Zelle was sued on Wednesday by New York Attorney General Letitia James, who said the electronic payment platform's refusal to adopt critical safety features enabled fraudsters to steal more than $1 billion from consumers.

The lawsuit in a New York state court in Manhattan followed the U.S. Consumer Financial Protection Bureau's decision in March to drop a similar case.

That agency has ended most enforcement activity following U.S. President Donald Trump's return to the White House.

Zelle was launched in 2017, and competes with apps such as PayPal's Venmo and Block's Cash App.

Its parent, Early Warning Services, is owned by seven large U.S. banks: Bank of America, Capital One, JPMorgan Chase, PNC, Truist, US Bank and Wells Fargo.

James said Zelle's parent and the banks knew for years that the platform was vulnerable to fraudsters but resisted basic safeguards, with the banks sometimes ignoring customer complaints while Zelle let fraudsters stay on the platform.

The result was "rampant" fraud that Zelle sometimes refused to address even after it occurred, despite its assurances it was a safe alternative to cash and checks and "backed by the banks, so you know it's secure," the complaint said.

In a statement, Zelle said scams start when criminals trick people into sending money, rather than on the platform itself, and holding it liable could lead to higher fees for consumers.

Zelle also said more than 99.95% of transactions it handles are completed without reported fraud, leading the industry.

"This lawsuit is a political stunt to generate press, not progress," Zelle said. "The Attorney General should focus on the hard facts, stopping criminal activity and adherence to the law, not overreach and meritless claims."

Early Warning Services is based in Scottsdale, Arizona. The seven banks were not named as defendants.

PUPPY, UTILITY BILL SCAMS

James said typical scams involved hacking into users' accounts and making unauthorised transfers, convincing users to send money for nonexistent goods and services, and impersonating banks, government offices and utilities.

According to the complaint, one victim was told his electricity would be shut off unless he paid Con Edison $1,477 via Zelle to an account named "Coned Billing."

Another victim said Chase and Zelle wouldn't help him after he sent $2,600 in two instalments via Zelle to buy a puppy, and realised he had been scammed when the purported seller demanded more money.

James said it wasn't until 2023, after the CFPB and several members of Congress began probes, that Zelle adopted "basic" safeguards it had proposed four years earlier.

While reported fraud losses plummeted, the safeguards were "too little too late" for consumers who had lost money, and despite those safeguards, Zelle still facilitates "substantial fraudulent activity," the complaint said.

"No one should be left to fend for themselves after falling victim to a scam," James said in a statement.

The lawsuit seeks to require Zelle to beef up anti-fraud protections and pay restitution and damages to defrauded New Yorkers.

James sued Capital One in May for allegedly cheating savings depositors out of millions of dollars in interest, and in June, settled claims against MoneyGram over remittance transfer lapses. The CFPB abandoned similar cases earlier in the year.