How Zelle plans to recapture the smaller banks, credit unions it left behind

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A year after its launch, Zelle’s P2P payment volume has rapidly expanded through usage at the nation’s largest banks. But enabling smaller institutions to offer it to their customers is proving to be more challenging.

Early Warning, the bank-led company that operates Zelle, said 51 banks are live on its network, with more than 200 under contract for integration in the coming months.

"We're accelerating the rollout through resellers, but it's a process that will take some time," said Lou Anne Alexander, group president of payment solutions at Early Warning, said in an interview.

The consumer use case for P2P took years to materialize, but as momentum builds now from several directions, many small banks and credit unions are overcoming their initial skepticism. And as they wait to add Zelle, their anxiety grows.

"We have a serious interest in Zelle, because it's very convenient and has a high level of usage among member segments we'd like to penetrate more deeply," said Anthony Marino, vice president of operations at Merrimack Valley Credit Union, which has six branches in eastern Massachusetts.

Large banks have put their marketing muscle behind Zelle, and the allure of real-time payments is proving to be a strong driver of the service for institutions already within the network. Zelle reported $32 billion in P2P volume during the third quarter, up 14 percent from the prior quarter. Bank of America's Zelle payment volume in October reached $4.3 billion, up 100 percent over the same period a year earlier.

But longtime P2P pioneer PayPal and its Venmo app are also seeing strong gains, particularly among millennials. Overall PayPal and Venmo reported $36 billion in total payments volume for the third quarter. Even Fiserv’s Popmoney P2P service, introduced in 2010, has seen double-digit gains, according to Fiserv.

Of course, this is little comfort to the smaller banks and credit unions on the sidelines, waiting for Early Warning or the institution's bank-platform reseller to bring them aboard.

Zelle is working with resellers of bank-platform services like Jack Henry to speed up the integration process by onboarding many banks and credit unions at once, versus the more time-consuming individual integrations, but it's not clear exactly when mass onboarding will become routine.

“A lot of banks are wondering if Zelle is really coming, and how long it will be until we can onboard hundreds of banks at one clip,” said Lee Wetherington, Jack Henry’s director of strategic insight. “Banks are wondering if they’ll make their 2019 timelines for rolling Zelle out, and what Plan B is, in case Zelle doesn’t become the ubiquitous solution we hope."

FIS and Fiserv are optimistic about adding participants to the network next year as the onboarding process pace accelerates.

Resellers report that more smaller institutions are anxious to join the P2P movement, concerned they'll lose ground to Venmo and other P2P services if they don’t find a way to participate soon.

Venmo continues to gain ground, not just from its own expanding base of P2P users, but also the recent surge of merchants adding Venmo as a funding source for e-commerce. Shopify introduced a Venmo button in October, and BigCommerce added it this month.

“It’s a big concern to smaller institutions, not having an answer to Venmo or Square as they see the potential for standalone P2P apps to become a de facto account competing with them,” Wetherington said.

Fears about Venmo gaining significant ground on Zelle in the future may be overblown, said Talie Baker, a senior analyst with Aite Group.

"I'm not sure that using Venmo for e-commerce will accelerate its popularity for P2P at the expense of other P2P services," Baker said, adding that PayPal still needs to make Venmo operate in real time to maintain its cachet with consumers.

In addition to the long queues for smaller institutions waiting to join the Zelle network, some had waited on the sidelines because they weren't sure Zelle was a good fit for their operations, based on initial friction from users who were paid or asked to send funds indirectly through Zelle. Some credit unions also worry that joining Zelle would not be worth the tradeoff of giving fee revenue to their traditional rivals — banks.

But one credit union that was among the first to adopt Zelle reported positive results.

First Tech Federal Credit Union, based in Palo Alto, Calif., was one of the first credit unions to offer Zelle, beginning in September 2017, a launch that coincided with Zelle’s general brand rollout.

“Zelle helped us get the word out to staff and members with a coordinated campaign that worked well with our brand,” said Andy Wright, First Tech's senior products marketing director. The credit union has 40 locations in eight states plus Puerto Rico, and it worked directly with Early Warning on its integration.

While Merrimack Valley Credit Union admires Zelle’s transaction security, the credit union also wants to lower its costs.

“P2P will be a crucial service offering for us, and as Popmoney has a fee, we’d prefer to have a service for members that doesn’t carry a fee,” Marino said.

Merrimack Valley has contacted Early Warning — along with other undisclosed P2P providers — about possibly adopting its P2P services in 2019 after its merger with Bridgewater Credit Union in Massachusetts, Marino said.

Thousands of U.S. banks depend on resellers like FIS, Fiserv and Jack Henry for broad implementation of Zelle. By contrast, the nation's largest banks worked directly with Early Warning.

A substantial number of smaller financial institutions FIS serves are already offering Zelle, either directly or through FIS’s platform, said a spokesperson for the Jacksonville, Fla.-based bank platform provider.

One large credit union FIS serves will go live with Zelle this quarter, and FIS expects many more will launch the P2P service at the beginning of the year, according to FIS.

Fiserv is also poised to take Zelle live with many financial institutions of varying size when the opportunity becomes available with Early Warning Systems, said Matt Wilcox, Fiserv's senior vice president of strategy and innovation.

“It’s not possible yet to take thousands of banks live at once, but we’re collectively figuring out how to do that,” Wilcox said.

The banks most likely to have cold feet about adopting Zelle at this point are those that haven’t previously dabbled in P2P, according to Wilcox.

“The concern comes from banks that haven’t offered P2P before, and because it enables consumers to transact differently through a different payment type, there’s risk associated with that,” he said.

Headlines from certain fraud cases reported earlier — wherein consumers were tricked into using Zelle to send money to scammers — also gave pause to some of Fiserv’s customers.

“As with anything new, there’s noise and energy around it, but we haven’t seen the type of fraud alluded to in some of the early press clippings,” Wilcox said, noting that some smaller banks are taking a "wait and see" approach before committing to adopt Zelle.

For now, adding Zelle is easier for the 2,500 banks that already offer Popmoney, he said.

Delivering real-time payments via Zelle is one of the P2P service’s biggest draws for financial institutions, according to Wilcox.

“Zelle is displacing some transactions that would have been cash or check, but they’re also seeing net new transactions through it,” Wilcox said.

Popmoney also supports real-time payments, but relatively few financial institutions have tapped that feature, he said.

“We’re big believers in how the Zelle brand can drive a ubiquitous experience real-time payments experience, and be the right solution for financial institutions,” Wilcox said.

But Fiserv has no plans to sunset Popmoney.

“Popmoney may be just fine for some financial institutions, but there may not be that many who stay with it,” Wilcox said. “It’s true that for several years everyone was saying this would be the year for P2P, and it was never that moment, but I think we’ve finally landed on that year.”

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