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By bringing the Zelle app to the checkout counter, big US banks could cannibalise much of their card issuing revenue; however, the expansion to merchants is a natural next-step building on the success of its peer-to-peer (P2P) services.
Late last week, the Wall Street Journal broke the news that large US banks are considering moving their Zelle app to the checkout counter, potentially competing with cards for dominance at the point of sale (POS).
Zelle is one of the largest P2P payments providers in the US, and is co-owned by Bank of America, Truist, Capital One, JPMorgan Chase, PNC Bank, US Bank and Wells Fargo.
According to the report, Wells Fargo and Bank of America backed the proposal, while JPMorgan, US Bank and Capital One wanted to wait, saying it is not the right time to expand.
Instead, JPMorgan was reported to want to place more focus on improving fraud detection, which has come following fierce criticism from a New York Times report claiming “fraud is flourishing on Zelle” and the founding banks are ignoring the problem.
A lucrative business
By moving to the POS segment, the banks would effectively create a rival to the card networks, such as Visa, Mastercard and American Express.
This could be a significant risk for the bank owners of Zelle. Merchant fees paid to banks from card payments generate billions of dollars in revenues for banks.
This is particularly so in the US, which it is claimed have the highest card fees in the industrialised world that are estimated to cost $110bn a year for merchants.
However, this revenue is increasingly under threat from new fintech products such as buy now, pay later (BNPL), other alternative payment services and even Apple Pay, which a recent survey found was the most popular payments app among American teenagers and is able to take a cut of the interchange that banks receive.
In addition, banks may find themselves under increasing pressure from regulators in relation to debit card fees.
The Dodd–Frank Wall Street Reform Act 2010 establishes that debit card fees should be proportional to banks’ costs and that merchants can choose between at least two payment routing options to process debit card transactions.
The Merchants Payments Coalition, however, argues that those fees are neither proportional nor reasonable and that the double routing option has not been fully adopted.
The P2P springboard
Financial institutions and payment firms typically do not target the mobile P2P space as a means to generate direct profits. P2P payments are mostly low-value, high-volume transactions that are offered to customers for no fee.
However, many of the most successful payments services in recent years, particularly mobile payments solutions, have emerged after gaining a strong foothold in P2P.
P2P offers a simple, targeted and effective use case to grow mobile payments, enabling firms to scale and build an active customer base. Eventually, this customer base can be leveraged to move on to more profitable business cases.
A great example is Swedish payment phenomenon Swish. Launched in 2012 and focusing on the remaining use cases where cash was still dominant in Sweden, the bank-owned service offered low-value mobile P2P payments for individuals for no fee.
Later on in 2014, the service was extended to enable payments to and from small businesses, charities and sports associations, with its e-commerce service being introduced in 2017 and in-store POS payments added in 2018.
Despite starting as a pure P2P service, by the end of 2021, half of all Swish payments involved businesses, and roughly 25 percent of the value of payments is now done at merchants.
Another good example is Zelle’s rival, Venmo. The PayPal-owned P2P services initially targeted millennials and generation Z customers through the integration of P2P payments with social media features.
Having built a successful network of dedicated users, the company then attempted to expand its footprint into the lucrative merchant payments space, in turn offering prospective customers potential access to this key socio-demographic base.
Defending their market
Despite not offering lucrative revenues, mobile P2P is a crucial battleground for banks as they look to defend their positions from third-party alternatives.
For example, the development of Zelle was partly aimed at ensuring banks stay front and centre of the consumer payment experience. In particular, concerns that they could lose ground to services like PayPal’s Venmo or Square Cash.
Launched in 2017, Zelle has grown to be one of the largest P2P processors in the US. It processed 1.8bn payments, worth $490bn, in 2021. Total payments value currently represents double the amount transferred through Zelle’s closest P2P competitor.
The Zelle network includes nearly 10,000 financial institutions, representing more than 500m bank accounts.
Such a network may also help the banks to attract small and medium-sized enterprises (SMEs) and add a new revenue-generating offering.
As such, the network is well placed to expand upon its P2P offering.
This places a significant strategic dilemma for banks. Do they stick and protect the core to avoid any disruption to their lucrative cards business? Or do they twist, disrupt themselves and ensure they are best positioned to compete with other wallet providers, such as PayPal?
