Zelle: “Venmo Killer” or Just Another Wannabe?

2017 promises many things, but one event that fintech enthusiasts are eagerly awaiting is the release of the purported “Venmo-killer” app, Zelle. Announced at Money 20/20 in October 2016, Zelle is actually a rebrand of ClearXchange, the P2P payments consortium between major banks such as Wells Fargo, Morgan Stanley, and Bank of America. Banks are hoping that the reincarnation of their P2P payments solution with a zippy new name and increased marketing support will stem the flow of customers who are using third party services (namely Venmo) to transfer money. The app promises to provide a sleek, intuitive interface allowing users to transfer money between customers of participant banks (currently ~20 listed on their website). As we see it, there are three key issues that could tip the scales one way or another, either making Zelle the next big thing in fintech, or just another player crowding the space.

1. Security — Security is arguably Venmo’s greatest downfall. Due to their intense focus on user experience and simplicity, the app also invites a fair amount of fraud. For a long time, Venmo didn’t verify logins from new devices and didn’t notify users if their password had been changed. While Venmo did introduce multi-factor authentication in 2015 and now allows users to set an optional pin number specific to the app, their security sophistication is nowhere near the level of banks and credit card companies, which utilize complex algorithms to detect whether a transaction might be fraudulent. For instance, if a hacker tried to send a large sum to a person who has no mutual “friends” with the user on Venmo, the app should ideally flag that transaction and ask the user for verification. If Zelle can introduce and effectively market superior security settings (that don’t overly impede the user experience), they may be able to draw in the significant portion of users — typically older and less comfortable with mobile technology — who are resisting mobile P2P payment adoption. In a recent report from Accenture, over 50% of survey respondents had never made a P2P mobile payment, and another 20% did so very infrequently. This represents a giant portion of the market that banks may be able to capture with Zelle if they can convince users that the app is secure and easy to adopt.
2. Brand Recognition — Venmo clearly has the upper hand here. While there is little data about what actual brand recognition stats look like, Venmo currently has a much stronger name than Zelle, and even other players in the space such as Square Money. To top it off, Paypal acquired Venmo in 2013, giving them further legitimacy. The sheer power of Venmo’s brand is demonstrated in the fact that their name is now used as a verb: users ask one another to “Venmo me.” Clearly, the big banks recognized this was a problem and decided that they would have to unite under one network and attach a snappy name to their app to encourage a similar viral adoption amongst users. But is it too little, too late? Venmo has been in operation since 2009 and has acquired a cult-like following among young professionals and teens alike, setting them up for a long future of sticky customers whose financial assets will only grow with time. Zelle needs to intensely market to the current customers of all participant banks, perhaps focusing on the late majority that has yet to adopt Venmo. It is essential for Zelle to quickly ramp up users amongst all participating banks, to increase the power of their network, and inherently the app itself. Which brings us to our final key issue…
3. Network Effects — The last piece of the puzzle is the strength of each app’s network effects. Clearly, any P2P payment system depends on a strong network — if I can’t conduct a transaction because the other party does not have the required app, the technology is worthless. On the one hand, Venmo has an advantage here. They are the incumbent in the P2P payment space and already have a strong network of active users (no official numbers have been reported, but parent company Paypal reports 188 million total users, a decent portion of which we can expect to be Venmo users). On the other hand, Zelle has access to a massive captive audience (76 million customers) which they can grant automatic access to Zelle. The key here will be to get this potential pool of users to actually utilize the service, rather than using Venmo or simply opting out of the network. As long as the consortium of banks can agree to each market Zelle to their existing customers and encourage customers to use the service, they have a fighting chance.

There’s still no official word on when in 2017 Zelle will be released, but if they can crack these three core issues, Zelle could be the “it” payments app of the year. Of course, we can’t forget that Venmo still commands fierce loyalty with the demographic that is most likely to cause this technology to change the financial services industry. Venmo’s core strength is in their user base, and the power of those users has yet to be fully realized.