I almost never have cash on me, just my credit cards.
And I pay my friends my bills all using this.
This has honestly changed the world and how money moves
through the economy. An estimated 149 million
Americans, or 62% of smartphone users, use
peer-to-peer payment services. That's up from 90
million people in 2019.
Stocks of payment services like PayPal, which owns Venmo,
and Block, which owns Cash App, boomed in 2020 as more
people began sending money digitally.
And then there's Zelle, which launched in 2017 and is owned
by seven big banks.
It stands out from competitors in one major way:
it doesn't have an independent revenue stream.
Zelle is a consortium of banks working together for an
opportunity as opposed to as a standalone company.
The financial institutions that were offering P2P
services, many of them, got together and decided that they
needed a common branding.
But customers using any P2P service are vulnerable to
being scammed.
What are the costs to consumers when things don't go
well in the payment space?
So why did the banks create Zelle?
And what can be done to stop fraud on the platform?
Zelle was launched in early 2017.
It's owned and operated by Early Warning Services LLC.
That company is co-owned by seven major banks: Bank of
America, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S.
Bank and Wells Fargo.
There are more than 1800 banks and credit unions
participating in the Zelle Network.
Zelle is a P2P payment system that enables
two people with different bank accounts to send money
across from one bank account to another bank account
instantly. They're trying to create the ease of money
transmission that Cash App and PayPal and Venmo have, but
while doing it in a contained ecosystem inside the bank.
And the banks needed a service that anyone could use because
you, your mom, your best friend could all sign up for
Venmo or for Cash App or for PayPal and send money to each
other whereas you might not be able to do that directly
from your bank account.
The banks didn't want to lose that engagement, so they said,
We're going to build a service that's open to
everyone.
Projections suggest that Zelle outperformed Venmo, PayPal and
Cash app in transaction value in 2022.
You should think of this really as a little bit of an
accommodation, but also as an engagement tool versus a
revenue generating machine.
Peer-to-peer payment apps can be traced back to the late
nineties with the founding of PayPal.
Back when eBay was a baby basically.
It was a wonderful invention that kind of occurred right
after Y2K.
So it facilitated transactions between people
who didn't know each other, particularly in this online
auction space.
And at that time we were still using checks for those
types of transactions.
That's what person-to-person payments stepped in to
address. And PayPal was the person-to-person payment
provider that stepped in to do that.
Several banks tried to compete with PayPal back in the early
2000s, but they ultimately were forced to shut down.
One of their major flaws was trying to monetize their
services when PayPal was not only free, but also paying
people to join and to refer friends.
I think that the failure in the past was that they were
trying to emulate PayPal without really understanding
what was going on. They were trying to monetize something
that was already being given away for free.
So they have learned that lesson obviously because Zelle
is a free P2P mechanism.
The other thing that led to the banks pulling out of P2P
payments was the high rate of fraudulent activity.
With the beginning of any new product or services there's
fraud and there's gaming, and it's how quickly you can learn
and consume that to make the product better.
It has a real impact on how well the service is able to
survive. And admittedly, financial institution
tolerance for stuff like that is pretty low whereas a
fintech might be more willing to have some losses and learn
as they go.
Venmo was founded in 2009.
It was purchased by PayPal in 2013 and grew in popularity a
few years later. Similarly, Cash App was launched in 2013.
For banks, it's a no-brainer to try to compete in that
space. Customers use their mobile banking apps all the
time, and no one wants to see the opportunity from a space
that people are already really active in to
third-party competitors.
So that's where Zelle kind of came into the picture.
So Venmo is actually pretty different from Zelle.
On its face, it's also an account-to-account fintech
challenger. But there's a number of different ways in
which Venmo can monetize its consumer base that Zelle does
not take advantage of for a variety of reasons.
Venmo has the most users but a lower volume.
That leads to a lower average transaction value.
Zelle, on the other hand, has a really high average
transaction value. That's because it's really popular
for high value transactions.
For example, I use Venmo a lot for social, but I also pay
my rent on Zelle. And that dichotomy is is super common
and it makes competition in this space really interesting
because it isn't necessarily a "winnable space." It's a
space where providers can compete for volume, but they
can compete for different kinds of volume.
And you can get users who are on another platform to use
yours, even if they don't give up the one that they were
using before.
Tight security can be at odds with convenience and that also
applies to P2P payment apps.
Of the seven banks that own Zelle, four of them reported
more than $90 million in scam or fraud claims in 2020.
