In a payments industry long dominated by third-party fintech companies, traditional banks have remained a looming but quiet presence. That situation has changed with the announcement of Zelle, a new person-to-person (P2P) payment app designed as the big banks’ answer to Paypal’s Venmo. Zelle’s powerful gallery of sponsors gives it a direct line to customer accounts, theoretically allowing swifter and safer transfers between customers at participating banks. While Zelle’s insider advantage may prove troublesome to the Paypal subsidiary, Venmo’s recent performance —and its enormous popularity with millennial users —suggests that it’s not going to give ground anytime soon.
Venmo, P2P and the Generational Edge
Venmo has experienced rapid and sustained growth over the past year. The company handled $17.6 billion in transactions in 2016, posting a 135% increase over 2015 and bringing it closer to the $28 billion processed by Chase QuickPay, a popular Zelle forerunner. Venmo’s high volume is particularly significant considering the fact that it’s most frequently used for smaller transactions such as splitting restaurant bills or paying back friends. In contrast, P2P transactions processed by the major banks tend to occur less frequently but in larger amounts.
The different ways in which people use Venmo and Chase QuickPay provide a glimpse of the demographic divide that Zelle’s backers hope to overcome. For the past few years, banks have struggled to position themselves amid the growing tide of fintech startups that provide younger adults with alternatives to traditional banking. Although they have ready access to millions of existing account-holders, bank-owned P2P services have consistently underperformed with millennials, who represent the bulk of P2P payment users. Meanwhile, older users have been slow to adopt the same services, even when they’re offered at traditional banks.
The development of Zelle, a new brand with the unified support of the banking industry, seems to indicate that the industry has finally focused its ponderous attention on the challenge of attracting younger consumers. However, that’s no reason to assume that banks have given up on leveraging their pervasive reach in the mass market. The 24 partner companies listed on Zelle’s website include payment giants Visa and Mastercard as well as 19 of the largest banks in the US. With Chase, Wells Fargo and Bank of America all taking a hand in Zelle, the app’s success seems equally rooted in how persuasively it can introduce P2P payments to mainstream bank customers.
Delivering Speed and Security
In theory, the direct participation of major banks should allow Zelle to deliver a swifter and safer user experience than Venmo, which has seen its share of controversy about the security of its transactions. Many of Venmo’s issues stem from the fact that it operates as a third party. Instead of direct account-to-account transfers, customers receive their payments in a Venmo balance that must then be transferred to a checking account. This creates delays and the potential for fraud if an unscrupulous user cancels a payment before the recipient cashes out.
Zelle’s integration with its bank partners means that payments will circulate entirely inside the secured confines of bank-to-bank transactions. Rather than maintaining a separate balance as with Venmo, Zelle will enable users to receive funds directly in their bank accounts, so that transfers take place more quickly. Currently, Venmo users can experience delays of up to 2 business days, although most transfers take place within the same day. Zelle’s promise of speedy delivery and safe transfer represent its two biggest weapons in the war against third parties like Venmo.
Of course, the explosive growth of the payments industry as a whole may leave room for more than one service provider. The gradual pace of Zelle’s rollout supports the idea that the banks hope to target mainstream users first. For now, banks like Bank of America will introduce Zelle’s functionality as an embedded service inside their own apps, with an independent app rolling out later in the year. In this setting, it’s unlikely that Zelle’s growth will significantly dent Venmo’s dominance among millennial users, who have proven loyally enthusiastic about the app and its social features. While Zelle’s insider advantage may prove troublesome to the Paypal subsidiary, Venmo’s recent performance —and its enormous popularity with millennial users —suggests that it’s not going to give ground anytime soon.
Whatever the result, Zelle’s debut promises a heightened period of upheaval in an already-turbulent landscape.
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