In recent years, financial institutions have seen their customers gravitate toward third-party peer-to-peer (P2P) payment services like Venmo and PayPal. While this doesn't equate to a loss of revenue per se, losing P2P volume to third parties means banks and credit unions miss an important customer touch point and an opportunity to keep account holders engaged with their digital channels. Zelle has emerged as a plausible solution to help financial institutions keep customers' P2P transactions within their own mobile and online banking channels, while offering a platform for expansion into adjacent areas like B2C disbursements. In this report we discuss the origins of Zelle and its approach to helping financial institutions bring a stronger P2P payments proposition into the market.

The 451 Take
At a time when financial institutions are facing incessant threats from technology companies aiming to distintermediate them from their customers, Zelle has emerged as an ally. Offered by Early Warning Services, an entity with a strong and trusted pedigree in banking, Zelle aims to help banks and credit unions regain ownership over their customers' usage of P2P payments. In doing so, it delivers a network rooted in security and efficiency, with potential to support adjacent revenue-generating use cases. Zelle is growing nicely in terms of transaction volume and partners, but will require more financial institutions to be integrated into its network to truly deliver on its mass-market, real-time payments proposition. Further, it will need to increase consumer education and awareness to ensure the momentum in volume growth is maintained. Early efforts to align with technology partners and its national advertising campaign are reaping promising returns on both fronts, but Zelle will need to continue to expand upon on these efforts throughout 2018.

Zelle is a service offered by Early Warning Services, a company that today is owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, US Bank and Wells Fargo. Early Warning is based in Scottsdale, Arizona, and has been in operation for more than 25 years, providing various risk management and anti-fraud products that help to address fraudulent activity pertaining to payment transactions and bank accounts. Its customers include some 2,500 financial institutions, payments companies and government entities.

Zelle draws its roots from Early Warning's 2015 acquisition of clearXchange, a large US-based P2P and B2C payments network that at the time shared most of the same owners as Early Warning: Bank of America, Capital One, JP Morgan Chase, US Bank and Wells Fargo. The combination of Early Warning's fraud and risk expertise and clearXchange's payment network created the basis for Zelle, which was announced in October 2016 and launched in June 2017.

Today, roughly 60 financial institutions are part of the Zelle Network. They include large national banks like Bank of America, JPMorgan Chase, Wells Fargo; a handful of credit unions such as BECU and local and regional banks like Frederick County Bank and First Tennessee Bank. According to Zelle, collectively these financial institutions represent 95 million US consumers and 50% of US demand deposit accounts (DDA). By year-end 2017, Zelle says it was averaging 100,000 daily customer enrollments.

That year was one of growth for Zelle. North of 247 million payments moved across the Zelle Network, representing $75bn in funds exchanged – an 18% increase in the number of transaction and 36% increase in the value of transactions Y/Y (compared with when it operated as clearXchange). As expected, much of that volume stems from the large banks using Zelle Network; Bank of America, for instance, processed about 68 million transactions through Zelle in 2017, up 84% Y/Y when it was using the clearXchange platform.

Zelle goes to market via its financial institution partners' digital banking channels. Banks and credit unions that are part of the Zelle Network embed its funds transfer functionality into their online banking websites and mobile banking apps. Financial institutions can customize the look and feel of how Zelle is integrated and accessed, but Zelle's branding remains visible, which helps to drive consumer recognition and brand familiarity.

Consumers whose financial institutions are part of Zelle can transfer and request funds to and from their peers directly from their bank's website or mobile app. For those who bank with a financial institution that has not yet joined Zelle, the service can be accessed via the Zelle app, which became available in September 2017. The Zelle app is for use on iOS or Android and users can enroll with a Visa or Mastercard-branded debit card. Transactions using the Zelle app don't actually leverage the Zelle Network, and instead use Visa and Mastercard's respective real-time funds transfer services, Visa Direct and Mastercard Send. This is intended to help create ubiquity and expand the reach of Zelle to all consumers.

