Big Banks’ Interest in Launching Zelle Into Retail Payments Puzzles Some Observers

A serious expansion of the Zelle peer-to-peer payments network or just saber rattling to get a better deal from the card networks? That’s one question raised by payments-industry experts after The Wall Street Journal reported Wednesday that Bank of America Corp. and Wells Fargo & Co.—two of the seven big financial institutions that own Early Warning Services LLC, operator of the Zelle network—are lobbying to expand the service to retail payments. 

At issue is whether the financial institutions can leverage the expansion of Zelle to retail payments to avoid restrictions on debit card fees imposed on big banks by the 11-year-old Durbin Amendment, payments industry experts speculate. 

In theory, banks offering Zelle for retail payments could set pricing to merchants higher than the Durbin cap, which is 0.05% plus 21 cents per transaction. At the same time, payments experts argue that expanding Zelle to retail payments also could benefit New York City-based The Clearing House Payments Co. LLC, in which both BofA and Wells Fargo have an ownership stake, by increasing volume through the network. An increase in volume means lower operating costs and more fees for the network, which benefits its owners.

Early Warning says it uses The Clearing House, as well as the nationwide automated clearing house network, to settle transactions on the back end. About 10,000 financial institutions offer Zelle to their customers. In 2021, consumers and businesses sent 1.8 billion payments totaling $490 billion through the Zelle network.

A commercial expansion of the 5-year-old Zelle service to retail payments would not be considered a stretch, payment experts say, as Early Warning began in 2020 allowing consumers to use the service pay small businesses, such as landscapers, tradesmen and physical therapists.

While Scottsdale, Ariz.-based Early Warning would not comment specifically on The Wall Street Journal report, it said in a statement via email:

“Since our launch five years ago, we have added several features and functionalities within Zelle, including adapting the service for businesses. We announced Zelle for Small Business in 2020, after a pilot in 2019. In 2021, we saw a 162% year-over-year increase in payments received by small businesses….We are working with financial institutions to explore more opportunities to streamline consumers’ and businesses’ financial lives by leveraging Zelle.”

Bank of America declined comment and Wells Fargo did not respond to requests for comment.  

While there is a business case to be made in favor of expanding Zelle to retail payments, the chief argument against the move is that it could cannibalize retail credit card purchases, on which there are no interchange caps, says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based payments consultancy.

“Card issuance is an enormously profitable business for financial institutions, and Early Warning’s owners are large card issuers,” Grover says. “Offering Zelle as a retail payment option won’t necessarily attract new customers and will likely displace card payments. Charging consumers a fee [to make up for lost interchange revenue] is a non-starter. Any interchange fee would have to be competitive with other alternative payments for merchants to accept Zelle.”

Some observers say Early Warning may be looking to emulate PayPal Holdings Inc.’s Venmo, a direct competitor to Zelle in the P2P space, which has successfully made the transition to retail payments. In November 2021, for example, Venmo struck a deal with Amazon.com.

The other hurdle facing a move by Zelle into retail payments is that consumers would lose the protections and rewards they receive when making a purchase with a credit or debit card. 

“There would be no way for a consumer to dispute a transaction with a card issuer when making a purchase using Zelle and there would be no rewards earned on the transaction,” says Grover. “Merchants may like that, but consumers will not be better off making purchases using Zelle as opposed to a card.”

Grover also points out that financial institutions have floated the idea in the past of forming their own payment network to compete with Visa Inc. and Mastercard Inc. In the early 2000s, the financial institutions that owned Visa and Mastercard decided to end their co-operative business model and turn the networks into for-profit public companies, largely to escape the threat of antitrust lawsuits.

“That concept was more a shot across the bow of Visa and Mastercard and a way of saying I want a better deal,” says Grover. “To create a successful alternative retail payment network, the new network has to be far more compelling than the incumbent systems, not 10% or 20% better.”