Zelle Costs Bankers Money, Venmo Can Make Bankers Money


payments-11-29-18.pngZelle, the personal payments platform developed by a consortium of large banks, is poised to become the most used P2P app by the end of the year—outpacing PayPal’s Venmo service, according to the market research company eMarketer.

But does that make Zelle a must-offer capability for the banking industry? Not necessarily.

eMarketer projects the personal payments market to grow nearly 30 percent in 2018, to 82.5 million people—or about 40 percent of all smartphone users in the U.S.

Zelle was developed by the likes of JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. to compete with Venmo, Square Cash, also known more simply as just “the Cash app,” and other up-and-coming third-party P2P services.

You can think of Zelle as the banking industry’s containment strategy—just like France’s vaunted Maginot Line in World War II that was supposed to keep out the German army.

The network of banks offering Zelle has grown to 161, but is a closed system where consumers at participating banks can send personal payments—for free, and in real time—to anyone at another Zelle bank.

One factor that probably accounts for Zelle’s fast growth was the decision to include it in each participating bank’s mobile app. So, if a customer’s bank belongs to the Zelle network, they are automatically a potential user.

While Zelle is a weapon that banks can use to beat back Venmo and Square Cash, the third-most frequently used P2P app, it does have its drawbacks. While Zelle is both free to the user and instantaneous, it costs the participating bank between $0.50 to $0.75 per transaction. So as Zelle’s transaction volume increases, so will each bank’s costs.

Charging users a transaction fee to offset that cost probably isn’t realistic since Venmo and Square Cash are free, although Venmo does charge $0.25 for instant transfers. A good analogy is online bill pay. It costs banks something to offer that service, but most banks don’t charge for it. They offer it for free because all their competitors do, and because it’s a hassle for customers to disentangle their finances from one bank’s online bill pay service and connect with another bank’s service, which can be a disincentive to switching.

Free online bill payment has become table stakes in retail banking, and P2P may go that way as well. But P2P transaction volume has yet to build to such levels that there’s a sense of urgency for all banks to offer Zelle today, lest they find themselves at a competitive disadvantage.

“Urgency means I immediately need to get Zelle. I don’t necessarily think that’s the case,” says Tony DeSanctis, a senior director at Cornerstone Advisors. “Why am I better off offering a product where I’m going to pay 50 to 75 cents a transaction to move money … and also pay the fixed costs to [integrate] it?”

There is, in fact, an argument to offering Zelle and Venmo, or maybe just Venmo. If a bank allows its consumers to include the Venmo app in their digital wallet and prefund the account, Venmo will pay them an interchange fee on every transaction. So while Zelle costs its participating banks money, Venmo offers them a small revenue opportunity to offset their costs.

Zelle is also a private network (which means other people can’t see your transactions) that is marketed to all demographic groups. Venmo, on the other hand, is a social payment network popular with younger generations who are among its biggest users. Richard Crone, CEO of Crone Consulting LLC, says banks are missing out on an important opportunity in social payments.

“A social network is not about [being] social,” says Crone. “It’s a marketing platform and it’s the most effective marketing out there because it’s word-of-mouth. It’s a referral. It’s peer pressure. And that’s how Venmo grows virally.”

Embracing Zelle and other non-bank payments options like Venmo, Square Cash, Apple Pay Cash and Google Pay could be described as a ubiquity strategy. Both DeSanctis and Crone argue that banks should accommodate a variety of payment options within their mobile apps that are linked to their debit and credit cards, just to stay relevant in the evolving payments space.

The problem is that when it comes to payments, most banks really don’t have a strategy. And hiding behind a virtual Maginot Line probably isn’t going to work.

Indeed, history is instructive. The invading German army easily flanked the Maginot Line, which now serves as a metaphor for a false sense of security.

Correction: An earlier version of this article stated that transfers sent over the Zelle app do not occur in real time. This is incorrect. We regret the error.

Is It Time to Get Aboard the Zelle Train?


zelle-8-3-18.pngConsumers moved $25 billion in the first quarter of this year using Zelle, the peer-to-peer (P2P) real-time mobile payments service introduced late last year. That puts consumers on track to spend an estimated $100 billion through Zelle this year, a 33-percent increase from 2017. While this indicates an impressive level of growth, it is less clear whether consumer acceptance will be widespread enough to fuel mass adoption by the nation’s financial institutions. But bank leaders can’t ignore the important role payments could play in their organizations.

