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Is Zelle a Threat to Visa & Mastercard?

Money transfers, card payments, and digital wallets witnessed a significant boost in volume throughout the pandemic. With nationwide lockdowns in place, consumers used more of their plastic money to pay for products and services online.

One such private player, Zelle, a product of Early Warning Services LLC, has gained tremendous traction during this time, with more than 1.8 billion transactions (49% Y/Y growth) worth $490 billion (59% Y/Y growth) being processed using its network.

Early Warning Services is a fintech company owned by seven of the U.S.’s largest banks, namely JPMorgan Chase & Co. (JPM), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp. (USB), Capital One Financial (COF), PNC Financial (PNC) and Truist Financial (TFC).

Why do Banks Want to Stage Zelle Against V & MA?

Undoubtedly, Visa (V) and Mastercard (MA) are the two biggest players in the card processing space. Merchant banks earn fee income each time a customer pays using the cards, amounting to billions of dollars. These fees, however, are decided by the payment networks, Visa and Mastercard, which also cut a small fee before passing it on to banks.

Zelle also offers similar services to banks along with offering different financial solutions related to deposit and checking accounts, payments, and identity checks.

A Wall Street Journal report explains that a few of the owner banks, including BAC and WFC, are contemplating extending Zelle’s network services to the point-of-sale counter. This will eliminate the payment cut by networks like Visa and Mastercard from the channel and also ensure that banks get a free hand in deciding the fees charged, without their influence.

However, JPM executives argue that this isn’t the right time to expand Zelle’s presence, and officials at USB and COF are undecided yet. JPM’s hesitance stems from frauds on the Zelle app, which is a victim of rising scams. The bank insists that the owners first ensure full protection of the customer’s money before expanding it into mainframe retail.

In the meantime, some banks are already pursuing retailers to launch a pilot of the Zelle payment network for retail transactions. However, to launch the Zelle network nationwide across multiple banks would require a vote from all of Zelle’s owners.

Zelle also offers small businesses to receive money through its network. This segment saw a massive 162% year-over-year growth in 2021. Additionally, three banks are also pursuing a project whereby consumers can use Zelle to make rent payments to known large property managers. Should this launch be successful, it could create a huge opportunity for Zelle as a first mover in the space of rent payments, which has been a lucrative but difficult segment for card networks to cater to.

Analysts’ View

In a recent Card Issuer & Networks industry report, Wells Fargo analyst Donald Fandetti noted that card issuers Visa and Mastercard remain the key beneficiaries of the rising inflationary scenario.

Moreover, based on both companies’ exposure to Russia and Ukraine, the analyst lowered the estimates for both V and MA to the same effect. However, Fandetti said, “We remain constructive on the stocks as border re-openings will boost travel, plus we see other catalysts such as less competitive concerns, pricing, and rotation.”

Turning to Visa, the biggest player in the industry, Fandetti reiterated a Buy rating on the stock with a price target of $280, which implies 27.8% upside potential to current levels.

The other analysts on the Street also have a Strong Buy consensus rating on the V stock with 16 Buys and three Holds. The average Visa price target of $273.18 implies 24.7% upside potential to current levels, at the time of writing. Notably, its stock has remained almost immune to the market sell-off year-to-date as well as over the past year.

Concluding Thoughts

Why the big fight to capture the payments market? According to Statista, in 2023, Visa is set to record a whopping $5.09 trillion in purchase volumes, followed by Mastercard with $2.27 trillion. This signifies the sheer size of the transaction processing market and its indisputable attractiveness.

If large U.S. banks get a hold on the segment through Zelle, they will become the most powerful players in the finance world and have the most dominating influence on the economy.

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