Zelle: Venmo’s New Competitor?

With fintech startups on the rise, banks feel the pressure to innovate and keep up with the times. Photo courtesy of BusinessWire.

Written by Devyani Nijhawan

Revolutionizing the peer-to-peer (P2P) payments space, Venmo has turned into an action verb among millennials “Venmo me!” is a common postlude to group dinners and brunches. In February 2016, the PayPal-owned app hit a milestone with $18 billion in transaction volume. Despite competing with the likes of Google Wallet and Square Cash, Venmo has firmly held its ground, having increased its user base across the United States by 150% this past year, particularly on college campuses. Popularity of the digital payment service among youngsters can largely be attributed to its convenience, simplicity, loyal user base, and social network integration.

Traditional banks do also offer P2P options, such as BofA Mobile Pay, Chase QuickPay, and Popmoney—in fact, annual volumes of Wells Fargo, Chase, and BofA’s P2P payment platforms combined exceed $50B compared with Venmo’s $18B. While these services provided by individual banks have a strong existing user base (with slow to stagnant growth), millennials predominantly have not warmed up to these services.

For one, they lack the interactivity that Venmo offers. In 2011, fearing disruption from startups, the country’s largest banks – JP Morgan, Bank of America and Wells Fargo – introduced clearXchange, a network of digital payments facilitating easy transfer of payments for individuals and businesses with U.S. bank accounts using a mobile number or email address. Today, the network boasts 25 million registered users yet has seen little success garnering youngsters’ attention. Consequently, clearXchange decided to rebrand itself last year.

In October 2016, nineteen banks joined forces to tweak clearXchange and devise a better, more intuitive platform called Zelle (short for ‘gazelle,’ symbolizing agility and pace) – a Venmo-replica without the social media component. But does this mean war?

With fintech startups on the rise, banks feel the pressure to innovate and keep up with the times. Venmo, Airbnb, and Uber have infiltrated millennials’ lives to such an extent that youngsters today lack the patience to spend too much time on anything; why spend time withdrawing money from the bank when you can pay using your phone? Why write a check for rent when you can just Venmo it to your landlord? Smartphone penetration in the United States was reported close to 80% of the mobile phone market in 2015, and banks view this spurt in smartphone usage as an opportunity. Moreover, they recognize the need to create ease in consumers’ daily lives. Zelle is an outcome of this recognition, more so than a head-to-head competition with Venmo. Yet Venmo faces a threat from the soon-to-be-launched P2P platform.

Venmo currently faces two key challenges. First, Venmo is not as secure as one might think. In 2015, Chris Grey, a developer in NYC, noticed a $2850 transaction on his debit card from Venmo. He tried to login to his Venmo account, but his password and email had been changed. Venmo never notified him, which per se represents a weak security layer. Augmenting Grey’s difficulty, Venmo did not respond to his emails and calls until 24 hours later. He disputed the charge with Chase, finally securing a refund. Second, Venmo does not offer the ability to cash out immediately. Users have to wait one to three business days for the money to get transferred to their accounts. Say, you use Venmo to sell your $100 textbook. You hand over the textbook and Venmo notifies you that John or Jane Doe has paid you. If the buyer is a scammer, he or she has the ability to cancel the transfer.

Zelle would overcome these shortcomings. Plus, it has the backing of the biggest banks in the country—i.e., more capital for merging security and innovation. Through clearXchange, Zelle has the potential to capture a bigger market share of both individuals and businesses. But is it going head-to-head with Venmo? Venmo’s $2999.99 transaction limit per week and ‘Request’ feature send a clear message: Venmo was not designed in the first place for huge transactions with vendors. Instead, it was created to ease payment between friends and family—people you know, people you can trust. Zelle has the potential to be the P2P player used to make large payments but no matter how superior Zelle is, in the near future, millennials are still more likely to “Venmo” $5 for pizza and drinks on a Saturday night.

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