Few financial institutions offer Zelle to their customers. Zelle lists 113 financial partners, a fraction of the more than 10,000 U.S. banks and credit unions. Twenty-nine banks have launched the service so far, including the seven big banks that partnered together to form Early Warning, the company that owns Zelle. (The consortium also owned Zelle’s predecessor, clearXchange, which was deactivated shortly following Zelle’s September 2017 launch; Zelle’s transaction data includes clearXchange.)

The biggest banks hold the lion’s share of deposits—the consortium accounts for more than 40 percent of domestic deposits, according to an analysis of Federal Deposit Insurance Corp. data—so many consumers already have access to Zelle.

“P2P really works when all of your friends and family can use it,” says Jimmy Stead, the chief consumer banking officer at $31.5 billion asset Frost Bank. Frost was an early Zelle adopter, signing on with clearXchange in September 2016. He says customers love it, and use of the service has grown by roughly 300 percent over the past year.

Zelle is free for consumers and easily accessible through their bank’s online and mobile banking channels. (Consumers can use the Zelle app if their bank hasn’t launched the service.)

Early Warning’s efforts to generate buzz around the Zelle brand—most notably through a series of TV ads featuring Hamilton actor Daveed Diggs—help partner banks get their customers on board. And Zelle only has to convert existing bank customers to the service, while services like Venmo have to attract individual new users, notes Ron Shevlin, director of research at Cornerstone Advisors.

A lack of interoperability between payments services has dampened mobile P2P adoption by consumers, says Talie Baker, a senior analyst at Aite Group. “[Zelle] will be the only interoperable network for mobile P2P payments once all the banks get on board with it—and it basically is right now because of their partnership” with Visa and Mastercard, she says. Eventually, “a bank that’s not participating in [Zelle] is going to have a hard time being in business.”

Eighty-four of the financial institutions partnering with Zelle have yet to launch the service, and the rest of the industry is waiting in the wings. But implementation isn’t as easy as just flipping a switch.

“This is a very complex system—it’s spread across multiple banking platforms, multiple electronic data providers,” says Frank Sorrentino, CEO of $5.2 billion asset ConnectOne Bancorp in Englewood Cliffs, New Jersey. The bank plans to launch Zelle in August. A Zelle spokesperson confirms the payments system must be integrated with the bank’s core, which includes integrating messaging, and putting policies and procedures in place around risk management and customer support.

It’s interesting to note that the Zelle TV spots feature a diverse cast of actors, not just millennials. Stead says that adoption leans toward Frost Bank’s younger customers, but older customers are using the service, too. Cross-generational payments—a college kid getting rent money from mom and dad, for example—are common. This sets Zelle apart from the millennial-heavy Venmo, which doesn’t put funds directly into a bank account (users have a Venmo balance) and has a lower average transaction compared to Zelle.

But the payments space isn’t poised to end like Highlander, the 1986 Sean Connery film in which immortal beings fought until only one survived. Connery may have said “there can be only one,” but there doesn’t have to be—and there’s unlikely to be—one winner here. Venmo is also growing with consumers, with its social media-like feed, debit card and new partnership with Uber. “[Venmo is] hardly suffering as a result of the launch of Zelle,” says Shevlin.

In today’s competitive deposit market, payments should be a part of any bank’s core deposits strategy, says Shevlin. Services like Zelle can help keep deposits in the bank, while an institution that offers an outdated solution—or doesn’t offer one at all—may find its deposits lured away by a competitor, whether that’s a Zelle bank or a fintech account like Venmo.

Risk/Reward: Can Insurtech Build Better Relationships With Your Bank Customers?


insurtech-5-8-18.pngThe rise of financial technology, or fintech, has not disrupted banks to the extent that many predicted it would. What it has done, however, is chip away at the number of services a given customer will seek from their bank. Instead of using their banking app to check balances and transfer funds, many use third party personal budgeting tools like Mint and peer-to-peer (P2P) payment apps like Venmo. Instead of seeking credit at their local branch, many consumers are turning to online lenders like SoFi. As customers spend less and less time engaging with their banks, brand loyalty is at risk, which is at a higher premium in today’s market.

