What Can Banks Learn From Zelle?

P2P-10-13-17.pngThe banking industry saw one of the biggest technological developments of the year in June with the introduction of Zelle, a peer-to-peer (P2P) payments app now offered by over 30 of the leading U.S. financial institutions. Participating are some of the biggest names in banking, such as JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Citigroup and Capital One Financial Corp., as well as many smaller banks through partnerships with leading payment processors.

The ability to make quick and easy peer-to-peer payments across banks has existed for a few years now, although most banks haven’t had this capability. In fact, PayPal’s Venmo has overwhelmingly dominated the peer-to-peer payments space. The introduction of Zelle marks the first bank-backed response to Venmo, and thus, the banking industry’s most significant attempt to capture some P2P market share from third-party technology providers.

It’s only been a few months and already Zelle has had a clear influence on the industry. Bank of America recently reported around 11 million P2P transfers made in 2Q2017, reflecting an 89 percent increase from 2016. Overall P2P payments users have also increased by 39.5 percent from the start of this year, likely in part due to Zelle.

It remains to be seen whether Zelle will be able to trump Venmo’s popularity, but in either case, its launch can teach banks a few valuable lessons about their own service offerings.

The Appeal of Venmo
Venmo was launched independently in 2009 and later acquired by PayPal in 2013 after gaining considerable traction, especially among millennials. Perhaps one of the reasons it saw so much popularity with this demographic is the built-in social elements that appeal to millennials’ desire to connect with friends online and to “see and be seen.” Users can view friends’ transactions through a newsfeed, send personalized transaction messages and even integrate with Facebook so it’s easier to locate friends.

Another major reason for Venmo’s popularity is its ease of use. The app now supports text and voice control integration, seamlessly aligning with how users are already using their phones by allowing them to send or request payments simply by sending a text or dictating the command to their phone.

The Introduction of Zelle
With the wild popularity of Venmo, many banks realized they were being blown out of the water when it came to peer-to-peer payments. In response, Bank of America, Wells Fargo, and JPMorgan Chase teamed up with payments technology company Early Warning to begin developing their own app that could facilitate payments between their customers.

While Zelle has the disadvantage of its network being limited to participating banks, the app introduces a few compelling benefits that make it a true contender for Venmo. Primarily, there’s a feeling of security that comes with an app associated with the bank itself, since users won’t have to submit sensitive data into a third-party platform.

With transfer between banks using Zelle, users will also be able to receive money instantly instead of having to wait a few days for the transaction to process through Venmo. They’ll also enjoy a more seamless banking experience as Zelle is accessed through the host bank’s existing mobile banking app so customers making P2P transactions can also complete other banking tasks within the same platform.

What Banks Can Learn
Ultimately, the launch of Zelle isn’t just a lesson for banks to offer innovative technology. More importantly, it’s a reminder for them to keep an eye on technology companies and the way they’ve influenced bank customers, or else they may be missing out on valuable business opportunities.

So why did banks wait so long to present a competitive solution to Venmo? Even though many noted the popularity of Venmo years ago, they might have waited because there was no straightforward way to generate profit in the P2P space.

However, providing a relevant, convenient and user-friendly experience is of the utmost importance for banks, as that’s what continues to attract and drive business—and ultimately, does generate a profit. Given how prevalent technology has become to consumers’ daily lives, building technology into this experience is not only essential but expected.

Regardless of whether or not Zelle comes out on top, its launch is only a positive for banks. The innovations Venmo and similar companies have introduced have forced banks to reprioritize and modernize their services, focusing more on building deeper, more valuable relationships with their customers than simply on profits. And with those relationships, profits will come.

Why Banks Are Slow to Embrace P2P Payments

P2P-7-3-17.pngMost banks have been reluctant to offer person-to-person (P2P) payments services, although the market—which the research firm Aite Group estimates has at least $1.2 trillion in annual payments volume in the United States alone—probably deserves a closer look.

Writing in a May 2017 research report, Talie Baker, a senior analyst in Aite’s retail banking and payments practice, argues that a P2P payments capability could be a “competitive differentiator” for financial institutions as they fight for market share in a crowded mobile banking market. And it’s a market that could be heating up as both traditional banks and fintech companies with their own payments offerings jockey for competitive advantage. “The P2P payments market is seeing growth in the adoption of digital payments, and both bank and nonbank providers, including tech giants such as Facebook and Google, are looking for ways to secure a piece of the P2P payments pie,” she wrote.

Most financial institutions offer a P2P option either through the Zelle Network (formerly clearXchange), which is owned by a consortium of banks and launched its new P2P service in June, or Popmoney, which is owned by Fiserv, the largest provider of core technology services to the industry. A total of 34 institutions currently offer Zelle, including the country’s four largest banks—J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup. Alternative providers include Facebook Messenger, Google Wallet, Square, PayPal through either its PayPal.me or Venmo services, and Dublin, Ireland-based Circle.

With 83 percent of the digital P2P market share in the U.S., compared just 17 percent for the alternative providers, banks are clearly in command of the space. Some of that advantage is attributable to the industry’s large installed base of mobile customers. “They have a captive audience to start with … and that gives them a one-up on, for example, a Venmo or a Square that don’t have a captive customer base and have to go out and build their business through referrals,” says Baker. However, the banks need to be careful that their big market share advantage doesn’t result in complacency. “Alternative providers are catching up from a popularity perspective and are doing more volume, and banks probably need to step up their game a little bit from a marketing perspective to keep their market share,” Baker says.

Why hasn’t the P2P market grown faster than it has until now? For one thing, P2P providers generally will have a difficult time charging for the service since consumer adoption has been slow. “Checks are free today, it’s free to get money from an ATM, so if [the services] are not free, I don’t know if they’re going to be popular for the long haul,” Baker says.

Another obstacle is the enduring popularity—and utility—of cash. Baker says that many potential users are still comfortable using cash or checks to settle small debts with friends and family—which is still the primary use case for P2P services. “I love being able to make electronic payments personally, I just have found that my peer group is not as up on it,” says Baker, who did not give her age but said she was older than a millennial.

The biggest impediment to the market’s growth, however, is the lack of what Baker calls “ubiquity,” which simply means “being available everywhere, all the time.” Cash and checks are widely accepted mediums of exchange, while most P2P services run on proprietary networks. “All of them are lacking in interoperability, so if we want to exchange money and I am using Venmo and you are using Square, we can’t,” Baker says. Baker points out that this is not unlike how things worked when email was becoming popular in the early days of the internet, where you could only exchange emails with people who shared the same service provider. Of course, a common protocol eventually emerged for emails and Baker expects the same evolution to eventually occur in the P2P space.

Why should banks care about a free service like P2P payments? Baker says that based on her conversations, many smaller institutions “don’t seem to understand that P2P helps drive consumer engagement. I think that P2P services keep them right at the center of a consumer’s life and keeps driving engagement with the banking brand.”