The recent momentum for digital payments has led to many new and innovative alternatives to credit and debit cards. The next big threat to cards may come from the issuers themselves.
Several of the nation’s largest banks that own Early Warning Services, the company that operates the Zelle peer-to-peer payments service, reportedly are talking about the pros and cons of using Zelle — which today connects accounts at 1,450 financial institutions — to build a retail payment acceptance service that could compete with the major card networks.
Bank of America and Wells Fargo favor the idea of expanding Zelle for retail payments, while JPMorgan Chase opposes the idea and U.S. Bank and Capital One Financial are on the fence in these discussions, according to a report in the
Two other banks that own a stake in Early Warning —
The biggest question surrounding the concept is why banks, who earn billions in their cut of credit and debit card interchange fees, would potentially undermine that revenue stream by providing Zelle as a cheaper alternative at the point of sale.
But observers say U.S. financial institutions are wise to begin contemplating how their future roles will be shaped by rapid changes in the payments technology landscape, and crafting strategic responses.
Certain retail niches are already using instant payments in new ways. For example, TD Bank’s automotive-financing unit this month began enabling car dealerships nationwide to receive
With the Federal Reserve’s FedNow instant-payments rail expected to go live next year,
But applying instant payments to routine consumer checkouts within existing payment systems is another story, said Patricia Hewitt, a principal with PG Research & Advisory Services.
“Figuring out the governance model alone, among seven competing banks and across a savvy merchant base, would take years,” Hewitt said.
Still, there can be no doubt that as instant payments evolve globally, U.S. banks would be wise to participate in the architecture of interconnected systems, she said.
“Ubiquity will rule the day at the point of sale and all these competing instant-transfer solutions — whether they’re Zelle or Cash App or Venmo — need to interoperate in order to make sense at that level. When you think of how the electronic funds networks stitched themselves together behind the scenes to effortlessly move PIN debit transactions nationwide, it’s clear that Zelle’s owners would be better off driving that discussion,” Hewitt said.
Zelle is already used for transactions that aren't strictly P2P.
Also, Early Warning recently said it plans to expand the use of Zelle QR codes, which it’s been testing with four undisclosed financial institutions, to help eliminate misdirected payments.
“For small businesses, QR codes provide a faster, more professional payment flow, with peace of mind that customers won’t mis-key their contact info,” Meghan Fintland, senior director of external communications at Early Warning, said by email.
That move is one of the ways Zelle is working to offset
“Zelle needs to take care of fraud, but part of offering any payment system is managing the settlement risk. Fraud with Zelle currently is centered on the standalone app, and with banks directly supporting retail payments there would be many more points of security,” said Richard Crone, a principal with Crone Consulting.
One of the biggest advantages Zelle has to expand retail payments-acceptance is its vast base of enrolled and verified consumers, according to Crone.
“It’s hard work for banks to populate their customer databases with a valid email and phone number, and Zelle has helped banks accomplish that,” he said.
Europe’s experience demonstrates the complexities of developing retail acceptance of account-to-account payments in larger, more diverse markets, said Zilvinas Bareisis, a senior analyst with Celent.
“While account-to-account payments are very popular in the Netherlands and some Nordic areas, in the U.K. we’ve been talking about it for more than 10 years," Bareisis said. "Cards remain very popular and account-to-account payments are only now slowly starting to become a reality with merchants, mainly for e-commerce transactions.”
Account-to-account payments aren’t free, either, Bareisis pointed out. While cards offer a payment guarantee to merchants and protection for consumers, there is no established format for resolving returns, disputes and fraud liabilities for account-to-account payments handled directly through retailers.
How retailers mediate returns has become a friction point with the fast-growing buy now/pay later services merchants offer through fintechs, whose
But interchange is not guaranteed to continue to be a cash cow for banks indefinitely, said Jason Heinrichs, CEO of Alloy Labs, which has assisted several community banks in developing
He noted there is downward pressure on interchange worldwide, and U.S. merchants within the past year have pushed back on these rates in high-profile ways.
Amazon recently resolved a
“The power dynamics in interchange are shifting," Heinrichs said. "And look around: How many places can you check out now directly with Amazon or Google? How much money do you load onto a Starbucks app even though the rational thing is to pay as you go?”