So how can banks recapture engagement or retain loyalty? Adding an insurance offering could be an option for creating a new touchpoint with bank customers. To many bankers, this is not a new idea. The concept of bancassurance—where a bank serves as an insurance broker and directly offers products to its customers—has been around for a long time. But there is a wave of technological transformation taking place in the insurance space that could breathe new life into bank/insurance partnerships: insurtech.

Insurtech is very similar to fintech. At the core, these firms are about utilizing technology and data to shake up an incumbent industry. The end goal of insurtech is offering more targeted, consumer-centric insurance products and ways of accessing those products. Insurtech is still in the early stages of development but, according to customer experience technology firm, Quadient, most incumbent insurance firms now have a “strong plan or strategy for how they will deal with onboarding innovative technologies and channels” that they did not have just two or three years ago.

Banks utilize a few key models for incorporating insurance into their customer offerings:

Building a marketplace: The marketplace model is being pioneered by many digital-only challenger banks. For example, U.K.-based challenger banks Starling Bank and Monzo have rolled out in-app marketplaces that augment their basic checking accounts by linking customers to a bevy of outside partners, from insurance and pension providers to mortgage lenders. While it’s possible to generate referral fee income from this type of arrangement, this model has not proven to be a major revenue driver, as the banks have yet to see a month without losses.

The marketplace model does allow digital banks to offer services beyond their basic online consumer accounts without the stress of integrations and new partnerships, but that’s a challenge that most traditional banks do not face because they can typically offer payment transfers, loans, and more. While a marketplace would move incumbents closer to the Amazon-like platform model in vogue today, it doesn’t seem to offer a major value add for traditional banks.

Using white-label products: Taking the idea of an insurance marketplace a bit further, banks can also consider incorporating white-label products to help consumers access insurance or compare policies in the bank’s existing online platform. Fidor Bank, a digital institution out of Germany, created an online marketplace that allows customers to access curated fintech and insurtech products. The Fidor product, FinanceBay, is now available as a white-label product to other banks.

Many digital-first insurance providers offer ready-made affinity programs with white-label capability as well. With this increased connection between the bank and the third party insurance providers, though, liability becomes a much larger concern.

“Bancassurance,” or partnering to establish an insurance brokerage: A step even further than incorporating a white-label product to help customers find insurance would be to engage in a bancassurance model, where the bank would serve as an insurance broker actively selling insurance products to its banking clients. This form of partnership has been utilized heavily in countries such as France and Spain.

When Glass Steagal was repealed in 1999, those bank/nonbank commerce barriers were largely removed, but regulations, complicated corporate structuring questions and mixed results have largely kept the model out of the U.S. However, the recent partnership announced between Germany’s largest bank, Deutsche, and Berlin-based Friendsurance is bringing interest in this model back to the forefront.

By mid-2018, Deutsche plans to offer coverage from over 170 German insurers through its in-app insurance manager function, according to Insurance Journal. Friendsurance uses artificial intelligence to evaluate potential plans based not only on price but also on “the question of how financially stable the insurer is or how good its customer service is,” Friendsurance co-founder Tim Kunde told Handelsblatt Global in January. Deutsche will be establishing its own insurance brokerage firm run by Friendsurance as opposed to a simple referral program or marketplace tool. This differentiation, the bank hopes, will reinvigorate the bancassurance concept thanks to the added value the insurtech brings to the insurance buying experience.

However a bank/insurtech partnership takes shape, liability is a looming issue. The more deeply engrained a partnership is, the more complicated the liability analysis becomes. As with all major technology partnerships, banks should bring their regulators into the conversation early on if they’re considering a partnership with an insurtech provider.

Insurtech is a fast-growing sector, and the distribution of insurance products is becoming more prolific among retailers, utilities, lifestyle brands and more. If banks don’t begin to explore insurance partnership models, they may lose out on yet another opportunity to service their customers.

