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BirdsEye View

 The Zelle real-time payments network is a latecomer to the world of peer-to-peer payments compared with competitors like PayPal’s Venmo or Block’s Cash App. Despite having launched eight years after Venmo and four years after Cash App, Zelle has processed more than five billion transactions worth nearly $1.5 trillion in its first five years of business.

Zelle is run by a fintech company owned by seven of our country’s largest banks: JPMorgan Chase, Bank of America, Capital One, PNC, Truist, U.S. Bank and Wells Fargo. It appears to most users as an option within their desktop or mobile banking app and processed $490 billion in volume in 2021 vs. Venmo’s $230 billion worth of transactions and Cash with just $15 billion.  This is contrary to the public image of these three networks.  At our forums nearly all attendees tell me that Venmo dominates the space, and many do not see the need for Zelle at all.  They hear about a lot of fraud and ;low usage, and conclude that Zelle isn’t worth the risk.  The facts aren’t quite as cut and dry.  Zelle clearly dominates the field, but fraud is indeed significant and growing.

Zelle’s rapid growth is attributable in large part to its distribution network. Zelle has partnered with nearly 1,700 banks and credit unions representing 619 million checking, savings and money markets accounts, or about 79% of all such accounts in the United States. Zelle appears to consumers through their mobile banking apps, which is KEY to convenience, visibility and credibility.  This unique ease of access facilitated its rapid scale despite its late entry into the space.

When the Zelle payment option appears within a bank’s mobile app, it is acceptaed as a bank-sponsored activity, and therefore safe.  The convenience is also meaningful, since it requires just a few clicks, and can be linked into a user’s contact list, thereby adding another layer of security to the transaction.

The Zelle payment initiator is then notified thorough three different channels to ensure authenticity and out-of-band authentication:  Within the app, in an email and in a text.

Also note that Zelle is currently the only PtoP FREE real-time payment option on the market. Recent Venmo enhancements allow users to send money real-time, but for a hefty $10 per transaction.

While the service is free to users, it is expensive for banks (0.45 and 0.90 cents per Zelle transaction). The high sticker tag deters some community banks and credit unions from joining the network. In an effort to circumvent Zelle, in January a group of 12 small banks launched a competing service called Chuck. That peer-to-peer payment service costs less than Zelle and supports a broader swath of services including PayPal’s Venmo.  I’m not sure this is a viable alternative to the Zelle option considering its distribution. 

Chuck’s aim is to connect these networks to offer customers the option to choose which they prefer. Unlike the existing peer-to-peer services, Chuck is an open payments network; individuals send money from their bank app and recipients can choose to accept the funds into their bank account, into Venmo or through an instant transfer via debit card. The platform is designed so that other peer-to-peer services, like Cash App, can be added later if there is demand. 

One key differentiator between Zelle and Venmo is the sociability of the platform. In Venmo, users see all of their friends' public transactions on a live payments feed which includes emojies and comment features. Zelle transactions are private and have no social media aspect to them.  For that reason, Venmo has been firmly entrenched among young people, who typically use it to jointly pay for meals and drinks.  Also, Venmo and Cash App allow users to hold funds in their platforms, while Zelle moves money between existing bank accounts. Transferring money from your Venmo or Cash App balance to your bank account can take several days, unless you pay a fee.  That’s a meaningful difference between Zelle and its alternatives - no float, no fees, real time.

Zelle’s average transaction value is typically higher than its competitors, but transaction limits are low due to major fraud issues. Venmo and Cash App have higher limits for how much users are allowed to send per month. Zelle sending limits are dependent on individual bank policies, but hover around $15,000 monthly. Venmo and Cash App users who have completed identity verification could send up to $60,000 or $30,000, respectively, per month, though transactions may be declined if they trigger security flags.

Zelle has replaced paper checks in the payments space, including rent payment and gifts as well as business transactions. Smaller, service-oriented businesses appreciate the fee-free and near-instant settlement it offers. Accepting payment over Zelle also means small businesses can avoid the Visa and Mastercard fees charged to merchants who accept payment through bank cards. 

Zelle is clearly not a perfect solution for banks, though.  This is particularly evident in the fraud incidence. In July, eight U.S. senators wrote to the Zelle owner banks calling out the company for not doing enough to combat fraud on the platform. Zelle is a bank-to-bank product which transfers funds between bank accounts within minutes. Once the transaction goes through, there are limited options for getting funds back that were sent in error or under false pretenses. This presents a prime opportunity for scammers who often impersonate bank employees. Another common scam is pretending to sell something, like concert tickets, or puppies, receiving payment through Zelle and then never sending the product. The fraction of fraudulent transactions compared to overall volume on Zelle sounds small – less than 0.09% of total volume since 2017, according to information the company has provided to the Senate. But with $490 billion sent through Zelle in 2021, that works out to as much as $440 million in scam transactions in just one year.

It is unclear whether banks may be responsible for reimbursing customers who authorize Zelle payments to scammers under the Electronic Fund Transfer Act’s regulation E. Part of the issue, the senators say, is that the integration with mobile banking apps leads consumers to believe they have the same protections against fraud they have when using bank-issued cards. The card networks which process those transactions have robust fraud protections in place which require banks to cover cardholders in case of fraud, stolen cards or chargebacks. Card network fraud protections are funded by merchant fees, if Zelle were to add similar coverage then the service might need to begin charging customers, Loosli said.

Zelle is working on improving its fraud prevention serviced, and recently introduced a prompt to consumers to double check a transaction before they authorize it. It also plans to use existing data to flag potentially fraudulent transactions.

My personal view is that Zelle has emerged victorious in the current battlefield for P-to-P transfers, and it is getting ready to achieve similar results in the P-to-B space.  Banks need to examine the opportunity cost of opting out of the service at this point, because both consumers and small businesses are increasingly using it as their instant transfer of choice.