Zelle Small Business Payments Help Power the ‘P2P’ App’s Rapid Growth

At the five-year mark Zelle, the banking industry's answer to nonbank P2P services, is also becoming a channel for small business payment needs. It fits into a payments niche that's replacing cash and checks, but not so much cards.
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When Al Ko gets his hair cut, he doesn’t reach for his wallet to pull out cash or a card. His stylist opens Zelle on her smartphone, pulls up her QR code, and Ko shoots the code with his own phone to make the payment through Zelle.

The choice of channel isn’t surprising. Ko is CEO at Early Warning, the provider of Zelle. The ease of shooting the code instead of inputting recipient information is one of the latest factors helping push along Zelle growth.

Ko cites increasing use of QR codes by small business users of the payments app as an example of how the service is expanding beyond its original consumer P2P concept. Early Warning is owned by seven large banks, but the Zelle app is offered by 1,750 banks and credit unions.

“We’ve significantly invested in and grown the number of business checking accounts that integrate with Zelle,” says Ko. “It works very similarly to consumer Zelle, and it enables businesses to pay one another and to accept consumer payments.”

Many of the businesses that have adopted Zelle as a fast, easy and free payment mechanism are small concerns like landscapers, dog walkers and landlords receiving rent payments. Ko says that in the beginning this application sprouted organically as people using Zelle personally began trying it out for business. Now Zelle has been actively encouraging such transactions.

Potential Path for Zelle’s Business Payment Evolution

Another business usage that’s growing is Zelle’s disbursement service, which a growing number of larger businesses use to process rapid payments to consumers. This business alone increased by 87% in the second quarter of 2022 over the first quarter. Uses include distribution of insurance settlements and rebate payments.

Over the next five years, predicts Ko, speaking on the fifth anniversary of the start of the banking industry’s answer to Venmo, Square’s Cash App and other older P2P competitors, Zelle will build a much bigger foothold among businesses, on top of growth among consumers.

“Business has been a real driver of growth for Zelle. There will be more and more use cases, because it makes so much sense for money to move from my checking account into another checking account quickly and securely.”

— Al Ko, Zelle

In the second quarter of 2022 nearly eight million employees, contractors and customers received payments from small firms via Zelle for Small Business.

This evolution comes as Zelle continues to enjoy strong growth. In promoting its anniversary, the company notes that it has processed over five billion transactions coming to almost $1.5 trillion since its debut in 2017. In the second quarter of 2022 Zelle processed payments of about $155 billion over 554 million transactions.

Ko likes to drop a key statistic: The average Zelle transaction comes in at about $275.

“That’s a pretty expensive meal, if you are splitting it with friends,” quips Ko. It reflects the growing use of the service for larger payments, such as rent and money from home for college students, as well as business transactions.

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Zelle’s Place in Payments at the Five-Year Mark

Zelle can be accessed in two ways, generally, either from within institutions’ mobile banking apps, as a feature to be selected, or through the Zelle app. In part reflecting the role of the largest banks in the mix, Ko says that 80% of Americans with a checking account can access Zelle through their mobile banking app.

At this point Ko sees Zelle as consuming more and more of the portion of payments that once relied on cash and checks, offering greater speed over the latter and the immediacy of the former. He likes to call Zelle “digital cash.”

However, he doesn’t see Zelle moving into ecommerce in a way that would supplant credit cards. A major use case for digital wallets is ecommerce as well, so he sees any role for Zelle in that space as something down the road. Even if the company developed a role there, “I would expect card-based payments to rule the roost.”

One of the appeals of Zelle is immediacy. While settlement between institutions is overnight via the automated clearinghouse, the payments are immediate from the consumer’s perspective, Ko notes.

During an interview with The Financial Brand, Ko was asked about the role of faster payments in relation to Zelle. The Clearinghouse’s RTP program is already out there, and the FedNow effort is slated to pilot in the fall of 2022.

Ko points out that the two programs, much like the ACH system now, will serve as behind the scenes payment rails for the institutions participating in Zelle, rather than as a competitive factor.

In many ways, multiple payments mechanisms are working in parallel these days. Beyond the new faster payments efforts, Ko points to the quintessential P2P use, splitting a restaurant bill.

“I wouldn’t pay you with a card, I’d pay the restaurant with a card,” and then Zelle or another P2P would be used for the reimbursement. Ko characterizes faster payment rails as “enablers.”

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The Impact on Zelle of Frauds and Scams

Zelle has been roasted on Capitol Hill, in the media and elsewhere about customer losses. Ultimately, reimbursement of customers for funds stolen is between their financial institution and themselves.

The issue falls into two categories. Ko explains the difference, in his view. Fraud, he explains, “is where somebody gets into your account and makes an unauthorized transaction. That’s exceptionally low.”

On the other hand, the volume of scams has been growing. These are situations where people fall for online romance cons and other deceptions. “These are situations where you paid someone, you authorized it, but it turns out it was a mistake, or you were duped,” says Ko.

Ko says Zelle has been spending more and more on user education, to alert people to the risk of scams. In addition, he says, the service has been introducing “smart friction” points in transactions to make users stop and think a moment about money being sent to a new payee.

Another tool Zelle has been using are dynamic payment limits. Higher amounts of payments can be made to another party after some payments have been made under lower limits. The understanding is that recipients who have proven to be legitimate can be trusted more.

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