Community banks developing a lower-cost Zelle alternative

A consortium of community banks is developing a peer-to-peer payments network designed to be more affordable than existing P2P services like Zelle.

The concept, called “Chuck,” is designed as an open network leveraging existing and emerging faster-payment rails like FedNow, according to Forbes, which first reported the news Monday.

Such an approach could cut costs by finding the lowest-cost rails to send P2P funds in each circumstance, while driving ubiquity and equal access for all sizes of financial services players. It would also operate from within banks' own mobile apps, similar to how Early Warning Services' Zelle does.

Payrailz, a payments startup in Glastonbury, Connecticut, will use its AI-powered digital platform to route digital payments for Chuck to ACH, debit cards, the Clearing House’s RTP network, and other popular networks, Alloy Labs said.

"Our Paywaze 'open-loop' platform integrates with different network rails and uses a smart router capability to route each transaction independently, based on the characteristics of the payment," Marvin Goldwasser, vice president of marketing and chief of staff at Payrailz, said in an email.

The initial group of banks participating in Chuck range in assets from under $500 million to $5.6 billion and are based in states throughout the country. They include Five Star Bank in New York, Mercantile Bank of Michigan, First Northern Bank of Dixon in California, Chesapeake Bank in Virginia and American State Bank in Iowa, as well as Savers Bank and Reading Cooperative Bank, both based in Massachusetts.

Financial institutions that haven’t already committed to Zelle may welcome having another option.

When Zelle launched in 2017, some credit unions balked at signing on to the service, fearing it would increase their risks and costs while also handing over control to Zelle's owners, the megabanks that the credit unions compete against.

Today, more than 1,200 U.S. financial institutions directly support Zelle, with 600 more planning to install it, according to its operator, Early Warning Services, which is owned by seven large banks.

Banks are individually responsible for managing Zelle payment disputes, but Zelle-related fraud and scams recently drew a significant number of public comment letters to the Consumer Financial Protection Bureau in response to its inquiry into Big Tech payment systems.

Early Warning charges banks an unspecified fee for using Zelle, creating a dilemma for smaller financial institutions as P2P has become an important customer-retention tool, according to Richard Crone, a principal with Crone Consulting.

"Community banks and credit unions want to avoid the exorbitant fees that Zelle charges them, rumored to start at 24 cents or less per transaction for the largest, Zelle-founding banks to 45 cents up to 90 cents per transaction for low-volume, smaller institutions," Crone said.

Chuck's mission of creating a hub enabling financial institutions of all sizes to support all P2P apps could have broad benefits, Crone said.

"Chuck symbolizes a preemptive move protecting [smaller banks'] role in enrolling customers for direct deposit while developing an open gateway that agnostically supports all available P2P services," Crone said.

Alloy Labs was established in 2018 by 12 community and midsize banks, with the mission of developing alternative approaches to P2P payments, digital client onboarding and small-business lending.

Alloy’s collective assets total more than $250 billion and reach more than 30 million consumers and over 6 million small businesses, according to the group’s website.