Venmo: Friend or Foe


friend-or-foe-3.png

Venmo, a P2P leader that focuses on the millennial market, processed over $7.5 billion in transactions in 2015, and over $1billion in January 2016 alone. Now owned by PayPal, Venmo may not be a direct threat to banks, but it’s certainly worth paying attention to. Let’s dig in a little deeper_

The Good:
Venmo is a great example of the ease and convenience that consumers are looking for when it comes to payments. With the ability to connect by Facebook, phone number or email, anyone is able to transfer money within seconds once they have registered. Not only that, but users can insert emojis and comments for their friends to see. CEO Dan Schulman says that this social feature is what keeps the typical user visiting the app between four and five times a week without any intention of transferring payment. The opportunity for users to see what their friends are up to, not to mention the ability to pay anyone in their contacts or social circles with a process that’s both free and easy–now that’s any millennial’s dream.

Perhaps these social and convenience factors are two attributes banks should look at from an emulation standpoint.

The Bad:
Uncertain about the demand and worried about the costs, banks have been slow to add P2P payment to their consumer products arsenal. If Venmo is indeed making significant progress in providing payments for their customers, this poses a serious threat to their growth and profitability. Give the recent partnerships announced with companies such as Papa Johns and HBO, and Pay With Venmo–a new retail payments program rolling out just now thanks to PayPal—banks have a real problem on their hands as the fees they are used to receiving on credit and debit card transactions could soon be funneled right into Venmo’s pockets, leaving traditional FI’s out to dry.

Venmo has had its share of critics and bad press–and just recently it was announced that the Federal Trade Commission is investigating it for “deceptive or unfair practices,” so stay tuned.

Our Verdict: Foe
Any brand that customers choose to trust their money with over a bank is quite simply a threat to the traditional bank model. How should banks respond? Payveris or Popmoney, offered by Fiserv—a large provider of core processing services to the banking industry–are two examples of fintech solutions that offer up the same consumer proposition. But if banks really want to compete in this market–and not to be reduced to the dumb pipe that transactions flow through, they better act quick and work hard on promoting this feature to their audience. Loyalty is something earned–and right now, Venmo is doing just that. It’s time for banks to catch up!

Three Questions to Ask About Your Bank’s DNA


Today, numerous financial technology (fintech) companies are developing new strategies, practices and products that will dramatically influence the future of banking. Within this period of transformation, where considerable market share is up for grabs, ambitious banks can leapfrog both traditional and new rivals. Personally, I find the narrative that relates to banks and fintech companies has changed from the confrontational talk that existed just a year or two ago. As we found at this year’s FinTech Day in New York City on Tuesday, far more fintech players are expressing their enthusiasm to partner and collaborate with banking institutions who count their strengths and advantages as strong adherence to regulations, brand visibility, size, scale, trust and security.

With more than 125 attendees at Nasdaq’s MarketSite on Times Square, we explored the fundamental role financial technology firms will play in changing the dynamics of banking. While we heard about interesting upstarts, here are three questions that underpinned the event that I feel a bank’s CEO needs to sit down with his/her team and discuss right now:

1. Are We Exceeding Our Customer’s Digital Experience Expectations?
Chances are, you’re not. But you can re-set the bar to make clear to your team that while customer expectations have shifted in pronounced ways, this is an area that a bank of any size can compete, especially with the help and support of a fintech company. If you are looking for inspiration, take a look at these examples of successful partnerships that we highlighted at FinTech Day:

  • City National Bank in Los Angeles and MineralTree in Cambridge, Massachusetts, developed an online business-to-business, invoice-to-pay solution that enabled the bank to differentiate itself from its competitors and attract new corporate customers. (In June 2015, City National was acquired by Royal Bank of Canada.)
  • USAA in San Antonio, Texas, and Daon in Reston, Virginia, collaborated to roll out a facial, voice and fingerprint recognition platform for mobile biometric authentication that enhances security while enhancing customer satisfaction.
  • Metro Bank teamed up with Zopa, both in the United Kingdom, on a deal which allows Metro Bank to lend money through the peer-to-peer platform the fintech company developed.

Any good experience starts with great data. Many presenters remarked that fintech companies’ appetite to leverage analytics (which in turn, allows a business to tailor its customer experience) will continue to expand. However, humans, not machines, still play critical roles in relationship management. Having someone on your team that is well versed in using data analytics to uncover what consumer needs are will become a prized part of any team.

