Subcommittee detailed the extent of the abuse of power by financial regulators who put pressure on institutions to debank conservatives, including President Trump. More scrutiny will only lead to more debanking of completely innocent Americans.
None of this is to excuse the real and costly fraudulent activity that takes place on these peer-to-peer finance apps.
Individual scammers and more sophisticated criminal networks exploit data breaches, hacks, and social engineering to deceive victims into sending money with little recourse.
There are “pig butchering” scams that take place over days and weeks, swindling investors and hopeful romantics alike out of their cash. Criminal actors impersonate bank employees or family members and can score big. These are simple but sometimes elaborate scams often perpetuated from abroad.
New York AG James is correct to highlight these examples in her legal complaint, but no institution or payment app will ever be able to completely get rid of all fraudster schemes, at least not if they want workable products that consumers actually like.
Rather than subjecting innovative platforms we all use to yet more lawfare that will only make our apps worse, the state should orient its resources toward more consumer education and penalties for real criminals. Fraud and scams are already illegal, and state and local agencies have the means and the budgets to catch them. They should get back to it and hit offenders hard.
If New York targeted real criminals again, rather than just companies offering useful services to consumers, there would at least be a chance of protecting the most vulnerable from online criminal actors.
