The movement of money has been a challenge for centuries and even with the evolution of technology – most notably the internet and then the mobile internet – transferring money has continued to be fraught with challenges. Companies that have created payments applications are generally trying to balance four variables: cost, efficiency, privacy and security, which is a balancing act that is tricky to say the least. Each one of these four variables largely stem from the fact that virtually all payments applications are third party applications: users must download the apps, connect their bank accounts and then send money from their bank account to the applications to then be able to transfer money. As a result, when a handful of banks announced the launch of a new payment system known as Zelle in 2017 that eliminated the need for a third party application, the payments industry would be changed forever.
Zelle’s Competitive Advantage is Significant
In most cases, if a consumer in the United States wants to transfer money to a friend they can do so at little or no cost. In fact, there are now very many options available to consumers to send money for free. The options include apps such as Venmo – the hugely popular social application now owned by PayPal and that boasts more than 80 million users – Cash App and Apple Pay. Each of these apps are not only very popular but will allow you to send money to friends at no cost. The primary catch is that the recipient in any transaction will have to wait to get access to those funds. The amount of time is typically 1 to 3 business days. This time lag is where the convenience of free electronic transfers buckles in comparison to cash: if someone owes you $100 and hands you $100 in cash, the transaction is complete. With most electronic applications you must wait up to 72 hours to be able to say the same.
This is where Zelle stands in a league of its own. Zelle transfers are completed within minutes, by default, and importantly the transfers occur from bank account to bank account. This is as close as the payments world has come to narrowing the electronic transfer disadvantage relative to cash. Each of the aforementioned payment applications have an option for their users to get access to received funds sooner, but it comes at a cost. Indeed, if you’ve ever wondered how does Venmo make money given the fact that they don’t ostensibly charge for their default service, the answer starts with instant transfers. Venmo charges its users 1.75% of the transaction value for the privilege of getting funds deposited into their accounts in minutes versus the standard 1 to 3 business days. Apple Pay charges 1.5% and Cash App charges anywhere from 0.5-1.75% of the transaction value. You can accurately state that the instant transfer fee is the cost consumers must incur while using these third party apps if they want to have the same efficiency as Zelle.
However, The Immediacy of Zelle Transfers Is Causing Problems
Lura Ball, a California native, was reported by ABC 7 Chicago to have lost $18,500 through a scam that was perpetrated using Zelle. She is just one of countless examples of what seems to be an exploding number of cases of Zelle-facilitated scams. The most popular scheme seems to involve scam artists sending out text messages pretending to be from a bank and informing the recipient that a transaction was attempted on their account and asking them to confirm or deny its validity. Regardless of the consumer’s response, the next step is a phone call from the scam artist, again pretending to be an official from the consumer’s bank. The scam artist then solicits information such as the consumer’s online banking username and asks them to read back a code that was just sent by text message as part of a security protocol. In reality, the code is part of a password reset and by engaging the scam artist the consumer has now given them access to their bank accounts.
These scams are especially injurious because consumers in effect facilitate their occurrence. This makes it more complicated to get your money back. The main point however is that the fact that Zelle transfers get processed within minutes by default means that by the time consumers have realized that they have been scammed, the scam artists could have withdrawn the funds i.e. the transaction has long been completed. It is a growing irony that the core revolution of Zelle – immediate and free transfers – is now at the epicenter of a national scam epidemic.
What Happens Next?
Who exactly is to blame is also a complicated question. Consumers can certainly be wiser when it comes to safeguarding their financial accounts, and hopefully articles like this one and others will raise awareness about these scams. At the same time, banks and credit unions can also do more to alert their customers or to detect unusual activity to perhaps anticipate some of these transactions. The actual technology of Zelle has enormous benefits, it would be a shame for society to lose it.