That number jumped to nearly $236 million in 2021, An
October 2022 Senate report projects it will exceed $255
million in 2022.
The report also says that in most cases, the banks are not
repaying customers who were the victims of a fraud or a
scam.
You built the system, you profit from every transaction
on the system and you tell people that it is safe.
But when someone is defrauded, you claim that's
the customer's problem.
Senator Warren has also accused the consortium of
banks that own Zelle of withholding information about
these scams and fraud cases.
Zell's parent company, Early Warning Services LLC, called
the report "misleading" in an October 2022 press release.
Zelle says that more than 99.9% of payments are sent
without any report of fraud or scams.
There have also been reports of fraudulent activity on
PayPal, Venmo and Cash App.
All four companies provide resources to consumers to
better protect themselves.
One of the reasons that P2P fraud is so tricky is because
it's less about something that's inherent to the
platforms. It's not like they're being hacked or their
data sort of falling off the edges or whatnot, and it's
more about human error. People are being tricked
online, there's social engineering, there's scams,
and they're falling for it.
Companies like Zelle and others will say, Well,
consumer has to work with their financial institution.
We're not the bank, right?
And I think that just puts too much onus on the consumer.
Right now, the way that things are in terms of legal
liabilities and responsibility, companies have
obligations to investigate and to adhere to certain
prescriptions, but the consumers largely still can be
liable for sometimes up to $500.
So that's problematic.
Most of them are taking it on a case-by-case basis.
So they'll listen to what the situation was and then make a
determination about whether or not those are funds that
should be returned to the consumer.
And there are times too where they will work with the
receiving bank and try to claw back those funds.
That doesn't always work because if the funds are
already taken out of the account, what are you going to
do?
The challenge is that once you're online, there's
continually evolving kinds of schemes.
And yet, I would say with respect to all of the
companies, not just Zelle, beyond education, you don't
really see the technology keeping pace with methods
that consumers can use (a) to either slow down the
transaction, and you do see companies responding there, or
(b) if we're in a real-time payments and transactions
space are there real-time solutions to managing and
preventing fraud?
And who should bear the responsibility?
There's some mitigations around that, about how much
money you can send at one time, but fraudsters are
creative. So I think what we'll need to see and what I
expect to see in some form or fashion is some ability to
rein in and provide some consumer guarantees around
reversibility or effectively a chargeback.
They are working to fix the fraud problem, and there's
really three approaches they're taking to that.
The first is a tech-driven approach.
They basically use AI machine learning to better make sure
that senders and recipients are who they say they are on
the back end. There are also education campaigns.
When you're sending money, you might get a prompt saying
"Are you sure you're sending this to who you think you're
sending this to?" just to try to preempt the fraud before it
happens by making consumers more aware that it's a risk.
And then the third is this rumored reimbursement plan
that came out late last year.
Under this plan, banks would determine if a fraud claim was
legitimate and then the bank that holds the account where
the funds were sent would reimburse the victim.
So if I sent money to you and you were a scammer, your bank
would be responsible for paying me back if it was
proven to be a claim that could be repaid.
Competition in the space is really fierce, but it's
complicated because it's really common for people to
use multiple apps for different use cases.
So I would say that the majority of P2P users are on
more than one of these platforms and potentially even
all four of them, but they are using them in different
ways.
The companies are competing to gain more share of users in
different age demographics.
Only 20% of people over the age of 65 said they use Zelle
while 41% said they use PayPal, according to a Pew
Research Center survey from July 2022.
What we're looking to see is more people who are older, who
have greater financial means, higher incomes starting to
adopt fintechs as their primary mode of accessing
financial services.
Gen-Z and even Gen Alpha are digital everything all the
time. They live and die by their smartphones.
Everyone wants to reach this population.
Cash App already launched a teen account.
Venmo seems to be exploring it this year.
So it's an exciting opportunity for growth
potential because if you can get people when they're really
young, they might form habits around you that last for a
lifetime.
The branding is helpful in that you aren't looking at
Wells's individual P2P payment mechanism or Citi's
individual payment mechanism.
It looks very cohesive across the financial institution
landscape that's participating in the network.
So I think all of those things bode well.
They're trying to chip away at some of the frequent
challenging points of interacting with the banking
industry, whereas Cash App, PayPal and Venmo are really
growing off of viral P2P benefit.
Providers are trying to get new features out there.
I'm interested to see how they're looking to tighten
relationships, grow their volume through these new
offerings.