Despite a late start, bank-owned Zelle moves more money than Venmo and the Cash app combined
Launched in 2017, The Zelle Network is a latecomer in the world of peer-to-peer payments compared to competitors like PayPal.
Zelle is run by Early Warning Services, a fintech company owned by seven of the largest banks in the United States: JPMorgan Chase
Zelle’s rapid growth is largely attributable to its extensive distribution network. The service has partnered with nearly 1,700 banks and credit unions representing 619 million checking, savings, and money market accounts, or about 79% of all such accounts in the United States. Zelle appears to consumers through their mobile banking apps, giving the service widespread visibility and credibility, which has allowed it to grow rapidly despite its late entry into the peer-to-peer payments scene.
“They leveraged the mobile banking app and so when the option appeared in your bank’s app, it was unquestioned,” said Richard Crone, CEO and founder of the company. payment Crone Consulting. “He had instant credibility and instant awareness.”
Although the service is free for users, Early Warning Services charges banks between 0.45 and 0.90 cents per Zelle transaction, according to a report of the American banker. The high sticker label deters some community banks and credit unions from joining the network. Despite its high deposit account coverage, Zelle’s 1,700 partners represent less than one-fifth of the more than 9,000 FDIC-insured banks and NCUA-insured credit unions across the country. Some recalcitrants may not want to play. In an effort to circumvent Zelle, in January a group of 12 small banks launched a competing service called Chuck. This peer-to-peer payment service costs less than Zelle and supports a wider range of services, including PayPal’s Venmo.
“We had to do something in the P2P space as far as our customers are concerned,” says Julieann Thurlow, president and chief executive of Reading Cooperative Bank, which tested Chuck before it went live. “When we looked at the data, our customers were using Venmo and when we called a focus group they basically told us, at least most of the millennials in the room who were using Venmo at the time, that even though we had Zelle, they would continue to use Venmo.
One of the main differentiators between Zelle and Venmo is the public nature of the transactions. In Venmo, users see all of their friends’ transactions on a live payments feed that includes likes and comments. Zelle transactions are private between the two parties. Venmo and Cash App allow users to hold funds on their platforms, while Zelle transfers 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.
While Zelle’s average transaction value is generally higher, Venmo and Cash App have higher limits for the number of users allowed to send per month. Zelle sending limits depend on individual banking policies, but hover around $15,000 per month. Venmo and Cash App users who have completed identity verification can send up to $60,000 or $30,000, respectively, per month, though transactions can be declined if they trigger security flags.
Chuck’s goal is to connect these networks to provide customers with the flexibility to choose the one they prefer. Unlike existing peer-to-peer services, Chuck is an open payment network; individuals send money from their banking app, and recipients can choose to accept funds in their bank account, on Venmo, or by instant transfer via debit card. The platform is designed so that other P2P services, like Cash App, can be added later if requested.
Sean Loosli, head of consumer and small business payments at Early Warning Services, says Zelle is valuable to banks because it gives them more control over the customer experience. Customers whose banks offer Zelle are more likely to use other products provided by their bank, have higher balances, or carry more of their funds with that bank, according to Loosli. “The more products you have with a bank, the more likely you are to stay with that bank and place more of your assets with that bank or credit union,” he says.
Zelle is popular for payments that have traditionally been made using paper checks, including rent payment and gifts. It offers benefits to consumers, such as increased privacy – the sender does not need to share their bank account number or routing number, which appear on paper checks – and funds transfers are complete in minutes. Payments are settled through the Automated Clearinghouse (ACH), the clearinghouse’s Real-Time Payments (RTP) network, or through card networks like Visa
A growth driver for the service (and its high volume of dollar transactions) is its growing adoption by businesses, which have traditionally relied on payment by paper checks. Zelle has become popular among small, service-oriented businesses that are drawn to the free and near-instant settlement it offers. Accepting payment through Zelle also means small businesses can avoid Visa and Mastercard fees charged to merchants who accept credit card payments. While Zelle is finding success as an alternative to checks, Thurlow notes that paper checks are the most cost-effective option from a bank’s perspective.
“If you really imagine all payments moving to Zelle and checks disappearing, then it becomes very expensive,” Thurlow said. “So you take a transaction of a few cents and translate it into something completely different, and then the current account becomes too expensive to be free.”
It hasn’t been quite smooth sailing for bank-backed Zelle. In July, eight US senators wrote to the banks behind the early warning services, calling on the company for not doing enough to combat fraud on the platform. Zelle is a bank-to-bank product that transfers funds between bank accounts in minutes. Once the transaction is completed, there are limited options to recover funds that were sent in error or under false pretences. This presents an excellent opportunity for scammers who often pose as bank employees. Another common scam involves pretending to sell something, like concert tickets, receiving payment through Zelle, and never sending the proceeds. The fraction of fraudulent transactions relative to overall volume on Zelle appears low — less than 0.09% of total volume since 2017, according to information provided by Early Warning Services to the Senate. But with $490 billion sent through Zelle in 2021, that’s up to $440 million in fraudulent transactions in just one year.
“It is imperative that the banks that created, own and offer the service do more to protect consumers from the fraud and scams that are perpetrated through the platform,” said the letter of the eight senators reads.
It is unclear whether banks may be responsible for reimbursing customers who allow Zelle payments to scammers under Regulation E of the Electronic Funds Transfer Act. Part of the problem, the senators say, is that integration with mobile banking apps leads consumers to believe they have the same fraud protections they have when using bank cards. The card networks that process these transactions have strong fraud protections that require banks to cover cardholders in the event of fraud, card theft, or chargebacks. The card network’s fraud protections are funded by merchant fees, so if Zelle were to add similar coverage, the service might have to start charging customers, Loosli said.
To combat fraud on Zelle, Early Warning Services introduced a prompt for consumers to verify a transaction before authorizing it. It also plans to use existing data to flag potentially fraudulent transactions.