Zelle is the epitome of convenience when it comes to modern banking. Founded in 2017, Zelle is a US-based digital payment service. The platform allows users to send and receive money without worrying about inconvenient delays. About 1,700 banks, minority deposit institutions, and credit unions offer Zelle in their apps.
Since 2017, and after more than five billion transactions, close to $1.5 trillion has moved through the Zelle network. Unlike other popular payment apps, such as Venmo and PayPal, Zelle does not charge users any fees to send or receive money. That’s interesting because most digital payment platforms make their money by charging users a small fee for each transaction. It begs the question: how does Zelle make money if it doesn’t charge fees?
A closer look into Zelle reveals the platform is more than a digital payment service- it’s a product of the nation’s biggest banks. In this post, I’ll explore Zelle’s business model and its relations with the banking industry. Is the platform a profit center for banks or simply a way to offer customers more convenient digital payment options?
Bottom Line Up Front
Zelle is a P2P (peer-to-peer) payment platform that allows users to send and receive money without any fees. The platform doesn’t generate any revenue on its own, but it is a product of the nation’s biggest banks. Banks see Zelle as a way to offer customers more convenient digital payment options and prevent them from using competing P2P platforms, such as Venmo or PayPal.
Company Overview: What is Zelle?
Zelle is a peer-to-peer (P2P) payment service that allows Zelle users to send and receive money quickly. Early Warning Services, LLC, a FinTech company owned by the nation’s biggest banks owns Zelle. These banks include Bank of America, U.S. Bank, Capital One, JP Morgan Chase, Truist, Wells Fargo, and PNC Bank. The company has its headquarters in Scottsdale, Arizona, United States.
Zelle enables customers of participating financial institutions to send and receive money quickly using only an email address or phone number. Participating institutions include banks, credit unions, and minority deposit institutions (MDIs) that offer Zelle in their mobile apps or online banking platforms.
How Does Zelle Work?
Transactions take place through the Zelle Network, a real-time payments platform that uses the Automated Clearing House (ACH) network to process payments. The ACH network is a federal system that electronically transfers funds between financial institutions. While initiating ACH transactions through your bank’s online banking platform is possible, the process takes a few days to complete.
The Zelle Network processes transactions in minutes. When you send money using Zelle, the recipient’s bank or credit union receives the funds and makes them available almost immediately. The same is true when someone sends you money- the funds will appear in your account in a matter of minutes.
To use Zelle, you must have a U.S. bank account and be enrolled with Zelle through your financial institution’s mobile app or online banking platform. Once you register, you can start sending and receiving money by using either an email address or phone number. MasterCard and Visa are the payment rails that Zelle uses to process transactions.
Zelle limits transactions to $2,500 per day. Users can make unlimited transactions if they don’t exceed the $2,500 daily limit. Funds are typically available in minutes when the recipient’s email address or phone number is already enrolled with Zelle. The weekly limit for users whose credit unions or banks don’t offer Zelle, the limit set on transactions is $500 per week.
History of Zelle: A Product of the Nation’s Biggest Banks
In 2011, early-stage FinTech companies disrupted the banking industry with innovative technologies, such as mobile and peer-to-peer (P2P) payments. Companies such as Square and PayPal were quickly gaining popularity and posed a threat to the traditional banking system.
In response, the nation’s biggest banks formed a consortium to develop their mobile payment solution. These banks, Wells Fargo, JP Morgan Chase, and Bank of America, created what they then referred to as clearXchange. ClearXchange allowed people to send money to registered users at banks that were part of the consortium.
The service could integrate into participating banks’ online and mobile banking platforms. Users didn’t have to fund different accounts because it was also directly linked to their bank accounts. People could transact using only an email address or phone number.
Later, other banks and credit unions joined, and users could also start transacting with them. Also, U.S. bank and Capital One bank joined as owner members of the consortium. In 2015, clearXchange introduced real-time payments to their service. Initially, some transactions could take up to five days to process.
