Repurposing the peer-to-peer payment tool Zelle as an option for the checkout line might seem like a no-brainer for the banks that own it until the consequences are considered.
If consumers used Zelle to make payments by tapping their bank accounts at check-out, the banks would deprive themselves, and their card network partners, of the billions of dollars they earn annually in interchange fees when consumers pay with credit and debit cards.
The possibility of banks pushing Zelle into such a commerce role was floated this week in a Wall Street Journal piece that said some of Zelle’s bank owners are interested in the idea, but others aren’t. While Wells Fargo and Bank of America are in favor of the move, JPMorgan Chase is not at this time, the publication reported.
Spokespeople for JPMorgan Chase and Wells Fargo declined to comment on the possibility. Zelle didn’t immediately respond to a request for comment.
Like other digital payment methods, Zelle grew significantly amid the COVID-19 pandemic as consumers hunkered down at home and turned to electronic alternatives to make payments. The company said in February that its payments volume last year jumped 49% over 2020, with a 59% increase in the related dollar value, according to Early Warning Systems, which operates Zelle.
Early Warning Systems is owned by a group of big banks, including Wells Fargo, Bank of America, JPMorgan Chase, Capital One, U.S. Bank, Truist Financial and PNC Bank. The service is available through about 1,100 banks and other financial institutions (it's mainly accessed through individual banks' apps, though there is a Zelle app as well).
While such a Zelle setup might be more friction-free for consumers, with simpler and speedier transactions, it might not match the consumer fraud protections of cards. And it turns out a little friction may still yield a bigger bottom line for banks and card companies.
"We doubt the banks would really push too hard for this," said analysts at the financial firm Baird Equity Research in a Wednesday note for their investor clients. "We think setting up Zelle would be costly to the banks (that don’t always work well together anyway!) and unless they charged quite a bit more than current interchange, it could be hard to make the economics make sense."
Plus, Visa and Mastercard provide the banks with "accelerating incentives" to flow as much spending as possible over the cards, so anything that reduces transactions would cut into their yield, the Baird note said.
Analysts at RBC Capital Markets also see disadvantages. "Why would a bank want to cannibalize interchange?" they asked rhetorically in a note to investors Wednesday. "In short, the answer is banks would never want to jeopardize interchange revenue, which is the equilibrium fee that is charged to the merchant and received by the banks for utilizing the banks’ branded network partners (Visa & Mastercard) who set the fees."
At the same time, the RBC analysts said they could understand why some of the banks might be leaning toward the idea of Zelle creating the new service. "Although expanding Zelle's direct to bank payment mechanism to large retail point-of-sale could self-cannibalize certain interchange revenue, we believe banks could be concerned that by not offering the service they run the risk of non-bank third parties, such as Venmo and Cash App, becoming quasi deposit gatherers," the note said.
In the event banks did proceed with repurposing Zelle for the checkout line, it would be the card companies, specifically Visa and Mastercard, that would be the big losers in the new arrangement, though PayPal and its Venmo payment app would also be negatively affected as would Block’s Cash App, RBC said.
