Banks have been slow to join the P2P (person-to-person) payments party, and while they lagged behind, PayPal’s mobile payment app, VenmoTM, quickly took over the P2P market.
Now banks have finally gotten into the game with their new, collaborative P2P fintech innovation, ZelleTM. Zelle was created by Early Warning Systems, LLC, a consortium of seven top banks that includes JP Morgan Chase, Bank of America and Capital One, among others. Zelle can be used as a standalone app or through one of the 30 banks that offer it as part of their mobile banking app. Among other benefits — such as the potential opportunity to cross-sell — banks are hoping to save on the costs of check and cash processing by capturing some of the rapidly growing P2P market.
First, funds transfers are made directly from account to account so users do not have to wait for funds to transfer from or into their bank account via their Venmo account, a process that can take a couple of days. Moreover, money in a Venmo account is not FDIC-insured like a checking account balance. Zelle is completely free to users and is easy to use seamlessly within a banking app.
One of the challenges of working with Zelle is making it clear to consumers that the service is meant for P2P transfers among family and friends, and not for purchases. Perhaps to reinforce this point, the banks impose daily and monthly payment limits that vary widely from institution to institution, but are generally lower than PayPal’s and Venmo’s limits.
Even so, some consumers have used Zelle to make purchases from strangers through websites like Craigslist. These users have learned the hard way that Zelle does not offer the same level of fraud protection as PayPal/Venmo. Increasingly, scammers posing as sellers have taken Zelle users’ money, shut down their account and then disappeared. At the moment, Zelle does not provide a way to dispute or cancel a transaction, so unfortunately, these users are out of luck. This shortcoming has already resulted in Zelle garnering negative publicity right out of the gate.
If Zelle continues to be associated with scams so early in the game, its banks will have to find ways to repair the damage, especially since the brand recognition is still quite low. They could start by emphasizing more explicitly that Zelle is meant for transactions between known, trusted parties only. How much influence individual banks have over their Zelle offering is still unclear, although they do design their own interfaces, which vary somewhat from bank to bank.
Meanwhile, Venmo has figured out how to compete with Zelle’s instant account transfer advantage. Now, Venmo users can transfer their funds “instantly” (within 30 minutes) to their Visa or Mastercard debit card for a fee of just 25 cents.
Banks might beat back Venmo’s gains if they can convince corporate customers to use Zelle for B2C (business-to-consumer) mobile payments, which remain stubbornly paper-dependent. Zelle could be used for healthcare saving account (HSA) disbursements, for example. But stronger fraud protections likely need to be put into place first.
Since banks’ value proposition to accountholders is based largely on trust, they cannot afford to offer a service that consumers associate with risk or fraud. The Zelle brand has yet to become widely known, therefore; a snafu this early may fly under the radar and give banks time to solve for security weaknesses or provide consumers with some recourse for illegitimate transactions. They will need to act quickly, though, as Venmo continues its advance