THE RISE OF ZELLE:
I’m sure you’re all familiar with Venmo and PayPal, but have you heard of Zelle? Zelle was only launched in June of 2017, but
they’ve been putting PayPal to shame. In fact, they’ve nearly grown to half of
PayPal’s size within just these 5 years. Currently, PayPal handles just over $300 billion
worth of payments every quarter. Meanwhile, Zelle has already reached over
$150 billion per quarter. Something else to note is that the average
Zelle transaction is worth a lot more than the average PayPal transaction. Last year, PayPal completed a total of 19.3
billion transactions which translates to $1.25 trillion. This means that each transaction was worth
$65 on average. Meanwhile, Zelle has completed over 5 billion
transactions within the past 5 years which translates to nearly $1.5 trillion. This means that each transaction was worth
nearly $300 on average. So, not only has Zelle been exploding in popularity,
but it appears to be the app of choice for larger payments. At this rate, it seems like Zelle overtaking
PayPal is inevitable, but how was a new player able to put an established giant to shame? EARLY FAILURE:
One of the main reasons for the popularity of Zelle is the players behind it. Zelle isn’t some startup like Stripe or
Affirm, it’s actually the brainchild of the largest financial institutions in the
world. This includes Bank of America, Capital One,
JPMorgan Chase, PNC Bank, Truist, US Bank, and Wells Fargo. With such large names behind, you might be
thinking that the success of Zelle is a no brainer, but that’s not actually the case. In fact, Zelle was not their first attempt
at taking on PayPal. Their first attempt was actually a service
called clearXchange which came out in April of 2011. The project was initially launched by Bank
of America, JP Morgan Chase, and Wells Fargo, and it was based on the same ideology as Zelle,
eliminating the friction and cost associated with making payments. Instead of having to use account numbers and
routing numbers, you could just use someone’s email address or phone number. But, despite the promising pitch, clearXchange
didn’t translate all that well in the real world. For starters, their branding was garbage. One of the key characteristics that make PayPal
and Venmo so popular is that they’ve become verbs. It’s common for people say “I can PayPal
you” or “I can Venmo you”. But, ain’t no one gonna be saying “I can
clearXchange you”. And given that much of these transactions
take place amongst younger individuals in social settings, public perception is critical. Aside from having terrible branding, clearXchange
was also rather clunky and slow. It was painfully evident that clearXchange
was not designed by a modern organziation. To initiate transfers, you had to navigate
to portals on these banks’ websites and apps. And if you used any of these portals 10 years
ago, you know how clunky the UI was. It wasn’t just the UI that was clunky either. The payments themselves were just as clunky
as it took up to five business days for transactions to be completed. Do you know what else takes up to five business
days to complete? Traditional ACH transfers. It appeared that these banks had just thrown
together a platform that could initiate ACH transfers using just someone’s email address
or phone number. But, nothing else about the service stuck
out. Something else that we should note is that
clearXchange offered no real benefit to most users. One of their largest selling features was
that there were no fees to send money. But, the problem is that PayPal nor Venmo
charge any fees to send money to friends or family either. So, really there was no reason to use clearXchange. From the average person’s perspective, Venmo
was already popular amongst their friend groups, transfers took less than 5 days to complete,
the UI was magnitudes better, and as far as they were concerned, it was free. So, there was really no incentive to make
the jump to clearXchange. At first, the banks thought that the reason
for the failure was a lack of participating members. So, they worked on growing the size of their
network, but eventually they realized that what clearXchange needed wasn’t more fundamental
features. What it needed was a facelift, and that brings
us to the introduction of Zelle. INTRODUCING ZELLE:
The first problem that Zelle addressed was the branding shortfall. They changed the name from clearXchange to
Zelle. Zelle was not only easier to pronounce than
Venmo, but it was unique and memorable as it started with a Z. The old branding wasn’t the only thing that
the banks left behind. They also more or less ditched their institutional
business. Remember how we discussed that clearXchange
was free? Well, it wasn’t just cost effective for
individual users, it was also cost effective for institutional users unlike PayPal and
Venmo. So, the banks were very much hoping that businesses
and governments would start using the service and that this would prompt consumers to use
it as well. But, this is rarely how things work out, it’s
almost always the other way around. Institutions usually shift to use what their
customers want. This is precisely why businesses like PayPal,
Visa, and Mastercard are so successful. Consumers want to use them and businesses
have to pay the price. ClearXchange was looking to eliminate the
price for businesses, but that doesn’t make the service any more popular amongst consumers. They eventually realized this with Zelle and
they pretty much ditched the services market altogether. Instead, Zelle is only intended for paying
people that you already know and trust. In fact, Zelle disclaims any responsibility
for goods and services that are bought through the system. While this might sound like a disadvantage,
this is what actually allows for Zelle’s biggest selling feature. By keeping the checking and verifications
to a minimum, Zelle was able to allow for instant transfers. This feature was actually launched under clearXchange,
but Zelle is what became known for it. This was really Zelle’s checkmate move because
