Zelle — The Empire Strikes Back

Zelle? WTF is Zelle, Big Red Car? You got some ‘splaining to do, Big Red.

Big Red Car here on the edge of a new dawn in the ATX. [Drama queen is the Big Red Car.]

One of my favorite notions is the idea that a startup “disrupts” a legacy industry or business and then expects the legacy old folks to lay there and just take it. Silly rabbit!

The legacy brethren didn’t get to be the approved solution by being dummies. They may not be lean, nimble, and agile, but they can rent that talent.

WTF are you talking about Big Red Car?

Nowhere does it seem more obvious that the legacy tribe is not going to give up their franchise than in FINTECH.

So, let me tell you the story of PayPal v Zelle.


A little history for y’all.

PayPal logo

PayPal (originally known as Cofinity) was founded in 1998 by Max Levchin, Peter Thiel, Luke Nosek and Ken Howery. It was founded as a money transfer service.

It merged into X.com, an internet bank founded by a guy named Elon Musk — you may have heard of him. He has something to do with cars and space travel and hyperloops and super models.

Renamed PayPal, the company went public at $13/share in 2002. Ebay, recognizing the promise of the approach (and having a dumpy service of its own called Billpoint), swooped down and bought the now public company for $23/share which was a good deal for the initial stock buyers and the founders.

In July of 2015, Ebay spun PayPal off as a separate public company at the urging of Carl Icahn (cue the Darth Vader music). Darth Icahn was right and made a shit pot of money on the deal.

Today, the company has a market cap of $62,000,000,000 and has 197,000,000 active accounts in 202 markets in 25 currencies.

It does a lot of things, but the Big Red Car uses it to pay editors and to buy stuff on the Internet.

One would have to say that PayPal was a bit of ALL RIGHT, no?


Through the years other fintech legacy companies tried to create their own bill paying services. The Boss uses USAA, Wells Fargo, Schwab for those services generally for paying bills, but there hasn’t been anyone with flexibility of PayPal.

The Boss likes Dwolla as it is much cheaper than PayPal, but it can be a little cumbersome to operate and doesn’t have the brand recognition of PayPal.

Google Wallet and Apple Pay are in the convenience payment business also, so it’s not just PayPal.

PayPal survived where companies such as Billpoint (Ebay predecessor), Citibank’s c2it, Yahoo!’s PayDirect, Google Checkout and Western Union’s BidPay did not. PayPal was and is a survivor.

What is PayPal?

You know the answer to that question (a payment intermediary) but what is very interesting is the regulatory framework in which PayPal operates.

They are subject to:

 1. Regulation E (financial industry consumer reg);
2. USA Patriot Act;
3. Truth in Lending Act; and,
4. Electronic Funds Transfer Act.

In Europe, PayPal is, essentially, a bank and regulated thusly.

Who gets the credit?

It is difficult not to credit Ebay and Meg Whitman with growing PayPal into the beast it’s become. The founders got the baby to crawl, but it was Meg Whitman who got it to walk and run in the crawl, walk, run sense of things.

Give Carl Icahn credit as he is the one who exposed the value hidden inside Ebay when PayPal was a subsidiary. Bit of vision.

So, what is Zelle?

Zelle is the response — finally — of the fintech legacy companies to PayPal. It is a system which was announced to compete with PayPal. Little late to the party, but it is the Empire Striking Back!

Zelle logo

I wonder how much it cost to think up the clever cross fertilization between the “Z” and the “$”? Hate the color purple. Ugh!

In this instance, the Empire includes: Ally Bank, Bank of America, Bank of Hawaii, Bank of the West (Paribas), BB&T, RECU, BNY Mellon, Capitol One, Chase, Citi, Citizens Bank, Comerica, ConnectOneBank, Frederick County Bank, Fifth Third Bank, 1stBank, First Natioal Bank, First Tech FCU, First Tennessee, Frost Bank, HomeStreet Bank, Key Bank, mbFinancial Bank, Morgan Stanley, M&T Bank, PNC, Schools First, Star One CU, SunTrust, TD Bank, USAA, USBank, and Wells Fargo Bank.

