Early Warning Services, which is owned by a handful of the largest U.S. banks, reports that it is persuading more small banks and credit unions to join its Zelle peer-to-peer payments network.
Those smaller institutions were often wary of potential exposure to higher costs, fraud and scam risks through Zelle.
More than 1,800 financial institutions were live on the Zelle platform at the end of last year, up nearly 40% from 1,300 in 2021, and most of the newcomers are smaller community banks and credit unions, Early Warning announced on Thursday along with its end-of-year results.
Nearly all of the 500 financial institutions joining the network last year had assets of $10 billion or less, and 70% of those directly integrating with Zelle last year had less than $1 billion of assets, the Scottsdale, Arizona-based firm said.
The gains are helping to close the gap between large banks that have been fully supporting Zelle for more than five years and the thousands of smaller banks lagging behind.
The numbers suggest that at the end of 2022, 42% of all FDIC-insured U.S. financial institutions were directly connected to Zelle, up from 30% last year. This could bode well for Early Warning’s quest to leverage its enrolled base of Zelle users to launch a cross-industry bank wallet for online shopping this year.
Early Warning recently appointed a former Mastercard executive to lead development of the bank wallet, and further details about it will be revealed early next month, Early Warning’s CEO Al Ko said in an interview.
“The big headline for Zelle is that smaller institutions are coming aboard the network now because they realize it’s the best way to get instant parity with the big banks, and increase engagement with customers,” Ko said.
Zelle now connects to more than 80% of all U.S. bank accounts, with consumers and businesses sending a total of 2.3 billion payments in 2022, up 26% over the prior year. The total value of Zelle transactions for the year reached $629 billion, up 28% over 2021.
Small businesses received more than 150 million Zelle payments in 2022, up 77% over the prior year. The total value of small businesses’ incoming payments in 2022 was $72 billion, up 84% over 2021.
More than 99.9% of Zelle payments had no fraud or scam reports, and the number of scams continues to fall, Ko said. He declined to provide specifics about how much fraud Zelle has eliminated.
Despite persistent headlines about consumers losing funds to fraudsters via Zelle — and lawmakers urging banks to reimburse consumers who have lost money in scams — Ko insisted Zelle scams are being curtailed.
“I want to set the record straight. The number of scams within Zelle are falling and rates of any fraud and scams on Zelle are overwhelmingly lower than alternative P2P services and non-P2P methods of sending funds,” Ko said.
He noted that while Regulation E of the Electronic Fund Transfer Act requires that banks reimburse customers to funds lost to unauthorized fraud, Early Warning has retooled its policies for banks to help prevent consumers from falling prey to scammers who trick them into sending irrevocable funds through the Zelle network.
“There is more consistency across the Zelle network about which types of scams get reimbursed [by banks], and Zelle is working to improve standards to protect against these types of scams with more bank reporting requirements,” Ko said.
Banks participating in the Zelle network must meet network security requirements and enforce transaction limits, but each bank sets its own fraud-prevention and reimbursement policies, he said.
Ko declined to discuss details of reported plans for financial institutions participating in Zelle to pay into a pool or create a system to reimburse consumers burned by scams. Smaller institutions have expressed concern about any broad Zelle scam-reimbursement program.
“We’re spending a lot of money and effort both on consumer education and on ‘smart friction’ — interstitial messages that appear when a user is paying someone new for the first time — to make sure it’s safe, and there’s a lot more of this friction than there was a year ago, across more dimensions and including many other proactive steps we don’t want to advertise to criminals,” Ko said.
He added that Early Warning has “limited visibility” into whether regulators may eventually step in and require Zelle to step up safeguards against fraud and scams, or require banks to reimburse certain victims.
“Scams are steadily declining, but with a network the size of Zelle there will always be a sob story to tell,” Ko said.
Early Warning said there were 69 million unique users sending and receiving Zelle payments at the end of 2022, with over 118 million users enrolled.