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Is Zelle a serious Venmo competitor for P2P payments?

US consumers can expect to see a new person-to-person (P2P) payments solution on their mobile banking apps early next year.

Zelle is the new name for the ClearXchange network, which is run on Early Warning’s payment solution and has the involvement of 19 US banks and counting. It is set to rival already established players; however, the focus has been on its competitiveness against the PayPal-owned solution Venmo.

The competitive peer-to-peer payment space

In the US, there has long been a need for better P2P payments systems, to offer a more convenient option than cash or cheques. This opportunity has been seized by likes of PayPal and Venmo. They – along with many others already on the market – have had a time advantage over Zelle’s proposition. This time has been used to raise brand awareness in the minds of consumers.

Over recent years, PayPal has made a big push to expand its capabilities within online payments. Not only do they offer P2P payments and interest-free credit themselves but they also own the popular P2P payment app Venmo, which has seen significant uptake among young adults in the US. Last quarter, Venmo processed $4.9 billion in payments, an increase of 131% over the same quarter in 2015. Their payments are expected to reach $20 billion by the end of this year. Needless to say, they seem to be doing well.

Both PayPal and Venmo solutions lie on top of the bank network, meaning they’re technically complementary to banking. However, both solutions allow users to keep their money within their P2P payment account, which means that the solutions further remove banks from their customers. As is normally the case when customers use third party payment providers, banks disappear from the value chain.

What’s interesting about P2P payments is that they don’t typically generate any money for providers. So the battle over market share in this space is about fostering customer relationships and driving engagement across platforms. With Zelle, banks will able to collect data and insight about its customers, which can generate cross-sell opportunities.

Looking at P2P payment app usage for this year, one quarter of US adult smartphone users will use a P2P payment app to transfer money at least once per month. This statistic is expected to exceed one third by 2018. Understandably, it’s an important piece that banks are looking to reclaim from non-bank payment competitors.

Security and customer reach

Although the P2P payments market is inhabited by some well-established players, Zelle is confident that it is going to launch next year with two notable strengths: an existing customer base (thanks to the banks involved) and customer trust in the security of the digital solution.

So, what’s the accumulated customer base of 19 of the biggest banks in America? Well, according to Paul Finch, chief executive at Early Warning, the banks have 76 million customers using mobile banking apps and about 65% of all checking and savings accounts in the US.

In addition, once all planned agreements with other financial services providers go live, more than 90% of bank accounts will connect to Zelle. Additional providers include debit card networks and other payment companies, such as Fiserv.

These partnering banks will all put the Zelle payments solution on their mobile apps and webpages – and banks will be able to do some customizations to the solution to make it more in line with their brand. Customers will have option to use their own bank’s mobile app or the standalone Zelle app, although it won’t be available to account holders of banks that are not involved in the network.

It’s also worth noting that the tokenization process means customers must use a different token (or sensitive data element) for each linked account. So, if a customer has an account with two different banks, they may use their phone number with one of them, and their email address with the other, as a form of tokenising their account details. This is something that could cause customer frustration.

This might, however, be seen as a minor pain point as Zelle becomes the default payment service for many of the biggest banks and financial institutions in the US.

The second strength that Zelle claims is the trust of their customers. Dave Godsman, head of consumer payments at Bank of America, told American Banker that security will play an important part in driving consumers to use Zelle. “Consumers have made it clear that trust in their bank is incredibly important to them, especially as they rely on more third-party apps to handle money,” Godsman says.

Part of this security topic is the matter of instant transfers. Many third party payment services have struggled to offer any transactions more quickly than within 24h. At a glance, this fact might not seem too concerning, but this means that transactions can be cancelled within this 24h hour period. This issue has been raised with regards to payments made between strangers on Venmo.

Further weaknesses in Venmo’s processes have been highlighted over the past few years and, in 2014, the payments provider was reprimanded by the California Department of Business Oversight for fraud prevention practices and customer privacy issues on 20 separate disputes.

Venmo is also currently being investigated by the Federal Trade Commission regarding unfair and deceptive practices.

Leapfrogging the Federal Reserve initiative?

Instant payments is something that is being explored further by the Federal Reserve, in an initiative to make US payments more efficient and secure. With an expected launch in 2019, and a full roll-out to banks the subsequent year, the Fed is now looking at several proposals for a new payments solution.

So, if Zelle is successful, they could decide to use the network of partnering banks to expand their proposition across other forms of payments, and potentially join the Fed initiative… or perhaps leapfrog it.

A summarised story of Zelle

Originally named ClearXchange, the network was started by JP Morgan Chase, Bank of America and Wells Fargo in 2011, to make it easier for customers to transfer money to accounts at different banks.

ClearXchange was slow to involve more banks in the initiative. Some say that the length of this process was to blame for other payment players surpassing the network in bringing a solution to market.

Recently, the decision was made to rebrand the network, and the product. The reason, according to Andrew Tilbury, a branding consultant and spokesman hired by the bank consortium, was to reflect something ‘more personal than product-like.’

Last month, they announced a partnership with payments technology company Early Warning, who demoed the payment solution at Money 20/20.

Early Warnings also revealed in a recent webinar that there are plans in place for Zelle to offer business-to-consumer payments next year, such as pay-outs of insurance claims. Using tokens removes the need for the insurance company to store account details, whilst at the same time offers  a faster payments process. This will be sure to improve the experience of insurance claimants. But first, P2P payments.

At its launch next year, 19 US banks stand ready to join the venture.

UPDATE 22 February 2017: Bank of America is the first to roll out the features of Zelle in its mobile banking app, according to its newsroom.

Mapa manages a portfolio of live US and global banking accounts to show you user journeys past the point of login. We would love to meet you to discuss any research needs that you might have – just send us a message or give us a call.

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