That is the legacy fintech blue bloodery if ever there was one. Somebody did a good job putting together the coalition and it shows how alarmed and pissed off they must be.

So, this is the early inning response to the disruption which took place about the time when Ebay spun PayPal off after 2015. If you use that as a benchmark, then the fintech legacy response is about two years after they began to notice the impact of PayPal.

Here’s the teaching point — if you are expecting the legacy companies to let you eat unfettered from their chili bowls, you are sadly mistaken. Who needs to focus on this — the bitcoin industry.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Have a great week.cropped-LTFD-illust_300.png




9 thoughts on “Zelle — The Empire Strikes Back

  1. 1stBank doesn’t like bitcoin business and they are about the 70th largest bank in the U.S.

    You’d think they would dabble and get bigger. But ya go “Zelle” it up.

    • .
      I doubt any bank “likes” the bitcoin or cryptocurrency business which is not a surprise as there is not really such a business other than an ill-conceived and even worse understood indistinct perceived threat.

      Banks do not like change. Perhaps less than any industry. They like pinstripes, cuffs on their pants, and a 3-4% margin over cost of funds.

      Banks rail at regulation until some perceived competitor appears to be able to slip out of the yoke of regulation whereupon the banks demand everyone wear the same necktie and hang together. One of the things PayPal has done successfully is to avoid being regulated like a bank.

      There is no question that the guys at the top of banking have some measured and forced curiosity because they don’t want to let something get past them.

      I recall with fondness the clear thinking of Charles Schwab when he first explained that the cost of administering a stock trade had absolutely nothing to do with the underlying cost of the stock. It took the brokerage business a decade and a half to understand that and, yet, it was a very simple concept.


  2. This is linear thinking.

    Speed is only a feature and not the purpose. Using cryptocurrencies allows for users to create accounts and get paid for what happens on that account. In doing so cuts out the transaction fee.

    No transaction fees plus an increase in income? Why would one hold on to the prior system?

    Venmo has no fees. Yet that account doesn’t allow for the creation of income.

    The argument is simple, YouTube.com takes a cut.

    • .
      I doubt I could disagree more with your statement to the degree I can, in fact, understand it.

      I don’t understand whose speed you are referring to? Speed of what?

      Holding value in cryptocurrency exposes the asset to the risks of the class. Right now, there is a sense it is always going up, but it also has the ability to go down.

      What you are calling “income” is, in fact, simply appreciation or depreciation of the value of the underlying asset. There is no process which creates income.

      To the extent there is a transaction fee, somebody has to bear it. There are costs associated with every digital transaction or process which are simply the friction of living digitally.

      We — you and I — are communicating without any obvious transaction fee, but we both have to own a computer, buy a bit of software, obtain Internet service, and purchase electricity. And, that is as cheap as it gets.

      The point of the post was not to argue for or against anything related to cryptocurrency, but rather to suggest that tickling the dragon’s tail carries with it the risk that the dragon wakes up and turns violently on the tickler.

      I consider this to be a very healthy development as it provides a wrestling arena for ideas to go hand-to-hand and result in better ideas and better service to the ultimate consumer. That is, after all, the fundamental driver of capitalism.

      If the dragon provides the incremental service subsumed within its existing fee structure, there is no incremental fee which is as “free” as life gets.


      • Was trigger happy on the crypto point.

        The tickling of the dragons tail is a great point. Continuing from the DSC razors I believe I also told my wife that Gillette bought them. Lots of automatic thinking going on with these “new businesses” where there are assumptions of success that isn’t actually true.

        So what happens to DSC?

        • .
          If history repeats itself, there is a race to the pricing bottom, the consumer gets some low prices, somebody goes bust, the remaining companies eat the competitor and raise prices.

          We have both seen this movie quite a few times. It is like Ground Hog day with a ground hog who shaves.


