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Payments Point-of-sale


DOES ZELLE MAKE SENSE AT THE POINT OF SALE?

By  Kate Fitzgerald
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April 07, 2022, 2:55 p.m. EDT 5 Min Read
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The recent momentum for digital payments has led to many new and innovative
alternatives to credit and debit cards. The next big threat to cards may come
from the issuers themselves.

Several of the nation’s largest banks that own Early Warning Services, the
company that operates the Zelle peer-to-peer payments service, reportedly are
talking about the pros and cons of using Zelle — which today connects accounts
at 1,450 financial institutions — to build a retail payment acceptance service
that could compete with the major card networks.

Bank of America and Wells Fargo favor the idea of expanding Zelle for retail
payments, while JPMorgan Chase opposes the idea and U.S. Bank and Capital One
Financial are on the fence in these discussions, according to a report in the
The Wall Street Journal.



Two other banks that own a stake in Early Warning — PNC Bank and Truist — were
not mentioned in the report. Neither Early Warning nor any of the banks that
operate Zelle agreed to comment on the report.



The biggest question surrounding the concept is why banks, who earn billions in
their cut of credit and debit card interchange fees, would potentially undermine
that revenue stream by providing Zelle as a cheaper alternative at the point of
sale.

But observers say U.S. financial institutions are wise to begin contemplating
how their future roles will be shaped by rapid changes in the payments
technology landscape, and crafting strategic responses.

Certain retail niches are already using instant payments in new ways. For
example, TD Bank’s automotive-financing unit this month began enabling car
dealerships nationwide to receive real-time funding of auto loans to ease
dealerships’ cash-flow crunches. And PayPal recently revamped its credit card to
incentivize payments directly from PayPal accounts.

With the Federal Reserve’s FedNow instant-payments rail expected to go live next
year, banks are working on practical use cases beneficial to all parties.

Community banking
Chuck, small banks' answer to Zelle, goes live
January 25, 2022 3:42 PM

But applying instant payments to routine consumer checkouts within existing
payment systems is another story, said Patricia Hewitt, a principal with PG
Research & Advisory Services.

“Figuring out the governance model alone, among seven competing banks and across
a savvy merchant base, would take years,” Hewitt said.

Still, there can be no doubt that as instant payments evolve globally, U.S.
banks would be wise to participate in the architecture of interconnected
systems, she said.

“Ubiquity will rule the day at the point of sale and all these competing
instant-transfer solutions — whether they’re Zelle or Cash App or Venmo — need
to interoperate in order to make sense at that level. When you think of how the
electronic funds networks stitched themselves together behind the scenes to
effortlessly move PIN debit transactions nationwide, it’s clear that Zelle’s
owners would be better off driving that discussion,” Hewitt said.

Zelle is already used for transactions that aren't strictly P2P. Rent payments
sent to small businesses were one of Zelle’s fastest-growing payment types last
year, for example.

Also, Early Warning recently said it plans to expand the use of Zelle QR codes,
which it’s been testing with four undisclosed financial institutions, to help
eliminate misdirected payments.

“For small businesses, QR codes provide a faster, more professional payment
flow, with peace of mind that customers won’t mis-key their contact info,”
Meghan Fintland, senior director of external communications at Early Warning,
said by email.

That move is one of the ways Zelle is working to offset damaging reports of
fraud, which is another challenge Zelle would need to conquer before expanding
its payment service to the consumer checkout.

“Zelle needs to take care of fraud, but part of offering any payment system is
managing the settlement risk. Fraud with Zelle currently is centered on the
standalone app, and with banks directly supporting retail payments there would
be many more points of security,” said Richard Crone, a principal with Crone
Consulting.

One of the biggest advantages Zelle has to expand retail payments-acceptance is
its vast base of enrolled and verified consumers, according to Crone.

“It’s hard work for banks to populate their customer databases with a valid
email and phone number, and Zelle has helped banks accomplish that,” he said.

Payments
Can Zelle change the narrative around P2P fraud?
March 9, 2022 8:50 AM

Europe’s experience demonstrates the complexities of developing retail
acceptance of account-to-account payments in larger, more diverse markets, said
Zilvinas Bareisis, a senior analyst with Celent.

“While account-to-account payments are very popular in the Netherlands and some
Nordic areas, in the U.K. we’ve been talking about it for more than 10 years,"
Bareisis said. "Cards remain very popular and account-to-account payments are
only now slowly starting to become a reality with merchants, mainly for
e-commerce transactions.”

Account-to-account payments aren’t free, either, Bareisis pointed out. While
cards offer a payment guarantee to merchants and protection for consumers, there
is no established format for resolving returns, disputes and fraud liabilities
for account-to-account payments handled directly through retailers.

How retailers mediate returns has become a friction point with the fast-growing
buy now/pay later services merchants offer through fintechs, whose
consumer-protection policies are currently the subject of a Consumer Financial
Protection Bureau inquiry.

But interchange is not guaranteed to continue to be a cash cow for banks
indefinitely, said Jason Heinrichs, CEO of Alloy Labs, which has assisted
several community banks in developing Chuck, a P2P network that can work
alongside or in place of Zelle.

He noted there is downward pressure on interchange worldwide, and U.S. merchants
within the past year have pushed back on these rates in high-profile ways.

Amazon recently resolved a showdown with Visa in the U.K. over whether the
retail giant would continue accepting its cards, and U.S. merchants recently
urged Congress to investigate credit and debit interchange rules.

“The power dynamics in interchange are shifting," Heinrichs said. "And look
around: How many places can you check out now directly with Amazon or Google?
How much money do you load onto a Starbucks app even though the rational thing
is to pay as you go?”

Kate Fitzgerald
Senior Editor, Payments
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