Zelle is a digital platform that enables peer-to-peer (P2P) payments, where one person digitally transfers money to another person. As banks report their 2017 fourth-quarter earnings, it is becoming ever more apparent how well Zelle fits into these banks' plans for growing their digital platforms.
For years, PayPal Holdings Inc. (PYPL 0.79%) and its subsidiary Venmo dominated the P2P space, as other financial and tech companies showed little enthusiasm in going after a market that promised little to no profit. But PayPal understood something that the big banks and tech companies did not: P2P payments were never about making money, but rather deepening customers' engagement with a given platform.
Thus far, PayPal's strategy has worked phenomenally well. In its latest quarter, user and engagement metrics continued to show solid growth: Active customer accounts grew 14% year over year to 218 million, and payment transactions per active account grew 9% YOY to 32.8.
The problem for banks and other P2P service providers has been offering a platform that could be used by enough people to allow their networks to gain traction. Previously, P2P platforms offered by banks could only be used to send money to other people with accounts at the same bank. Ditto for consumers on a smartphone manufacturer's P2P system, such as Apple Pay: It only worked if the person you wanted to pay, or receive money from, owned a device from the same company. Zelle solves this problem for banks, as it's incorporated into a number of big banks' existing digital and mobile platforms, considerably widening its potential user base.
Rapid and widespread adoption
Last summer was Zelle's big launch. Several banks simultaneously added the offering to their digital and mobile channels, including JPMorgan Chase (JPM 1.10%), SunTrust Banks (STI), Wells Fargo (WFC 1.54%), Bank of America (BAC 0.98%), and U.S. Bancorp (USB 1.76%). While we're still in the early innings of a long ball game, early results have to look encouraging for these banks. Nearly all of them called out Zelle at least once during their recently reported quarter's conference calls.
On JPMorgan Chase's conference call, CEO Jamie Dimon said the bank's digital offerings have "gotten better and better and better." Immediately afterward, he said:
Zelle and Chase QuickPay, we're not gaining share but we're definitely gaining clients, and we have barely started to market that. That's where real-time P2P has opened. How many banks are part of it now, like 30 to 40 ... Everyone's going to be opened up to Zelle.
During SunTrust Banks' conference call, CEO William Rogers said Zelle "significantly enhances our broader payment capabilities."
In the Wells Fargo conference call, CEO Tim Sloan mentioned that account holders had initiated more than $10 billion in P2P payments using Zelle since it was introduced last June.
Bank of America CFO Paul Donofrio said P2P payments "doubled from Q4 '16, as the introduction of Zelle makes it easier to send, request, and even split person-to-person money transfers."
In 2017's fourth quarter, U.S. Bank found uses for Zelle beyond simple P2P payments. The bank launched a new program called Disbursements via Zelle, a platform that allows businesses to send electronic payments to individuals using only a mobile phone number or email address. In the press release announcing the program, U.S. Bank's chief innovation officer Dominic Venturo said: "Organizations are looking for payment solutions that solve real-life challenges. ... We make payables more secure and efficient for business clients by eliminating the upfront effort required to obtain the payees' banking information."
Ready to be the Zelle of the ball
This is just the beginning for Zelle. This quarter, it's launching an ambitious marketing campaign featuring Broadway star Daveed Diggs, and it's scheduled to run ads during the NBA All-Star Game, Grammy Awards, and even the Super Bowl pregame show.
Early Warning Services, Zelle's privately owned parent company, believes it can reach traditional banking consumers who don't trust technology to fulfill their banking needs, because the platform is embedded in their banks' existing digital channels. Early Warning's chief administrative officer, Rose Corvo, stated, "In our research, we learned that people who are peer-to-peer skeptics are those resistant to using something outside traditional banking."
Judging by the early results, she appears to be right. While I don't believe PayPal shareholders need to be worried -- there's plenty of room in the growing digital-banking world for more than one player -- Zelle's early results show that it could see significant success in the digital payments arena.
That would be a boon for the participating banks: It would allow them to compete against savvier tech companies like PayPal, using their own digital and mobile platforms, and would keep customers from fleeing to more convenient options.