Banks are considering Zelle as an alternative to payment cards

Banks are considering extending peer-to-peer money transfer service Zelle to point-of-sale transactions, according to a Wall Street Journal report. The service has grown by leaps and bounds since the start of the pandemic, prompting banks to consider new opportunities, including as a way to avoid fees charged by Visa and Mastercard on debit and credit card transactions.

Key points to remember

  • Banks are evaluating the use of Zelle for point-of-sale purchases as an alternative to debit or credit.
  • The money transfer service is owned by a consortium of major banks.
  • Allowing consumers to use Zelle as an alternative payment method could wrest some control over the rules and fees from payment processors Visa and Mastercard.
  • While some of the banks that own the service are ready to go ahead, others are unconvinced.

Will Zelle come to a payline near you?

Zelle was first launched in 2017, but since the start of the coronavirus pandemic, the money transfer service has seen significant growth. In 2021, the service processed 1.8 billion consumer-to-business payments totaling $490 billion. This represents a 49% increase in payment volume and a 59% increase in payment value compared to 2020. That year, the company saw a 58% increase in payment volume and a 62% increase in payment value.

The growing popularity of the service has prompted the banks that own it to consider extending its use to point-of-sale transactions. It’s already working with businesses, and the number of payments received by small businesses in 2021 has increased by 162% year-over-year.

But not all owners of the service are on board. Zelle is a product of Early Warning Service, which is a joint venture between Bank of America, Capital One, JPMorgan Chase, PNC Bank, Trust, US Bank and Wells Fargo.

According to the Wall Street Journal report, Bank of America and Wells Fargo are supportive of the expansion, while JPMorgan Chase has reservations about the timing. Proponents can do this on a trial basis, but they cannot expand it to the service’s 1,450 financial institutions without a vote from the seven banks that own them.

How would that change things?

When consumers use debit or credit cards to make purchases, the merchant pays fees set by payment processing companies, including Visa, Mastercard, Discover and American Express. But Discover only processed payments on its own credit cards in the United States, and most of Amex’s business involves its own credit card lines as well.

That leaves Visa and Mastercard, which handle the vast majority of US-based credit card issuers.

When a merchant pays transaction fees, Visa and Mastercard share a portion of that revenue with the banks, credit unions, and other financial institutions that issued the card used in the transaction. But card issuers have no control over the amount of fees or the rules associated with the process.

Bypassing Visa and Mastercard through Zelle would reduce the billions of dollars banks earn each year from merchant fees. But it would give them more control over setting transaction fees and other rules on the process.

It is not yet known if the favorable banks will proceed on their own or if this will even spread among American consumers, who mainly use plastic in the queue. Adding another payment method could overwhelm consumers, leaving them to stick with what they are used to.

However, if Zelle and other payment card alternatives become mainstream, it could create more competition for Visa, Mastercard and other payment processors.

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