2. How Do We Know If We’re Staying Relevant?
How can new players show us whether the end is near? That is, what part of our business could be considered a profit center today but is seriously threatened in the future? As you contemplate where growth isn’t, here are three companies that came up in discussions at FinTech Day that could potentially help grow one’s business:

  • Nymbus, a Miami, Florida-based company which provides a cloud-based core processing system, web site design, marketing and other services to help community banks compete with bigger players.
  • Ripple, a venture-backed startup, whose distributed financial technology allows for banks around the world to directly transact with each other without the need for a central counterparty or correspondent.
  • nCino, based in Wilmington, North Carolina, which developed a cloud-based, end-to-end small business loan origination system that enables banks to compete with alternative lenders with quick processing and approval of loans.

3. Do We Have a “Department of No” Mindset?
Kudos to Michael Tang, a partner at Deloitte Consulting LLP, for surfacing this idea. As he shared at FinTech Day, banks need structure, and when one introduces change or innovation, it creates departments of “no.”

For instance, what would have happened if Amazon’s print book business was able to jettison the idea of selling electronic books? If you refuse to change with your customers, they will find someone else who does. Operationally, banks struggle to make change, but several speakers opined that forward-thinking banks need to hire to a new level to think differently and change.

Throughout FinTech Day, it struck me as important to distinguish between improvements to the status quo and where financial institutions actually try to reimagine their core business. Starting at the customer layer, there appears massive opportunities for collaboration and partnerships between established and emerging companies. The banks that joined us are investing more heavily in innovation; meanwhile, fintechs need to navigate complex regulations, which isn’t easy for anyone. The end result is an equation for fruitful conversations and mutually beneficial relationships.

2015 Growth Strategy Survey: Are Banks Missing Out on Millennials?


bank-growth-8-31-15.pngTraditional banks, which are typically run by baby boomers and older Gen X’ers, are still trying to figure out the next big generation of consumers.

Sixty percent of bank CEOs and directors responding to Bank Director’s 2015 Growth Strategy Survey, which was sponsored by the Vernon Hills, Illinois-based technology firm CDW, indicate that their bank may not be ready to serve millennials, which this year surpassed baby boomers as the largest segment of the population, according to the U.S. Census Bureau.  As digital use increases among an increasingly younger customer base, truly understanding and planning for the digital needs and wants of consumers seems to continue to elude bank boards: Seventy percent of bank directors admit that they don’t even use their own bank’s mobile channel.

Bank Director contacted chief executive officers, chairmen, independent directors and senior executives of U.S. banks with more than $250 million in assets, to examine industry trends regarding growth, profitability and technology. Responses were collected online and through the mail in May, June and July, from 168 bankers and board members.

Instead of millennials, banks have been finding most of their growth in loans to businesses and commercial real estate, which is their primary focus today. Loan volume was the primary driver of profitability over the past 12 months for the institutions of 88 percent of respondents, and the majority, at 82 percent, expect organic loan originations to drive future growth at their institutions over the next year. Eighty-five percent see opportunities for growth in commercial real estate lending, and 56 percent in commercial & industrial (C&I) lending. Total loans and leases for the nation’s banks grew 5.4 percent year over year, to $8.4 trillion in the first quarter 2015, according to the Federal Deposit Insurance Corp. 

Despite the rise of nonbank competitors like Lending Club and Prosper in the consumer lending space, just 35 percent of respondents express concern that these startup companies will syphon loans from traditional banks. Just 6 percent see an opportunity to partner with these firms, and even fewer, 1 percent, currently partner with P2P lenders to expand their bank’s portfolio. Few respondents—13 percent—see consumer lending as a leading avenue for loan growth.