this was something that PayPal simply couldn’t compete with, atleast not very easily. PayPal would essentially have to become a
bank if they wanted to allow for instant transfers. PayPal has very much moved in this direction,
but they still haven’t been able to eliminate instant tranfer fees altogether. Currently, they charge 1.75% for instant transfers. Something else that makes Zelle especially
appealing is that you don’t really have to create an account to use it. Virtually everyone already has a bank account
with a Zelle participant. So, all you have to do is enable the Zelle
feature within your bank account. This also means that payments go directly
to your bank account, so you don’t have to deal with nominal sums of money just laying
around in your PayPal account. To be honest, none of these are groundbreaking
changes from clearXchange, but the facts don’t lie as Zelle is magnitudes more successful
than clearXchange. It just goes to show that how you’re offering
a service is just as important if not more important than what you’re offering itself. The banks didn't realize this a decade ago,
but with Zelle they’re more aware than ever which has given PayPal and Venmo a run for
thie rmoney. THE BAD:
Hearing all this, Zelle may sound like the perfect option for money transfers, but like
always, there’s another side to the story as well. For one, Zelle doesn’t offer any sort of
consumer or seller protection which makes it virtually useless for small businesses
and merchants. Now, we should note that PayPal’s services
within this realm aren’t that great. In fact, it’s actually terrible and it seems
like PayPal almost always sides with the scammer regardless of whether the scammer is a customer
or a merchant. And this is why PayPal has a trustpilot review
of just 1.3. But, with that being said, atleast with PayPal,
there is a system, with Zelle, the system is nonexistent. This is likely something that Zelle is working
on in the background, but as of right now, if you want some sort of transaction protection,
you’re gonna have to go with PayPal. Not only will you not have transaction protection
with Zelle, but you’ll also be more prone to scammers. Here’s the thing, Zelle offers instant transfer
directly into anyone’s bank account. That’s like a scammers dream right there. And let’s just say scammers have been hard
at work to exploit Zelle. Their latest scam tactic is known as the Pay
Yourself Scam. The scam starts with a text message that alerts
you that your bank account may be at risk. If you respond to this message, the scammer
will pretend to be a bank representative and will ask for a one-time verification passcode
to secure your account. What they’re actually doing though is enrolling
their bank account through Zelle using your phone number and email. This means that the next time someone sends
you money through Zelle, it goes directly to the scammer’s bank account. And with the average Zelle transaction clocking
in at nearly $300, this become quite a big issue. The banks are looking to stand behind Zelle
and have been refunding these transactions. But, this has been quite expensive, $255 million
expensive to be exact. Now, you could argue that this amount is nothing
in comparison to banks’ net income, and that’s true. But, here’s the thing, Zelle doesn’t produce
any revenue whatsoever, and there’s no clear path to generate revenue moving forward either,
so it’s kind of hard to justify these expenses. I mean they’re basically spending all this
money just to protect their marketshare. Even that argument is a bit iffy given that
it’s not like people are opening Wells Fargo accounts just to use Zelle. Really, the only thing that Zelle is accomplishing
for these big banks is preventing PayPal from gaining too much power against them. For larger banks like Chase and Wells Fargo,
that’s probably a worthwhile investment, but the same cannot be said about smaller
banks. It appears that these institutions will be
kicked out of the system if they don’t agree to reimburse victims, so it looks like they’ll
have no choice but to participate. All of this probably sounds like a good thing
for consumers, but is it? THE UGLY:
While Zelle is truly an exceptional service, all of this brings us back to ground zero. One of the biggest appeals of using alternative
financial institutions is that it takes power away from the big banks. But, embracing Zelle does the exact opposite. Not only will the big banks have control over
our savings, but they’ll also have control over our transactions. And at this point, nothing short of a black
swan event could stifle the growth Zelle. If the banks launch some sort of transaction
protection further down the line, this will simply make Zelle even more appealing. Something else to note is that Zelle has a
much better shot internationally than PayPal ever did thanks to the members behind it. UBS, for example, would likely have a much
harder time turning down Chase, Wells Fargo, Bank of America, and basically the rest of
the US banking system, than just turning down PayPal. In the end, Zelle’s popularity is really
not surprising. The big banks are basically just flexing their
financial power by offering an phenomenal service for free. While they did have some struggles in the
early days, they’ve more than figured those out, and now they’re looking to overtake
PayPal. But, that’s just the first step. It appears that the real goal of Zelle is
to eventually challenge Visa, Mastercard, and American Express. For decades, banks have been reliant on these
payment processors to complete merchant transactions, but Zelle could change all of that. And based on Jamie Dimon’s pay by bank vision,
it looks like this is very much where the industry is heading, but that’s just what
I think. Are you a fan of Zelle? Comment that down below. Also, drop a like if you wish we could enjoy
the benefits of Zelle without giving banks even more power. And of course, consider checking out our discord
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