The world of P2P payments has been a major challenge for smaller banks and credit unions. A new cooperative effort launching in 2022 holds out the promise of a fresh alternative. The new option could become crucial as P2P technology has become regarded as table stakes for consumers’ paying each other, but increasingly for paying at point of sale.
The new option, called “Chuck,” has been in development for about two years as a project of Alloy Labs Alliance with a group of banks ranging in size from $370 million to $5.6 billion in assets. P2P was one of the first working groups formed when FinTech Forge created the Alloy Labs fintech “think tank” approach in 2019.
The initial effort, launched in cooperation with Payrailz, consists of the 11 banks that were in the working group, however, the consortium hopes to add many additional players. Banks, credit unions and even other companies like neobanks and fintechs will be permitted to join, according to Jason Henrichs, CEO at Alloy Labs and Managing Director at FinTech Forge.
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The Chuck project has been portrayed as a lower-cost alternative to Zelle for smaller financial institutions. While cost was one of the original drivers for the project, its purpose evolved to include other factors.
The technology, in brief, is designed as an “open loop” approach to P2P and potentially other forms of consumer payments. Payrailz’ software connect to the rails of other payment services. “Chuck” is designed to reside within a financial institution’s mobile banking app so that consumers will be able to send and receive payments via other networks, such as PayPal, Venmo, Square’s Cash App and Zelle.
Up until now, Zelle has been regarded as the banking industry’s answer to the original P2P challenge. Future connections are planned for the RTP (real-time payment) network created by The Clearing House and for the FedNow faster payments project that is slated to launch in 2023.
The idea is that by using routing numbers or alternative identifiers the consumers will be able to send and receive funds from within their institution’s mobile app without having to join the external providers’ programs.
Later in 2022 other payments streams based out of the same approach will be introduced for B2B and B2C, according to Henrichs.
“It’s a bold move,” says veteran payments analyst Richard Crone of Crone Consulting. “It will be interesting to see if they can pull it off.”
Frustrations Served as a Catalyst for Fresh Thinking
Smaller institutions have been frustrated in working with the established P2P services.
One larger community bank initially wanted to go with Venmo but the payments processor kept kicking the institution’s deployment down the road. Finally the bank decided to pivot to Zelle, according to an officer there, and before that was finalized it merged with a bank that already had a relationship with Zelle.
Reading Cooperative Bank, in Massachusetts, on the other hand, looked at Zelle when it was first introduced and wanted to join up. But many smaller institutions found themselves on a long waiting list — Zelle was started and is owned by a group of very large banks. (Zelle’s parent, Early Warning, is owned by seven major U.S. banks.)
After reviewing the pricing for smaller institutions, the bank demurred, says Julie Thurlow, President and CEO. Later, the bank began asking younger employees what they thought of the various options for P2P and many favored Venmo over Zelle. Thurlow says this led the bank to become involved in the Alloy Alliance project. Indeed, Reading Cooperative is the first institution to go live with Chuck, in a staff, friends and family beta test started in the latter part of 2021.
Crone says industry sources have told him that founding banks pay Zelle 24 cents or less per transfer, while smaller, non-owner institutions pay much more — between 45 cents and 90 cents per transfer. Crone adds that the latter pricing is more than it costs such banks to process a paper check.
In the beginning, says Henrichs, the cost of Zelle was a key factor. “Our effort was a direct response to community banks saying, ‘Zelle’s not for us. It’s prohibitively expensive. It makes us further beholden to large infrastructure players that don’t always have our best interests in mind’,” he explains.
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Moving Past Frustration Towards Better P2P
However, thinking evolved from there.
The Chuck Goal:
The idea is not to become “the anti-Zelle,” but to level the playing field for institutions and to rethink payments for consumers.
There’s been an overemphasis in coverage of Chuck, he continues, that holds that it is “designed to compete with Zelle, — that it is simply community banks striking back.”
“The group’s realization was that ‘We don’t’ need a community bank version of Zelle’,” says Henrichs. “‘We actually need to rethink where payments fit for community banks, because payments are becoming increasingly the #1 touchpoint between the institution and the consumer’.”
The thinking became that P2P payments ought to be centered on the customer, not on the platform.
“Instead of siloed walls between payment services, short-term networks and a lot of infrastructure, the group decided to create something that puts customer choice first and allows customers using different services to still be able to interact with each other,” says Henrichs. “This was rather than customers saying, ‘Either you have to be on this or that app or I can’t interact with you’.”
As for the institutions involved, says Henrichs, community banks’ roles are changing, especially as less routine business occurs in branches.
At the same time, he says, all participants in Chuck get equal treatment. “Julie Thurlow’s bank gets the same standing within Chuck as if she were JPMorgan Chase,” he explains.
“We’ve created a holistic, open strategy around how we solve for the future of payments for community banks,” says Henrichs.
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How Chuck Addresses Changing Consumer Banking Habits
Banking and financial services have increasingly become a fragmented affair, especially as fintechs give consumers many new options and as market-based open banking made it possible to have more accounts talking to and drawing on each other. In some regards this has turned banks and credit unions into insured deposit holding tanks for sexier nonbank apps and services.
Part of the thinking behind Chuck bucks these trends.
Reading Coop’s Thurlow says she sees appeal for pulling all of a consumer’s mobile payment data into one place, which apps using Chuck will be able to do. There is also a layer of safety that banking apps have, she says, including anti-fraud measures and deposit insurance, that nonbank apps don’t always provide.
“This helps bring value back into the bank,” says Thurlow, and gets past the usual emphasis of app providers simply on being fast.
In fact, while Venmo, PayPal and Cash App offer ways to make money, profitability doesn’t enter discussions with people associated with Chuck at this point.
“They need to give it away in order to maintain engagement,” says Crone. He says that P2P transactions can occur as many as 20 times a month and traditional institutions want to have visibility in that process. In some ways the participants are in catch-up mode.
“We’ve seen this movie before. It’s called bill payment. No bank makes money on bill payment.”
— Richard Crone, consultant
Joining together under Alloy gives institutions an opportunity to pool expertise and funding towards innovations that no one small player could afford to invest singly, notes Thurlow. So while revenue opportunity seems low now, holding onto customers with new services can at least be cheaper.
Selling Chuck to the American Public
Henrichs says that smaller banks and credit unions that want to stay relevant need to offer P2P. “There’s twin pressures, one that is creating a push and the other than is creating the pull,” Zelle is on one side — it does P2P but avoids other applications that other P2Ps expanded into, to avoid competing with other banking products. Venmo, for example, is as much a retail payment service as a person-to-person channel.
Marketing is still being developed. Henrichs says that institutions may adopt a “Powered by Chuck” approach rather than using that as their own product name.
“Chuck is the network and we can talk about the network in the same way that banks talk about Mastercard,” says Henrichs. “They still get to design their own card.” He notes that building national brand recognition is very expensive and that having each community bank establish its brand may make more sense.
The question lurking in some readers’ minds is, “Why Chuck? What does it mean here?” Henrichs admits the group is taking a bit of a flyer on the name. It started as a project name only but got legs for being different and for various other meanings of the word. One was the chuck in a power drill into which multiple bits and other tools can be placed. This is somewhat akin to the idea of using a Chuck-equipped mobile app to make payments. The proof will be in the public response.