- Retail banks have struggled for years to compete with digital payment rivals like Venmo and PayPal
- Recently, numerous banks have joined a shared industry platform to offer instant mobile payments at scale
- The new platform is attracting customers of all ages
As recently as a few years ago, when retail banking customers wanted to send a payment to a friend or a vendor, typical options were very 20th century. They could walk into a branch and request a wire transfer, which might take a week or longer to clear. They could also enroll in a free online bill-payment service, which often just resulted in banks issuing snail-mail checks to payees.
Or, they could just do what more than 90 million people do today: skip the bank and use Venmo, Square, PayPal, or other mobile payment apps, which avoid the headaches of conventional bank transactions and allow users to send and receive person-to-person (P2P) payments in seconds.
Surprisingly, the story didn’t end there. Big banks today are winning back many of those old payment customers and plenty of new ones. Zelle, a jointly owned digital payment network for banks, has been so successful since its launch in 2017 that bank-based digital payments are beating their mobile-app rivals in some key metrics.
The reality is that moving money is easy. The hard part [for banks] is making sure the money is going from the right place to the right place in the right amount. That’s what puts pressure on banking CIOs.
Although Venmo generates more total transactions, Zelle transfers almost double the total volume of money. During the second quarter of 2019 (the most recent period for which there are comparable stats) Zelle moved $44 billion in P2P payments, compared to just $24 billion for Venmo.
Nearly a decade in the making, Zelle allows banks to offer the same kind of instant, elegant customer experience on the front end as their mobile rivals, while masking the compliance and security requirements they must deal with behind the scenes. Another impressive result: Zelle appeals to customers of all ages, not just mobile-savvy younger ones. Of Bank of America’s nine million current Zelle users, a third are Gen Xers, Boomers, and seniors.
“The reality is that moving money is easy,” says Ron Shelvin, director of research at Cornerstone Advisors, a consulting firm for banks and credit unions. “The hard part [for banks] is making sure the money is going from the right place to the right place in the right amount. That’s what puts pressure on banking CIOs.
Taking on the disruptors
To be clear, banks didn’t just sit on their hands while PayPal, Venmo, and others walked away with the digital payments business—a market expected to reach $132.5 billion globally by 2025, according to Grand View Research. “P2P transactions have actually been available through financial institutions for over 10 years,” says Sarah Grotta, director of debit advisory service at Mercator Advisory Group.
Grotta is referring to the Automated Clearing House (ACH), originally developed in the 1970s to allow banks to move payments between institutions without having to process checks. Banks later adapted the ACH for first-generation online bill payment services. While those programs helped cut overhead costs, they didn’t move money any faster. Banks also tried launching their own money-transfer apps after Venmo’s debut in 2009, but the lack of common standards for the sector handicapped growth.
In 2011, Bank of America, JPMorgan Chase, and Wells Fargo invested in an online payment offering called clearXchange. When additional backers came on board (including Capital One, PNC, BB&T, and US Bank) the founders broadened the vision. They formed a bank-owned consortium, called Early Warning Services (EWS), and acquired clearXchange. In 2017 they launched a more scalable, mobile-first platform called Zelle.
Setup for any Zelle user takes just a few seconds on participating bank apps. To send money, users need only a payee’s email or phone number. That’s no small feat, considering that banks process P2P payments differently than mobile apps. Zelle moves money directly between linked bank accounts, whereas Venmo users fund and manage a separate account with a linked bank account, credit or debit card.
On the back end, Zelle handles two critical workflows to ensure accuracy and security. First, it transmits messages between banks to fulfill payment requests, which banks then settle through well-known, FDIC-compliant vendors such as Fiserv and Jack Henry & Associates. “The big core processors take care of process changes and integrations to make it easy for the banks,” says Grotta.
EWS algorithms also scan transaction data as part of an authentication process. According to EWS, Zelle tracks 14 points of risk for each transaction, and hundreds of additional points of authentication—including type of device used by customer, transaction frequency and amount, and identity of payee.
Payment payoffs and risks
The key payoffs of Zelle for banks, according to EWS, are new revenue and cross-selling opportunities, reduced costs of cash and check management services, and new customer acquisition. As Shelvin notes, however, the overhead costs of Zelle are high. “The challenge for banks is one of convenience,” he says. “If they are the one not offering this convenience, it’s an attrition risk.”
For the moment, Zelle is offsetting those risks by expanding beyond the P2P payment space. Community banks, for example, are starting to offer Zelle to small business customers. “Faster payments are the way of the industry,” says Jenny Moss, senior VP of Texas-based Third Coast Bank. “To be able to provide that to your customer base will become the baseline of whether you’re in or out of business.”