Zelle is a peer-to-peer payment network that indirectly benefits the banks’ consortium that backs it. Zelle also enables users to pay businesses for goods and services, free for users. Merchants pay a 1% fee to Visa or Mastercard, who share it with the bank that issued the card.
Zelle Origin Story
Zelle is a peer-to-peer (P2P) payment network. It allows users to send money quickly and easily to their friends and family from a mobile device.
The platform started life as clearXchange in 2011, a P2P, B2B, and G2C payment service owned by Bank of America, Wells Fargo, and JPMorgan Chase.
The platform was then sold to fintech company Early Warning Services (EWS) in 2016, owned by several American financial institutions.
After the sale, clearXchange was rebranded to Zelle, and more banking partners were added to the network to make it more consumer-friendly.
The standalone app was integrated with almost 1,200 banks and credit unions comprised of Zelle’s owners and other major players such as Capital One, Morgan Stanley, and TD Bank.
Zelle is launched
Zelle’s instant payment service and mobile app was launched in June 2017 and accompanied by an announcement that clearXchange P2P services would be suspended by the end of the year.
While some governmental services would remain on the old platform, clearXchange users were encouraged to migrate to Zelle.
Rather than existing as a standalone app like competitor Venmo, Zelle was initially available within the mobile banking interfaces of participating institutions.
The app moves money from one bank account to another in a matter of minutes, with only the recipient’s email address and phone number required.
This made Zelle a more efficient option than a traditional bank transfer which can take several days and requires users to input bank account details.
For this reason, Zelle’s creators intended the service to be for quick, personal payments such as splitting the cost of a restaurant meal or collecting rent from roommates.
Like its predecessor in clearXchange, users are identified on the Zelle platform by a unique association between their bank account and phone number or email address.
Since these details are easier to remember than bank account numbers, funds will likely be sent to the intended recipient.
Growth and expansion
In February 2022, Zelle announced that its users had sent 1.8 billion payments worth around $490 billion in the previous calendar year.
According to EWS, this represented a 49% increase in the number of payments from 2020.
Much of the increase was attributed to businesses such as property managers, health and beauty providers, and contractors, whose usage increased by 162% over the same period.
Universities, non-profits, and some Fortune 500 companies sent payments over Zelle as an alternative to writing checks.
While it was acknowledged that the market had seen tremendous growth because of COVID-19, the pace of Zelle’s growth had enabled it to become the largest P2P payment network in the USA by total payments value sent.
The platform’s dominance is more than twice the size of the nearest standalone competitor.
This growth has also been facilitated via several company initiatives:
- Consumer education around the security risks associated with digital transactions.
- Collaboration with the non-profit Cybercrime Support Network to educate small businesses on common instances of financial fraud.
- Investment in tools to help consumers avoid being scammed, and
- In-app notifications remind users to stop and re-confirm the recipient’s details before hitting the send button.
Zelle has moved almost $1.5 trillion across its network since 2017, with more than 99.99% of those non-fraudulent.
Nearly 1,700 banks, credit unions, and minority deposit institutions (MDIs) now offer Zelle services within their respective apps.
Zelle revenue generation
Zelle is not a fee-based platform, so it does not generate revenue directly. It was created to save banks money.
Competitor P2P offerings such as PayPal, Venmo, and Square charge banks a fee for every transaction, so keeping these transactions in-house reduces costs.
This also allows the banking institutions to capitalize on a general shift toward a cashless society and avoid maintaining ATMs and branch offices.
Importantly, the app also generates indirect revenue for the consortium of banks that collectively have access to 100 million users in the United States.
This encompasses a host of the add-on and complementary services such as credit cards, mortgages, loans, and insurance.
Generation X and Baby Boomer users have also become a significant growth area for Zelle, many of whom were previously unfamiliar with the P2P concept.
After just two years, the app has become the largest P2P service in the U.S, with users completing around 743 million transactions worth $187 billion.
Although not explicitly stated, Zelle owner Early Warning Services LLC likely receives a payment from participating banks to maintain the integrity of the Zelle network.
B2C and other potential revenue generation models
In 2018, Zelle launched a feature enabling users to pay businesses for goods and services.
For the consumer, Zelle offers this service free of charge. But the merchant must pay a 1% fee to Visa or Mastercard, who then share the resultant revenue with the card issuing bank.
Looking forward, it would not be unreasonable to suggest that other financial products be recommended within the Zelle app.
This would allow partnering institutions to generate revenue through affiliate commissions and referrals.
Zelle vs. Venmo
Venmo is another P2P platform that makes sending and receiving money easier for consumers.
While Zelle and Venmo have more or less the same functionality, there are a few key differences.
Zelle enables users to transfer funds between the accounts of participating banks for free.
Funds used in these transfers do not reside in a holding account.
Instead, they are withdrawn from (or deposited into) the bank account of a sender or receiver.
Venmo, on the other hand, more closely resembles a digital wallet. In other words, funds are held within Venmo with a balance that can be spent, sent to others, or reloaded.
Transfers are normally completed in 1-3 business days, but there is a 1.5% fee for those who desire instant transfers.
Note also that Venmo offers a branded debit and credit card that can be used to purchase products and services from approved merchants.
With the above in mind, let’s look at other comparisons between the two platforms.
As noted earlier, Zelle is free to use for funds transferred between a linked bank or credit union account.
Venmo is more expensive to use and charges more fees, mostly because it offers more features.
For example, there is a 3% fee for credit card transactions up to a total value of $15. There is also a $2.50 fee for out-of-network ATM withdrawals.
Both platforms have built-in security features that make them relatively safe to use.
Both monitor transactions for instances of fraud, with Venmo using data encryption to protect sensitive information.
Venmo also offers consumers the ability to add a PIN for multifactor authentication.
At the time of writing, Zelle and Venmo are only available for residents of the United States. This means that both are unable to send or receive money internationally.
However, it should be noted that there are various workarounds for users who like to travel, such as using a VPN.
Speed and ease of use
Zelle offers free instant delivery of funds, though many users will find that their particular bank restricts the amount they can transfer.
In many cases, transfers are capped at $500.
In scenarios where transfer limits are not in place, Zelle users may experience delays as the platform works to ensure the transaction is not fraudulent.
Others have also noted that in the case of money that is sent to the wrong account, Zelle cannot reverse the transaction.
Venmo, as we noted earlier, charges a fee for instant money transfers.
Credit cards give users more flexibility to make payments if they are willing to pay a premium for the privilege.
Since the funds in a Venmo account must be sent to a bank account to make purchases, one could argue that the company’s app is slightly less user-friendly than the Venmo app.
- Zelle is a P2P network allowing users to transfer money to their friends and family seamlessly. It was created by a consortium of 30 North American banking institutions.
- Zelle is a free platform that does not generate revenue directly. However, the app was likely developed to maintain market share in the P2P industry and reduce third-party fees from competitors. There is also scope to suggest that Zelle causes increased consumer uptake of add-on financial services.
- In the B2C space, Zelle shares a 1% merchant fee with Visa and Mastercard. As the service becomes more mainstream, affiliated financial products may be recommended in the app itself.
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