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.
