Why You Should Care About Zelle’s Business Model

As a consumer it is a good idea to understand the incentive structures and systems that underpin the products and services you use. Not only does it influence what you ultimately get charged for these products and services and what you could get charged in the future, but it also sheds important light on the inner workings of the businesses you’re dealing with. We’ve previously written about Zelle, which has become one of the most popular ways to send and receive money in the United States – indeed the combined list of banks that partner with Zelle and credit unions that use Zelle is now well over 1,000. In this post we hope to shed some light on the inner workings of Zelle and to specifically unpack the question of Zelle’s business model.

Brief History of Zelle

As noted above, we previously covered the history of Zelle, which you can review in detail, so we’ll just summarize the key points here.

• Zelle was founded in 2011 and was initially known as the clearXchange.
• The original owners were three banks: Bank of America, JPMorgan Chase and Wells Fargo.
• Initially clearXchange only facilitated transfers among customers of the three banks, but access was gradually expanded to include customers of other banks and credit unions.
• In 2016 clearXchange was sold to Early Warning Services, which itself was owned by 7 of the largest banks in the United States at the time and also now.
• clearXchange was subsequently shutdown and relaunched in 2017 as Zelle.
• In 2021, Zelle facilitated 1.8 billion transactions worth $490 billion

What is Zelle and How Does it Work?

Zelle is a money transfer application that enables consumers to send and receive money. It is commonly referred to as a person to person (P2P) application for this reason. It serves the same function as other p2p applications such as PayPal, Venmo, Cash App and Apple Pay, but does have some important differences which we address below.

If you have a bank account at a bank or credit union in the United States, there’s a good chance that you can use the Zelle payment application to send and receive money. All you have to do is follow 3 very simple steps to get started using Zelle:

1. Enroll – the first step is to enroll. You can do this with your e-mail address or with your phone number (has to be a United States phone number). You can also download the Zelle app from the Apple App Store or Google Play Store.
2. Choose a Recipient – once you’ve enrolled in Zelle, you then need to find the person you want to send money to. Similar to the enrollment process, all you need is the person’s e-mail address or phone number. The recipient just needs to have a United States checking or savings account to be able to receive the funds you send.
3. Enter The Amount – the last step is to enter the amount you want to send. Once that’s done, you click send and the transfer is initiated.

Importantly, once you’ve enrolled with Zelle you only need to follow steps 2 and 3 to transfer money. Zelle transfers get completed within minutes. Banks and credit unions that participate in the Zelle network are connected; therefore, instead of the funds leaving your bank account to travel to your money transfer application to then travel to your recipients money transfer application and then their bank account, Zelle transfers work from bank to bank. This is why Zelle transfers get completed very quickly.

How Does Zelle Make Money?

The short answer is that Zelle doesn’t make money directly but provides financial benefits (which we think are quite significant) to its partner banks indirectly. The typical business models for money transfer applications is to charge the consumers using the application to send and receive money, a variety of fees. Zelle does not charge any of these fees for using its service.

As the table shows, each of the main competing p2p applications charge their customers a fee for instant withdrawals and that is one of the ways these competing apps such as Venmo make money. In fact apps such as Venmo and Cash App have expanded their offerings (and business models) to include additional non-money transfer features such as bitcoin trading. So clearly Zelle does not make money from its service the same way its competitors do. To understand how Zelle’s business model came about, we have to understand its history and ownership structure.

As indicated earlier, before Zelle, there was its predecessor company: clearXchange. The business model of clearXchange consisted of participating banks (Bank of America, JPMorgan Chase Bank and Wells Fargo) being charged for using the payment network. These founding banks had to decide whether to charge the end customers for using Zelle or offer it for free. Ultimately we have to conclude that they elected to offer the service for free since there’s no evidence that they ever started charging consumers for the service.

In 2016, Early Warning Services completed the acquisition of clearXchange, and disclosed that at the time it was owned by the following banks: Bank of America, BB&T, Capital One, JPMorgan Chase, PNC, U.S. Bank and Wells Fargo. Collectively these banks represented (and still represent) a significant percentage of the consumer bank accounts in the United States. But these banks chose to expand the list of participating banks and credit unions while at the same time not charging these banks for using the Zelle Network and not charging consumers.

Our understanding is that Zelle does not charge any fees to either its participating banks and credit unions, or its users. In short, Zelle is not currently a for-profit entity. We think this makes sense for the owners of Zelle for three reasons. First, banks that participate in the network benefit from other banks joining the network since it increases the number of consumers that they can facilitate payments to quickly and cost effectively. Second, Zelle cuts out the middle man (Venmo, Apple Pay, Cash App) and allows banks and credit unions to keep transactions their customers make “in-house”. This could prove valuable from a big data standpoint, but almost more importantly, it helps fend off the many p2p competitors.

Third and finally, using Zelle can often be cheaper than the alternative. Bank of America has disclosed that usage of Zelle by its customers has resulted in a reduction of the number of checks they need to process each year – as a point of reference, our March Survey indicated that 9% of bank customers still used checks to pay their bills. Instead of a customer visiting a branch to deposit a check and Bank of America staff having to follow procedure to validate and process checks, with Zelle the transfer is completed within minutes, and entirely facilitated by technology. This not only saves time, but also money. In short, we don’t believe Zelle makes money, and instead we believe that its owners and partners have a strong incentive to expand the Zelle network while funding the operating cost of Zelle.

How Does Zelle Make Money Without Fees?

As discussed in detail in the preceding section, Zelle is able to operate without fees because it provides other business and financial benefits to its owners and partners. The Zelle service operates essentially as a not-for-profit service as of this writing.

How Do Banks Benefit From Zelle?

Banks benefit from Zelle by providing the fastest, cheapest and most convenient money transfer application that is available in the United States.

• Fastest – as shown in the table earlier, the default time it takes for a money transfer to be completed (i.e. to be in the recipient’s bank account) after a transfer is 1 to 3 business days. This is the case for Apple Pay, Venmo and Cash App – three of the most popular p2p applications available today. With Zelle the money transfer gets completed within minutes.
• Cheapest – in order to get access to Zelle’s transaction timing, competing applications charge fees that range from 0.5% to 1.75% of the transfer amount. With Zelle its free. It literally does not get cheaper than free.
• Most Convenient – Zelle has a unique advantage versus its competitors in that the service is built directly into the accounts of its partner banks. Therefore, even though there is a separate Zelle application that is available, for the majority of consumers in the United States, it is not needed. You simply just need to enroll in your bank or credit union’s online banking interface using your e-mail or phone number and that’s it.

In addition, according to Zelle’s operator, financial institutions that have implemented Zelle saw the following improvements in their operations:

1. A 12% reduction in the number of checks written (which saves time and money processing checks as discussed earlier)
2. A 2% reduction in the attrition rate of checking accounts
3. A 5% improvement in the reputation institution index score

Concluding Comments

Zelle is a revolutionary p2p service that has quickly become one of the primary ways that consumers send money in the United States. While the service is far from perfect given the growing number of complaints about fraud, it checks many of the important boxes for consumers: it is incredibly efficient and completely free.