Other key findings:

  • Forty percent of respondents worry about potential competition from Apple. Just 18 percent indicate their bank offers Apple Pay, with 63 percent adding that they “don’t think our bank is ready” to offer the feature to their customers.
  • More boards are putting technology on their agendas. Forty-five percent indicate their board discusses technology at every board meeting, up 50 percent since last year’s survey. Almost half of respondents say their board has at least one member with a technology background or expertise.
  • More than three-quarters indicate plans to invest more in technology within their bank’s branch network.
  • More than 80 percent of respondents indicate that their bank’s mobile offering includes bill pay, remote deposit capture and account history. Less common are features such as peer-to-peer payments, 28 percent, or merchant discounts and deals, 9 percent, which are increasingly offered by nonbank competitors.
  • For 76 percent of respondents, regulatory compliance causes the greatest concern relative to the growth and profitability of their institutions, and 64 percent say the high cost of regulatory compliance had a negative impact on their bank’s profitability over the past 12 months. Low interest rates, for 70 percent, were also a key impediment to profitability.

Download the summary results in PDF format.

Partnering with the Enemy?


3-30-15-Naomi.pngSugar River Bank has a growth problem. Serving a rural area, the $268 million asset bank in Newport, New Hampshire, sits in a town with a population of about 6,500 people. The bank’s management team would like to diversify and do more consumer loans, but there are only so many potential borrowers in the market. So the bank is turning to the Lending Club, a San Francisco-based online marketplace, which is positioning itself both as a partner with and an alternative to traditional banks. Sugar River Bank wants to buy consumer loans generated from Lending Club’s online platform. But are banks such as Sugar River too friendly with the competition?

A Federal Reserve survey found that 20 percent of small businesses applying for credit in the first half of 2014 reported they applied through an online lender. “Things are changing so greatly, I don’t understand [bankers] who don’t want to do partnerships,’’ says Mark Pitkin, Sugar River’s president and CEO.

Sugar River is a member of BancAlliance, a membership organization with more than 200 community banks, which recently signed a deal with Lending Club, giving the banks an opportunity to buy loans or portions of loans nationwide, as well as a chance to co-brand a marketing campaign where Lending Club will underwrite and solicit the banks’ own customers for a loan. Prosper Marketplace, another San Francisco-based online lender, signed a similar deal with Western Independent Bankers, giving the association’s roughly 160 members access to the Prosper Marketplace.

Both deals are for unsecured, fixed-rate installment consumer loans, which are billed as less expensive for the consumer than traditional credit card loans, with rates as low as 6.5 percent for the best borrowers. (Lending Club also offers small business loans, but for now, that’s not a part of the BancAlliance deal.)

Community banks in large part have lost market share for consumer loans to bigger banks during the last few decades, as they can’t compete with the efficiencies enjoyed by the bigger banks. Steven Museles, the general counsel and head of client business for Alliance Partners, the Chevy Chase, Maryland-based asset manager that runs BancAlliance, says the average community bank would have to invest tens if not hundreds of thousands of dollars to scale up a consumer lending business. “We think it’s a significant opportunity for our members,’’ he says. “Many of them would have difficulty putting in place a consumer lending program that could get to any scale.”

According to Ron Suber, president of Prosper, banks don’t want to turn their customers away for consumer loans, and they don’t want to push them into high-interest credit card debt. Partnering with Prosper offers a better alternative for the bank, which receives a 4 percent yield. Borrowers also pay about 4 percent as an origination fee to Prosper and the bank pays Prosper 1 percent of the outstanding balance to service the loan, usually with a three-year term. Customers can apply for a loan from their mobile devices or laptops, or while sitting in a bank’s office. The bank can specify the investment grade for the loans it will buy, such as AA loans, and Prosper categorizes them using data on consumers such as a FICO credit score, payment history and debt to income ratios.

But what are the risks? Fitch Ratings’ Brendan Sheehy, director of financial institutions, thinks the online marketplaces could loosen their underwriting standards to generate additional fees for themselves. In 2013, origination fees made up 88 percent of Lending Club’s total net revenues. And he’s not sure how much visibility community banks really will have into the underwriting models the online marketplaces will use. But he also thinks for now, these types of loans will remain a small part of the typical community bank portfolio. Andrew Deringer, the head of financial institutions for Lending Club, says the Lending Club wouldn’t sacrifice its reputation and goodwill by loosening underwriting standards. “The credibility Lending Club has with investors is paramount to the model,’’ he says. “We only build that credibility by building predictable performance to our investors.”

As far as the possibility that Lending Club could steal customers from banks such as Sugar River and offer them other products, the BancAlliance deal includes a provision to protect the bank’s customers from getting other offers from the Lending Club.