Since its founding in 2009, Venmo has established itself as one of the premier peer-to-peer money transfer services and one of the most prominent names in FinTech. From its humble beginnings as the brainchild of former college roommates, the app was the first to enable quick and easy money transfer between friends and last year processed $17.6 billion worth of payments, a 135% increase from the previous year. In 2016, Time magazine named it one of the best apps of the year, and in 2017, Fortune magazine named it one of its breakthrough brands. It has, without a doubt, changed the landscape of P2P payments by taking advantage of the inefficiencies of exchanging money with friends via traditional methods offered by the big banks.
Now, however, the big banks have answered; beginning this month, Zelle will enable more than 86-million US mobile banking consumers to easily send and receive money through the app. While this could spell the beginning of the end for Venmo, it could also show that the big banks are doing too little too late in the P2P money transfer field and that Venmo is already too established in its customer base for users to bother switching to something new.
However, no matter which service ultimately comes out on top, this has shown that FinTech firms have the power to force the hand of big banks towards crafting consumer-friendly innovation that may have otherwise been ignored. In order to understand the full scope of this development, we must first understand what enabled Venmo’s popularity and what Zelle is bringing to the table to compete with it.
How did Venmo come to be?
As mentioned, Venmo was founded in 2009 by two former college roommates who were frustrated by the difficulty of transferring funds from one person to another. They wondered why we were able to seemingly do everything on our phones but still had to have cash on hand or write a check to complete any small transfer of funds. With that, an idea was born, and after some initial changes to the design, we were left with what we know today as Venmo.
The app quickly distinguished itself from other P2P money transfer services with an array of features that appealed most notably to millennials. Venmo enables users to easily transfer funds to each other using the cell phone number or email address of the receiving party, and its business model also integrates payments with social media, setting it apart from competitors in the e-payment space.
The service shares payment data and personalized messages on a public social platform in the same way a user can share photos and news on Twitter. This feature has helped Venmo become much more than a P2P payment service: it’s something of a social media phenomenon. These social media characteristics have grown to define the app beyond its payment capabilities and have made it most popular with millennials and a staple on college campuses.
After significant gains in popularity, the service was ultimately purchased by PayPal in 2013 and has continued to thrive since then. The volume of money transferred via Venmo has been growing at an almost exponential rate, and the phrase “I’ll Venmo you the money” has become common in the millennial vernacular.
What makes Zelle different?
After watching Venmo eat up their market and complete transactions for their customers, the big banks decided enough was enough. In 2011, Bank of America, Wells Fargo and JPMorgan Chase teamed up to work on a digital payments solution that would allow their customers to send money to each other. The first product they developed, with the help of bank-owned company Early Warning, was called clearXchange. This was officially rebranded as Zelle earlier this month with an emphasis on bringing as many financial institutions onboard as possible. With eventual cooperation from more than 30 of the leading financial institutions in the United States and the world, Zelle is now set for its release to the public and its head-to-head battle with Venmo.
The root of the advantage that Zelle has over Venmo is its obvious connection to the financial institutions that its customers use.
When completing a money transfer using Zelle, a customer uses their usual mobile banking app, executes the transfer, and the money almost immediately appears in the receiving party’s bank account. Venmo, however, doesn’t work as quickly; while the transactions happen immediately within the Venmo network, the money goes to the receiving party’s Venmo “wallet,” which then must be manually deposited into their bank account, a step that can take days. Zelle’s direct link to financial institutions doesn’t only supply customers with quicker access to their money; it also supplies an added sense of security. By being able to complete all P2P transactions within their mobile banking apps, customers will avoid giving their banking info and passwords to a third party. Explained by Aditya Bhasin, CIO, Head of Consumer Technology, Wealth Management Technology & Operations at Bank of America,
“You don’t have to give your ABA number and your routing number...to some third party. You don’t have to give your username and password credentials to some third party. It all happens in a much more secure way inside your bank app.”
Additionally, Early Warning has established strategic partnerships with some of the leading payment processors (CO-OP Financial Services, FIS, Fiserv, and Jack Henry and Associates) which will allow millions more to experience Zelle through community banks and credit unions. According to Paul Finch, CEO of Early Warning Services,
“Fragmentation has been frustrating for consumers. Inconsistent experiences have made it difficult to send and receive money between banks. Zelle unites the financial community behind a single, real-time P2P payments experience for millions of consumers.”
It is not known yet if banks will add a fee to transactions on Zelle, but it is seen as unlikely as Venmo does not have any fees.
What is the bigger picture?
In the FinTech world, big banks have developed quite the reputation for their stubbornness over the years; it’s one of the things that has enabled so many FinTech startups to become successful. They have become outdated in their practices and been slow to adapt to a more mobile world, allowing insurgent FinTech firms like Venmo to sneak right under them and process billions of dollars of transactions for their customers. The wide release of Zelle, however, shows that these insurgent firms are forcing the big banks to rethink their ways and consider new ideas that will benefit consumers, even if they won’t necessarily be profitable.
This issue of profitability was the main reason the banks waited so long to respond to Venmo; the service lacks an obvious revenue opportunity.
Until recently, banks were content with Venmo helping millennials transfer small amounts of funds, but app designer Early Warning has bigger things in mind as Zelle is released, and is willing to overlook short-term profitability in favor of the bigger picture.
The goal with Zelle is to bring P2P money transfers “from millennials to mainstream,” according to Lou Anne Alexander, Early Warning’s group president for payments. Both Early Warning and the big banks recognize that both the P2P payment sphere and use of mobile banking apps are experiencing rapid growth, and both are set to take on a much more prominent role in society, and they want in on it. In addition to the functionality within pre-existing banking apps, Zelle will release its own app in the coming months that will offer the same perks to users.
The adoption of Zelle by so many large financial institutions is a truly groundbreaking development in the world of P2P payments and FinTech as a whole. Before Zelle, the best methods most banks offered to transfer money between parties were writing a check or completing a wire transfer – two activities that seem ridiculous and unnecessary given the capabilities of smartphones. Now, we are seeing banks and FinTech companies alike truly work together for the good of the consumer, and its due in large part to the pressure applied by a FinTech startup like Venmo. No matter what happens in regards to the competition between Zelle and Venmo, this launch shows that big banks are feeling the pressure from FinTech firms and know that they need to get on board before they’re left technologically in the dust. It will ultimately be interesting to track going forward how the banks treat new insurgent FinTech firms, and if they start innovating independently rather than needing to be pushed to do it.