What’s the Business Case for Zelle?

Zelle is a hot topic among mid-size banks and credit unions these days (big banks too, for that matter).

At American Banker's recent Digital Banking conference, a breakout session on Zelle was standing room only. And at a state banking association conference I attended, a legacy fintech vendor (guess which one) VP spoke on "Zelle and the future of real-time payments."

I missed the Digital Banking session, but can tell you the state conference session was little more than a sales pitch to get community bankers to sign up for the P2P payment service. Should they (and credit unions) do it?

Zelle is going to be YUGE!

According to eMarketer, by the end of 2018 Zelle users will outnumber Venmo users, on its way to roughly 56 million users in 2022 (~50% more than the number of Venmo users at that point).

And, in fact, according to the companies themselves, Zelle transaction volume has exceeded Venmo's volume for the past two years (which is a bit surprising when you consider that, technically speaking, Zelle didn't launch until 2017).

  Taking eMarketer's growth projections at face value can be misleading because:

  1. User growth will come from different sources. Zelle's growth will result from its members converting their own customers to the P2P tool. Venmo and Square's growth, on the other hand, will come from new customers they attract. Interestingly, eMarketer projects an increase of roughly 31 million Zelle users versus an increase of about 30 million for Venmo and Square combined. And this doesn't include any forecast of Apple's P2P user base.
  2. User growth won't be mutually exclusive. It's possible--and I'd argue likely--that many consumers will use multiple P2P tools, not just one (if you want a more detailed explanation of why, see the Insight Vault post Who Will Win the P2P Payments Battle?).
  3. Transaction volume isn't an apples-to-apples comparison. The average transaction size for Zelle payments is way higher than Venmo payments. Why? My bet is that it's because a lot Zelle transactions are really account-to-account transactions (between family members), and that Venmo has more true "p2p" transaction volume.

Should mid-size banks and credit unions care that Zelle transaction volume and user count is going to be big? Is that enough to get them to join the Zelle bandwagon?

What's the Business Case Here?

It would be nice if banks and credit unions took an economic rationale-based approach to that decision (remember the "we want to appear to be technologically advanced" rationale driving so many credit unions to adopt Apple Pay a few years ago?). Let's look at those reasons:

1) Direct revenue. The Fiserv guy (oops) who presented at the state banking conference said no bank or credit union was currently charging users to use Zelle. Given FIs' horrendous track record at charging for P2P transactions, it seems very unlikely that Zelle will be a revenue generator for FIs.

2) Indirect revenue. The rationale here is that by providing satisfactory P2P payment capabilities, customers of Zelle banks and credit unions will want to expand their relationship with those FIs. This is pretty shaky rationale and would require having a control group of demographically-similar non-Zelle users to compare Zelle users against. Even then, it wouldn't necessarily prove causation. Remember how many banks tried to say that PFM customers were better customers?

3) Cost reduction. It's my understanding that Zelle costs FIs more than they would have to pay for a service like PopMoney. And a bank or credit union whose digital banking platform isn't integrated with Zelle would have to incur development costs to be able to offer it. So much for the cost reduction rationale.

4) Customer engagement. Quoted in the Financial Brand, Celent's Bob Meara describes this rationale as follows:

“If banks can keep their users engaged, then they have more of an opportunity to cement relationships with customers while providing a broader array of services. Every time Paypal or Square or Venmo takes a customer interaction away from a bank, that’s engagement a bank doesn’t have with its customers.”

The first sentence is spot-on, but I'm not buying the second one. Engagement--when it drives an emotional connection--does help to cement relationships. But does a transaction like a P2P transaction or checking an account balance really help to drive that connection as much as providing advice or alleviating a problem?

To that point, Is there any evidence that existing Venmo users have switched banks, or not "cemented" their relationships with their existing banks? I've got data that shows that the large banks--who have been without Zelle until recently--have done quite well "cementing" their relationship with Millennials, who comprise a large portion of Venmo users.

The engagement argument is not a particularly strong rationale. Among consumers who consider a megabank to be their primary FI, 37% opened a credit card, roughly double the rate among customer of large regional banks and credit union members.

5) Revenue protection. This rationale might hold some water. According to a recent Cornerstone survey, nearly half of Millennials said they would be very likely to use a debit card from PayPal--and might even make it their primary card. About a quarter said the same thing about an Apple or Google debit card, and one in five said that about Venmo. In this scenario, the threat of interchange displacement is real.

A P2P provider-sponsored debit card is just one of a number of threats to banks' and credit unions' interchange revenue, however. Offering Zelle may help to deflect some of the potential reduction, but certainly not all of it.

6) Deposit protection. As I've written about before, banks and credit unions are facing the threat of deposit displacement. Venmo users currently have more than $2 billion sitting in their Venmo accounts--money that used to sit in their checking accounts. While this threat is real--and offering an alternative to Venmo and Apple would help slow deposit leakage--it's hard to weigh the costs involved with offering Zelle against this benefit.

What Should Banks and Credit Unions Do About Zelle?

Many FIs are currently wrestling with this question. Unfortunately, it's the wrong question to ask.

P2P payments is just one aspect of using--and getting benefits from--a checking account. Coordinating and/or integrating credit and investment accounts are two more aspects. The more important question to deal with today is:

What's our checking account strategy going to be?

I can't help but cringe as I write that, because the term "checking account" feels so 1978. And, of course, 1978 conjures up memories of the disco era, and those platform shoes that so many of you were wearing back then.

Adopting Zelle might be the right thing for your institution--but you'll only know it's the right answer if you understand how it fits into your broader account strategy.

Ron Shevlin
Director of Research
Cornerstone Advisors