Transactions between enrolled Zelle users generally occur in minutes, meaning funds are essentially available in a user's bank account in real time. This contrasts with services like Venmo and Square Cash, which typically take 1-3 days to transfer funds into a bank account, and levy a fee for real-time transfers.

Initiating a funds transfer on Zelle requires only the recipients' mobile phone number or email address. Non-enrolled users who receive a funds transfer are notified via text or email and have 14 days to enroll in Zelle before the payment is returned to the sender.

While Zelle has strong depth with large financial institutions, for it to be successful it must reach the thousands of small banks and credit unions in the US. Full integration into the Zelle Network takes roughly 6-9 months, and many financial institutions are disadvantaged by a lack of technical expertise and bandwidth to handle this on their own. To that end, Zelle has made strides in aligning with relevant channel partners over the past year, such as systems integrators and core banking processors, which are helping connect the Zelle Network to DDA systems. Current partners include ACI Worldwide, CGI Group, IBM, D3 Banking Technology, FIS, Fiserv, Jack Henry & Associates and CO-OP Financial Services.

Zelle's technology partners will also play an important role as it looks to connect to enterprises in effort to broaden its service to B2C disbursements. An early glimpse of this use case emerged in October 2017 when Zelle was leveraged by the Red Cross to deliver emergency relief funds to residents affected by Hurricane Harvey. Zelle envisions supporting a variety of disbursement use cases where funds need to be distributed quickly, such as insurance claim payouts. In time, it sees opportunity to facilitate disbursement use cases of all varieties, such as product rebates and healthcare. C2B payments are not a primary focus at this time, and are generally limited to transactions where both parties know each other, such as paying a dog walker or babysitter.

Financial institutions that have joined the Zelle Network are charged fees by Early Warning for their participation. These fees are typically absorbed by the financial institution and not passed down to the customer. However, the disbursement use case provides an obvious revenue-generation opportunity, where banks can wrap value-added services around Zelle and sell a real-time disbursement product to their corporate customers.

Looking ahead, one of the biggest challenges confronting Zelle is driving brand awareness and familiarity with consumers. Zelle must work to remove associations with the clearXchange brand, encourage older demographics away from using checks and drive messages into the market about its ubiquity and real-time capabilities. It aims to accomplish this in part through a large US marketing campaign that went live in October 2017. The multi-million-dollar campaign has included a variety of national print, TV and digital ads, including commercial spots during the Super Bowl and Grammys. Zelle also relies upon its financial institution partners to drive awareness of Zelle with their customers.

The US has no shortage of P2P payments services. Many of these services have primarily targeted millennials, who, according to 451 Research's Voice of the Connected User Landscape survey, are the most active users of P2P payments. Among the most prominent services is Venmo, which moved $35bn in funds in 2017, about 50% less than Zelle did in the same period. Square Cash is another P2P service that is increasingly popular with millennials, which, like Venmo, recently began enabling C2B payments. P2P payments capabilities are also available in the recently launched Google Pay (formerly Google Wallet) and Apple Pay Cash. But besides PayPal, few players have successfully made strides in gaining mass-market appeal.

While the aforementioned competitors are all third-party apps, Zelle also competes with P2P and funds transfer networks currently used by financial institutions. This includes Fiserv's Popmoney service, the ACH network and fintechs that have looked to partner with banks on real-time payments, such as Dwolla. Visa Direct and Mastercard Send, despite being leveraged in Zelle's stand-alone app, could also be perceived as competitive.
Jordan McKee
Principal Analyst, Payments

Jordan McKee is a Principal Analyst leading 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers. His research helps vendors and enterprises assess the key implications of emerging technologies driving the digitization of the end-to-end shopping journey.

Sheryl Kingstone
Research Director, Customer Experience & Commerce

Research Director Sheryl Kingstone focuses on improving the customer experience across all interaction channels for customer acquisition and loyalty. She helps operator and enterprise clients make decisions regarding the use of technology, business processes and data to boost revenue and optimize business performance. She also assists vendors with custom research projects, messaging and positioning, as well as product road map evaluations. Kingstone researches and writes on the top trends in mobile marketing and commerce along with cross-channel customer experience technologies.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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