It was recently announced that the banks behind Zelle, a bank-to-bank payment rail, are endeavoring to expand their purview to take on ecommerce in a digital wallet, and we have a ton of thoughts.
The article mentions Apple Pay as the motivation for the effort but we think this is only scratching the surface.
First, Apple Pay, which we’ll use as a placeholder for the wallet “fear” mentioned in the WSJ article.
Digital wallets allow consumers to pay for goods with multiple payment modalities. Some allow you to upload your existing card, which would in theory earn your issuing bank money on interchange fees, or you could use a different modality, like buy now pay later (BNPL), an ACH rail, crypto, or something else that cuts your issuing bank out of fees.
This is the largest concern about the wallets: ceding the customer relationship, which in turn means less revenue for the banks.
Apple is a great boogeyman simply because of its size:
With a market cap > $2T, Apple needs to grow hundreds of billions of dollars a year to satisfy public markets. They have a direct relationship with hundreds of millions of global denizens, and could easily stand up their own financial institution to enable preferred access to Apple’s ecosystem.
Think about it: what prevents Apple from making a bank today and allowing you to connect your Apple Pay account to your Apple Bank account?
Apple could underwrite your credit if you don’t have the balance for a transaction, and could tell the million US merchants that accept Apple Pay that, we don’t know, Apple Pay transactions made by Apple Bank come with a relatively paltry 10 bps fee.
It sure beats the shit out of paying 200+ bps to interchange, and another 100 bps to a greedy-ass processor adding zero value.
What merchant wouldn’t sign up for this assuming that the incidences of fraud, etc. were not materially worse?
Actually, the fraud could be worse so long as it was less than the amount the merchant was previously paying in interchange fees.
Accordingly, the non-Apple financial communities recognize the risk of Apple (or wallets generally) becoming a bank and are building their own solution to head this off.
But banks are not tech companies.
Not by a long shot.
Remember MCX? This was a consortium of large merchants that blocked Apple Pay from their stores under the belief that they would build their own payment app.
And it failed.
Because merchants, like banks, are terrible at building technology.
So these bank efforts deserve executional skepticism.
Yet it’s not hard to see this as an ultimate push to eliminate costs from the US payments ecosystem, which is insanely expensive relative to global contemporaries and naturally catching the eye of domestic legislators.
Assuming the bank rail works, what prevents Zelle from telling merchants that they’ll immediately save the 20 bps remitted to the card networks Visa and Mastercard from consumers who pay with Zelle?
The banks also have total control over rewards and issuing bank interchange, so they could offer that revenue as a sacrifice to merchants in driving adoption of their wallet.
The wrinkle that Zelle has is on the processing or merchant acquiring side: Apple Pay built all of its merchant distribution directly over the past 15 years.
Nearly every issuing bank has an acquiring arm that partners with a handful of merchant acquiring partners, complicating things because Zelle probably cannot turn off the acquiring costs depending how this rolls out.
The bank efforts have a few things going for it.
First, it will ride Zelle’s previous efforts. By outsourcing to a third party owned by the banks (Early Warning Systems, which oversees Zelle), the banks increase their chances of success. Innovating inside a big company, especially a financial institution, is impossible. Bureaucracy, culture, resourcing: it just never works.
(By coincidence it’s also how the card networks were created: banks seeded Visa and Mastercard and made their returns when they went public.)
Second, by focusing on ecomm the banks have made their lives easier. Card present / in-store, while the overwhelming majority of payments volume (80%+), is complicated.
There’s hardware you have to deal with, consumers are less likely to have their payment wallet handy, etc. Starting with ecomm will allow the effort to find if it has legs in a much faster, cheaper, and less embarrassing fashion.
But we don’t think anybody cares about the effort until it’s clear how they save money.
Looking at Forbes’ comparison of Venmo vs Zelle, the top issue people care about are the savings in moving money with Zelle.
In the long term we see this as a way to directly move funds to merchants without the need of intermediaries. Most merchants use a bank account from one of larger banks, as do most consumers, so this has a really solid thesis behind it.
Execution risk aside, we think the biggest, immediate loser upon any modicum of success will be the credit card networks, whose revenues will be placed upon the sacrificial alter.
Even if this doesn’t pan out, legislators are coming for Visa and Mastercard.
As are BNPL and other payment modalities.
Time for the card networks to create real value with data lest they risk relegation to the annals of history quicker than they imagined.