One regulation E, two very different regimes

The U.S. is often maligned as being customer-hostile compared to other comparable nations, particularly those in Europe. One striking counterexample is that the government, by regulation, outsources to the financial industry an effective, virtually comprehensive, and extremely costly consumer protection apparatus covering a huge swath of the economy. It does this by strictly regulating the usage of what were once called “electronic” payment methods, which you now just call “payment” methods, in Regulation E.

Reg E is not uniformly loved in the financial industry. In particular, there has been a concerted effort by banks to renegotiate the terms of it with respect to Zelle in particular. This is principally because Zelle has been anomalously expensive, as Reg E embeds a strong, intentionally bank-funded anti-fraud regime, but Zelle does not monetize sufficiently to pay for it.

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[...] Congress decided that unsophisticated Americans might be conned into using these newfangled electronic devices in ways that might cost them money, and this was unacceptable. Fraudulent use of an electronic fund transfer mechanism was considered an error as grave as the financial institution simply making up transactions. It had the same remedy: the financial institution corrects their bug at their cost.

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Reg E provided for two caps on consumer liability for unauthorized electronic fund transfer: $50 in the case of timely notice to the financial institution, as sort of a deductible (Congress didn’t want to encourage moral hazard), and $500 for those customers who didn’t organize themselves sufficiently. Above those thresholds, it was the bank’s problem.

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In this privately-administered court system, the bank is the prosecutor, the defendant, and the judge simultaneously, and the default judgment is “guilty.” It can exonerate itself only by, at its own expense and peril, producing a written record of the evidence examined. This procedural hurdle is designed to simplify review by the United States’ actual legal system, regulators, and consumer advocates.

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Having done informal consumer advocacy for people with banking and debt issues for a few years, I cannot overstate the degree to which this prong of Reg E is a gift to consumer advocates. Many consumers are not impressively detail-oriented, and Reg E allows an advocate to conscript a financial institution’s Operations department to backfill the customer’s files about a transaction they do not have contemporaneous records of. In the case that the Operations department itself isn’t organized, great, at least from my perspective. Reg E says the bank just ate the loss. And indeed, several times over the years, the prototypical grandmother in Kansas received a letter from a bank vice president of consumer lending explaining that the bank was in receipt of her Reg E complaint, had credited her checking account, and considered the matter closed. It felt like a magic spell to me at the time.

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There are on the order of 5 million criminal cases in the formal U.S. legal system every year. There are more than 100 million complaints to banks, some of them alleging a simple disagreement (undercooked eggs) and very many alleging crime (fraud). It costs banks billions of dollars to adjudicate them.

The typical physical form of an adjudication is not a weeks-long trial with multiple highly-educated representatives debating in front of a more-senior finder of fact. It is a CSR clicking a button on their web app’s interface after 3 minutes of consideration, and then entire evidentiary record often fits in a tweet.

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Zelle processes enormous volumes. It crowed recently that it did $600 billion in volume in the first half of 2025. Zelle is much larger than the upstarts like Venmo (about $250 billion in annual volume) and Cash App (about $300 billion in customer inflows annually). This is not nearly in the same league as card payments (~$10 trillion annually) or ACH transfers (almost $100 trillion annually), but it is quite considerable.

All of it is essentially free to the transacting customers, unlike credit cards, which are extremely well-monetized. And there is the rub.

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So, in sum and in scaled practice at call centers, the bank wants to quickly get customers to admit their fingers were on their phone when defrauded. If so, no reimbursement.

This rationale is new and is against our standard practice, for decades. If you are defrauded via a skimming device attached to an ATM, the bank is absolutely liable, and will almost always come to the correct conclusion immediately. It would be absurdly cynical to say that you intended to transact with the skimming device and demonstrated your assent by physically dipping your card past it.

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Having for the moment renegotiated their Reg E obligations by asserting they don’t exist, and mostly getting away with it, some banks might attempt to feel their oats a bit and assert that customers bear fraud risks more generally.

For example, in my hometown of Chicago, there has been a recent spate of tap-to-pay donation fraud. The fraudster gets a processing account, in their own name or that of a confederate/dupe, to collect donations for a local charitable cause. (This is not in itself improper; the financial industry understands that the parent in charge of a church bake sale will not necessarily be able to show paperwork to that effect before the cookies go stale.) Bad actors purporting to be informal charities accost Chicagoans on the street and ask for a donation via tap-to-pay, but the actual charged donation was absurdly larger than what the donor expected to donate; $4,000 versus $10, for example. The bad actor then exits the scene quickly.

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But Reg E doesn’t care about the safety of city streets, in Chicago or anywhere else. It assumes that payment instruments will continue to be used in an imperfect world. This case has a very clear designed outcome: customer calls bank, bank credits customer $4,000 because the customer was defrauded and therefore the “charity” lacked actual authority for the charge, bank pulls $4,000 from credit card processor, credit card processor attempts to pull $4,000 from the “charity”, card processor fails in doing so, card processor chalks it up to tuition to improve its fraud models in the future.

Except at least some banks, per the Chicago Tribune’s reporting, have adopted specious rationales to deny these claims. Some victims surrender physical control of their device, and banks argue that that means they authorized the transaction. Some banks asserted the manufactured-out-of-their-hindquarters rationale that Reg E only triggers when there is a physical receipt. (This inverts the Act’s responsibility graph, where banks were required to provide physical hardcopy receipts to avoid an accountability sink swallowing customer funds.)

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With a limited number of carveouts (e.g. wire transfers), Reg E is intentionally drafted to be future-proof against changes in how Americans transact. This is why, when banks argue that some new payments rail is exempt because it is “different,” the correct legal response is usually some variation of: doesn’t matter—that’s Reg E.