What The Zelle Is Going On?

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Should Zelle be used for retail payment? It already is!

There is a pressure in a number of markets to look at the use of account-to-account (A2A) payments for retail transactions, bypassing traditional card payments by allowing payments to go directly from consumer bank accounts to retailer and service provider bank accounts. In the US, for example, stakeholders are beginning to look at whether to extend Zelle in this direction. Zelle continues to grow strongly (Bank of America

BAC
customers made more Zelle transactions than wrote paper checks for the first time ever last year) and it is therefore no surprise that discussions are heating up.

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(According to the Wall Street Journal, Wells Fargo

WFC
and Bank of America are in favour of expanding into retail while JPMorgan is not convinced the time is right.)

Zelle is already used for retail payments, of course, but not in America. While Americans PayPal

PYPL
and Venmo money to each other, in Venezuela they Zelle each other. As I have mentioned here before, in Caracas the homemade signs reading “Aceptamos Zelle” (We accept Zelle) are in store windows everywhere. Computer printouts of the purple company logo are taped to cash registers in supermarkets, some of which have dedicated lines for customers paying with the app.

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Why? Well, in Venezuela nearly three-quarters of all transactions are conducted in dollars and of those, while around two-thirds are still in cash, the electronic alternatives (such as wire transfers and Zelle) are growing fast. Given the choice to use whatever they want, it seems that the good people of Venezuela are voting with their fingers, and they are not opting for Bitcoin

BTC
or NFTs or whatever. They are opting for greenbacks, as most people in most developing countries around the world would do if given the possibility. Steve Hanke, an economist at Johns Hopkins University and an expert on hyperinflation, says that dollarisation, “even if it is improvised” helps the inhabitants of Caracas and Maracaibo to protect themselves the against bolívar’s hyperinflation.

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I hadn’t heard that phrase before (in my book The Currency Cold War I talked about dollars “permeating” developing economies), but I rather like it. Reuters has an interesting report on what this “improvised dollarisation” means in practice. Routine purchases are increasingly made in dollars and around $2 billion of US cash is in circulation there (mostly in denominations of $20, $50 and $100 bills).

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The shortage of low denomination bills means that businesses have to be creative. Hence the increased use of IOUs (or reputation currencies, if you will). A customer pays using a $10 bill but since there is a shortage of cash and change in circulation, the shopkeeper writes “owes $1.87” on the back of the receipt, turning it into money for the customer to bring in on her next visit to the store.

(This in turn means that there is a significant premium on low-value bills, which trade above par. Reuters quote a street vendor in Maracaibo saying that “I collect the $1 dollar bills and go to the market, and for $17 of $1 notes, they give me a $20 dollar bill”.)

As I understand things, then, the revealed preferences in Venezuela are that the military mine Bitcoin to avoid US sanctions and other scrutiny, the opposition use a “stablecoin” (USDC

USDC
) to avoid government controls and the public opts for improvised dollarisation.

Developing Alternatives

America and Venezuela to one side, countries with more modern payments infrastructure are also looking to see if there is potential to grow A2A in retail. The UK’s Payment Systems Regulator (PSR

PSR
) has included in its plans for 2022/23 the removal of barriers to to the uptake of A2A retail payments, which it says can provide a “credible” alternative to card schemes. As part of these plans it intends to investigate whether the commercial incentives for banks, intermediaries and merchants are there to support greater use of A2A payments and to see what it can do to increase uptake and promote competition with cards. The PSR is also working with the CMA, FCA and Treasury on the future of open banking regulation, which will play a major role in A2A payments uptake.

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Similarly, in the Europe, the European Payments Initiative (EPI), or “Le Third Scheme” as we call it, is being refocused in the same direction. Piotr Jan Pietrzak, Director of International Development at BLIK (the Polish payment system), wrote an excellent blog post for my good friend Chris Skinner on precisely this topic. He noted that EPI’s misguided plans for omnichannel domination were a mistake, because it put EPI in direct competition not only with the US card schemes as well as the tech giants, while refocusing on instant payments makes it more feasible. I agree, and I hope that a pan-European request-to-pay and variable-recurring-payments are brought to merchants across the continent as soon as possible.

(Actually around a tenth of SEPA Credit Transfers are already SEPA Instant Credit Transfers, or “SCT Inst”, that began in 2017. These transfer are 24/7/365 and take less than ten seconds for the payee PSP to inform the payer PSP that the money has been received and to make the funds available to the recipient.)

Elsewhere, regulators are pushing service providers towards A2A. In India, for example, the Reserve Bank of India (RBI) introduced strict new rules for continuous authorities on payment cards, means that online merchants (eg, Apple) have to set up fresh mandates and implement two-factor authentication (2FA) for recurring payments. Hence Apple has decided to stop taking cards and switch to A2A transactions (via India’s Universal Payment Interface, UPI).

(Regulatory pressures aside, I can well imagine major retailers integrating an A2A EPI into their own apps and incentivising consumers to make these their preferred payment choice. In fact, by the time that Apple eventually caves in to the EU and allows access to EMV via the iPhone NFC interface, cards may well be a legacy payment method only used by old people, a bit like checks are today, except in America.)

Writing in Progressive Grocer a few months ago, Ken Montgomery (COO of the Federal Reserve Bank of Boston) highlighted some of the ways that retailers might benefit from the introduction of A2A instant payments. He identified this payment channel, powered by QR codes and wallets, as means to deliver safe and secure payments both online and in store; instant payments to provide instant refunds to customers when they are needed; and instant payments as a quick and easy way to load gift cards and prepaid debit cards.

I’m sure many retailers are already factoring the new options into their next generation infrastructure.

Expectations of redress

One major problem for A2A in the retail environment, though, is consumer protection. One of the apparent reasons for JP Morgan’s reticence on Zelle is the issue of fraud and how to protect consumers more effectively from the instant scammers who focus on instant payments. Consumers are used to the protections afforded by the card schemes and what we in the UK call “Section 75”, or the ability to charge back card transactions unconditionally. If you order a sofa, for example, and the sofa company goes bankrupt then you can get your money back if you paid by card: the liability is on the card issuer and it is up to them to recover the money from sofa company’s bank (or creditors.

I suspect we may see a bifurcation round this issue because as a consumer, I don’t especially need these protections if I am dealing with a trusted merchant where I have an expectation of redress. We used to call this the “rotten chicken” issue: if I buy a chicken from Tesco and it is rotten, then I will take it back and they will give me another one. I don’t need a third party to get involved because I have a well-founded expectation of redress.

Let me illustrate the point further. I am writing this article on plane. My ticket was purchased in the most expensive way imaginable (for the airline) using a platinum cash back corporate card. This means that British Airways were paying through the nose to the issuer so that the issuer can reward me with cash or points of whatever. You can see why the airline might prefer to have the money come from my bank account, bypassing the card, so that they can reward me directly: they can give me triple miles to go A2A. If they do this, I’ll cheerfully take the deal.

I don’t need the protection afforded by cards because I think it unlikely that British Airways will go bankrupt before Money 20/20 in Amsterdam. And if they cancel the flight (as they just did to a colleague on a different flight) then I know that they will rebook me or refund me and I’ll get it sorted out.

(On the other hand, if I were required to book a segment on Air Ruritania, where I have no status, then I would absolutely use a credit card to protect myself.)

So to return the topic at hand then, should banks extend Zelle into retail? Despite the narcotic effect of interchange, I think that they will, but not as a general-purpose card replacement. A Zelle option in the supermarket app makes sense but Zelle as an option to buy a dishwasher online from a cut-price white goods retailer 500 miles away probably does not.



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