Zelle Competes Against Venmo to Disrupt P2P Payments

At last, PayPal-owned Venmo has finally met its match: Zelle. In an effort to disrupt the peer-to-peer (P2P) payment market, major banks have built this platform that allows for speedy and secure money transfers directly to and from consumers’ bank accounts.

Major banks have been eager to streamline the P2P payment process for a long while now. Chase, Bank of America, and Wells Fargo joined forces in 2011 in order to create a P2P payment service formerly known as clearXchange, simplifying money transfers between these three member banks. ClearXchange has slowly grown under the radar in both the level of support and in its capabilities.

Six years later, clearXchange has been rebranded as Zelle and it has support from over 30 US banks.  Its mission is to disrupt Venmo and PayPal, the strongest P2P payment apps currently in the U.S. market.

As of now, the main way consumers will encounter Zelle is as an added feature in already existing mobile banking apps. Within their respective mobile banking apps, account holders will be able to use a “Send Money with Zelle” feature.  A standalone Zelle app, more akin to Venmo, is still in the making.

The funds will then be transferred from bank to bank using only a recipient’s email address or phone number. The lengthy routing and accounting numbers previously required in mobile banking app transfers will no longer be needed.

Through Zelle, every major banking app will steadily become a more efficient and convenient form of Venmo.

Dreaming Big

In its Early Warning press release on Zelle, Michael Moeser, the Director of Payments at Javelin Strategy & Research, was quoted as saying:

“There is a market opportunity to offer a secure and trusted experience, as well as have greater P2P availability in financial institutions’ digital banking, mobile wallets and voice-driven P2P services.”

Early Warning and the several banks supporting Zelle are hoping to bring P2P payments into the mainstream. Their current view is that existing services like Venmo and Square Cash are only popular with Millennials.

The belief is that many people are not comfortable using third-party apps that are not backed by actual banks. Yet, user-friendly apps such as Venmo have been favored despite their delayed transfer times and daunting security holes. This is mainly due to the difficulty of navigating through offered mobile banking app P2P services, but that stands to change now.

Big banks hope Zelle will be the solution by guaranteeing safe and timely money transfers directly between users’ accounts, but their sluggishness to innovate will be a potential roadblock to Zelle’s success.

While Zelle intends to offer more efficient and trustworthy services, Venmo has a substantial first-mover advantage. Venmo has been in business since 2009, was acquired by PayPal, and its app is already used synonymously with making P2P payments.

Putting Their Money Where Their Mouth Is

In order to compete with Venmo, Zelle needs to take advantage of its biggest strength – buying power. Being backed by over 30 banks gives Zelle a big advantage: it has the uncommon luxury of subsidizing any initial expenses in order to build up its network.

With the money to fund a number of incentive campaigns and launch the massive marketing campaigns, Zelle will be able to spread its brand and probably attract many mainstream consumers, particularly the segments of the population not already using Venmo. It doesn’t seem like gathering an initial user base will be too big of an issue for the newly launched platform.

The quick transfers guarantee will be useful, but the current market has already adapted to day-long delays. P2P payments today aren’t used like cash and microtransactions normally allow for consumer patience.

Will this increase in speed be enough of a competitive advantage? It’s unclear.

The lack of a central app will be a challenge for Zelle. In order to gain widespread consumer support and build network effects, it will need to release one soon. Otherwise it will remain dependent only on existing customers at major banks, who don’t always fall within the usual target market for P2P payments.

A few days following Zelle’s public release, PayPal announced it will bring an  “instant transfer feature” to both PayPal’s core service and Venmo. This will allow users to make instantaneous transfers to their bank accounts, one of Zelle’s main selling points.

PayPal and Venmo will be charging $0.25 each use of the feature and it is limited to only Visa and Mastercard holders. Square Cash currently has the same feature for any bank account, but charges a 1% fee.

In the coming months, Venmo will still be the go-to platform for large bill payments while Square Cash will remain the best option for small businesses and microtransactions.

Meanwhile, Zelle will have a standalone app with a free instant transfer service, but the timeline is murky at best and the late entry to the payments market could spell its doom.

A well-targeted market launch will be crucial for Zelle to overcome its being so fashionably late. If it wants to target non-millennial crowds, it’ll need to think long-term as that demographic ages and dies out. As long as it fully takes advantage of its industry resources and pulls off some exciting innovation, Zelle should stand a real chance at capturing a share of the P2P payments market.


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