In 2016, Early Warning Services, LLC, a FinTech company, bought clearXchange from Wells Fargo, Bank of America, and JPMorgan Chase. Early Warning Services is a fraud detection and risk mitigation company owned by a consortium of banks. These banks include Bank of America, Truist, PNC Bank, JPMorgan Chase, Wells Fargo, U.S. Bank, and Capital One bought clearXchange.
Under Early Warning Service’s ownership, clearXchange rebranded to Zelle in 2017. With the new name and brand, Zelle also expanded its services. Thirty more U.S. banks were part of the Zelle network. The consortium was heavily marketing and spent up to $1 million for each T.V. ad. In 2018, the platform processed 433 million transactions worth $119 billion.
Today, Zelle is one of the most used P2P payment platforms in the U.S. Despite backlash from people claiming to have lost money in scams; the company is still going strong. The company reached its five-year milestone with more than five billion transactions. Nearly $1.5 trillion moved through the Zelle network (about 1700 banks, MDIs, and credit unions).
Zelle’s Revenue Model: How does Zelle Make Money?
Perhaps the first thing you’ll notice when interacting with the Zelle platform is that it’s free. So how does a large company that facilitates millions of transactions per year make money? The simple answer is that Zelle doesn’t make money. At least not in the way you’re thinking.
Zelle is a product of the nation’s biggest banks. These banks are its shareholders. The company is for-profit but doesn’t generate revenue from individual users. As a free platform, users can send, receive, or request money to and from others. The transactions are free of charge because the banks that own Zelle make their money in other ways.
When still operating as clearXchange, the company tried to impose transaction charges but quickly retracted. During that time, its competitors were offering free services. Imposing charges would have put clearXchange at a disadvantage. Offering free transactions ensured that participating banks kept their customers.
2018 saw Zelle launch a service that allowed customers to pay for goods and services to merchants. Through this service, merchants paid a 1% fee for each transaction processed by Zelle. However, the processing fee was payable to either MasterCard or Visa, which then went on to pay the bank that issued the customer’s debit card at an agreed percentage.
So while it looked like Zelle was making money off these transactions, the company wasn’t. It’s interesting to note that other P2P platforms like PayPal, Square’s Cash App, and Venmo make much of their revenue from merchant transactions. If Zelle had continued down this path, it could have been a significant source of revenue for the company. But at what cost?
We can say that Zelle doesn’t make money and doesn’t plan to in the future. Instead, beneficiaries of the platform are the banks that own and operate it. These institutions use Zelle to keep their customers from defecting to other P2P payment platforms. As long as the consortium of banks that owns Zelle feels that it’s meeting this objective, don’t expect any changes to the company’s revenue model.
Who Pays the Cost of Zelle?
We’ve established that Zelle doesn’t make money from transactions. So, who covers the cost of running the platform? Banks that own Zelle shoulder the cost. These institutions have deep pockets and can easily afford the costs associated with operating the platform.
Some of the cost of Zelle’s operations includes:
- Development and maintenance of the app and website
- Employee salaries
- Office rental and other associated costs
- Marketing campaigns
In return for shouldering the cost of Zelle’s operations, the banks that own it use the platform to offer their customers a convenient way to send and receive money. The banks also benefit from the data that Zelle collects on users’ spending habits.
This data is valuable because it helps the banks better understand their customers and target them with products and services they’re more likely to use. We can’t say for sure how much the banks pay to operate Zelle. But we do know that they feel it’s worth the cost.
Zelle’s Partner Network
Zelle’s partner network consists mainly of the financial institutions that offer the platform to their customers. The company has close to 1,700 financial institution partners as of 2022. These include credit unions, banks, and minority deposit institutions (MDIs). Given the number of financial institutions in the U.S., this number seems small. But the number becomes more significant when you consider that Zelle’s target market is bank customers.
MasterCard and Visa are also part of Zelle’s partner network. Zelle uses the companies’ networks to process transactions for merchants. MasterCard and Visa make money from these transactions through the fees they charge Zelle’s merchant partners. As we mentioned, these fees are typically 1% of the transaction amount.
Processor partners like Fiserv play, FIS, and Early Warning Services also help to make Zelle’s merchant transactions possible. Fiserv and FIS develop the technology that allows merchants to accept payments through Zelle. Early Warning services provide the risk management tools that Zelle needs to protect itself from fraud.
Zelle’s Future and Business Strategy
The pandemic of 2020 changed how we interact with the world and each other. One of the most significant changes has been the move away from cash and towards digital payments. This shift accelerated the growth of existing P2P payment platforms like PayPal, Square’s Cash App, and Venmo.
As one of the leading P2P payment platforms in the U.S., Zelle is well-positioned to benefit from this trend. The company has an extensive network of financial institution partners and millions of active monthly users. The U.S population is also increasingly comfortable with using mobile apps and digital devices to conduct financial transactions.
Given these trends, we expect Zelle’s growth to continue in the coming years. The company will likely focus on expanding its merchant network and increasing adoption among small businesses. We also expect Zelle to launch new products and features that make it easier for users to send and receive money.
One area where Zelle may face challenges is in international expansion. The company has a small presence outside of the U.S. and will need to invest heavily to expand its reach into new markets. Additionally, Zelle will need to compete with established P2P payment platforms like PayPal, which has a significant head start in international markets.
Zelle’s business strategy is to continue growing its network of financial institution partners. The more institutions offer the platform to their customers, the more users Zelle will have. And the more users it has, the more valuable it becomes to the banks that own it.
The company is also focusing on expanding its merchant partner network. By partnering with companies like MasterCard and Visa, Zelle can offer merchants a simple way to accept payments. Perhaps most importantly, Zelle is working to increase awareness of its platform. The company is running marketing campaigns and working with its financial institution partners to promote the platform to its customers.
How does Zelle Make Money? (FAQs)
Question: Why is Zelle safer than Venmo?
Answer: Both platforms have excellent security features in place to protect their users. However, most people consider Zelle the more secure option because it is a bank-backed service. Early Warning Services (EWS), which owns Zelle, is an LLC owned by a consortium of the biggest U.S. banks. Also, EWS is a fraud detection and prevention company. So, it has a vested interest in keeping Zelle safe and secure.
Question: Does Zelle take a percentage of the money?
Answer: Zelle doesn’t take a percentage of the money you send or receive. It doesn’t charge any fees to use the service. That’s one of the reasons why many people consider it the most convenient way to send money. Other P2P payment platforms, like Venmo and PayPal, charge a small fee for certain transactions.
Question: What is Zelle’s net worth?
Answer: Zelle doesn’t reveal its net worth publicly. However, we know that it’s a subsidiary of Early Warning Services, LLC. EWS is majority-owned by seven of the biggest U.S. banks. These banks include Bank of America, Capital One, JPMorgan Chase, PNC Bank, Truist, U.S. Bank, and Wells Fargo.
Question: Does Zelle report to IRS?
Answer: Zelle doesn’t report to the IRS even if the amount of money transacted exceeds $600. The law that requires financial institutions to report such transactions to the IRS doesn’t apply to P2P payment platforms. So, if you’re using Zelle to send or receive money for business purposes, you should keep track of the transactions and report them to the IRS before tax.
Zelle’s purpose is quite clear. To make money transfer more straightforward and faster between two people who bank with separate financial institutions. Zelle doesn’t make its money by charging users any fees. Instead, the company focuses on growing its network of financial institution partners and expanding its merchant partner network.
By doing so, Zelle becomes more valuable to the banks that own it and can continue to grow its user base. An important thing to remember is that Zelle is a service provided by banks. So, while it doesn’t make money directly from users, the company’s ultimate goal is to increase profits for its shareholders.