  3. One of my favorite notions is the idea that a startup “disrupts” a legacy industry or business and then expects the legacy old folks to lay there and just take it. Silly rabbit!

    Yes, “silly rabbit”. But, sometimes the silly rabbit is correct. E.g., currently Wal-Mart is just letting Amazon have it.

    Amazon started with just books and CDs of music. Okay, Wal-Mart sells lots of CDs and DVDs, at least tries to. But their approach is from maybe Macy’s basement.

    There is an easy and much, much better way to do that, but don’t hold your breath waiting for big boy Wal-Mart to figure out such a thing and implement it.

    The legacy brethren didn’t get to be the approved solution by being dummies. They may not be lean, nimble, and agile, but they can rent that talent.

    Let’s see: Some big companies are nearly free lunches for anyone who wants one:

    IBM let startup Amdahl eat much of its lunch in the mainframe business for years and didn’t do much to fight back.

    IBM tried the PC business, but too soon Dell, Gateway, Compaq, HP, etc. ate their lunch and dinner.

    IBM and HP tried the small, desktop, black and white laser printer business but eventually just walked away and let Brother, etc. have the business.

    Sony long did well in a wide range of consumer electronics but one product at a time let cheaper competitors have the business.

    My understanding of what long happened in Detroit was that a major car company would gather their managers for AC, alternators, bearings, brake disks, calipers, and pads, gauges, headliners, floor coverings, lug bolts, motors for power windows, mufflers, nearly anything molded from plastic, pistons, rubber hoses, seats, starting motors, steering wheels, suspension bushings, wheel covers, wheels, etc. and announce that the company wished in the future to buy such items from independent suppliers run by experts in such work with good backgrounds in companies such as they were currently working for — hint, hint, hint, non-union, hint, hint, hint, with nice loans to get started, etc.

    So, they didn’t want to destroy or buy startups taking part of their business but encourage startups to take parts of their business.

    It can be a goofy world, business.

    Rent some talent? Yes. Rent all crucial talent? Not always! Even when they could rent the talent, for anything very innovative, different, or advanced, usually they don’t know what talent to rent and, even if they knew, wouldn’t want to rent such talent.

    Today, the company has a market cap of $62,000,000,000 and has 197,000,000 active accounts in 202 markets in 25 currencies.


    So, what was the secret or secret sauce for how PayPal, sitting there as a subsidiary to eBay, became so valuable when several competitors didn’t?

    Interesting. The bank I use, Key Bank, is in the list of Zelle members.

    What did Key Bank do? They displayed all my accounts and for each its name and account balance. Then how to get the details on one of the accounts? Not clear!

    There were no buttons for that, no obvious links — and one of those is what is SUPPOSED to be there. Nor was their any explanatory text.

    But from clicking all over the screen, if click on the account balance itself then discover that that numerical value acts like a link and causes a page that shows the account details. Obscure. UI 101 disaster.


    Key Bank has been making such simple UI mistakes, and worse, for years.

    Issue: Since the Key Bank computer shop is so good at making such simple mistakes, there’s a lot of question if they could play a very constructive role in Zelle!

    For Zelle, there is an obvious danger: Such a large collection of such large organizations will have a super tough time getting details correct between now and year 2200.

    Hmm …. Ah, for a solution:

    Maybe in practice Zelle will be mostly just some data format and data query standards for internal use of the member banks. As Zelle alpha tests their format and query standards with all their member banks, they will discover nearly any flaws quickly.

    Then for future versions, they will do the right things for compatibility.

    Then everything a user sees will be from a member bank and not directly from Zelle.

    That might work.

    This solution is likely a lot like what the banks did long ago on common standards for secure data and money transfer. So, for the infrastructure Zelle needs, the banks should be able to do that, too.

    Still, I’m surprised at the Zelle effort! My guess would have been that the banks would have continued to ignore PayPal.

    Here’s the teaching point — if you are expecting the legacy companies to let you eat unfettered from their chili bowls, you are sadly mistaken.

    Well, again, Wal-Mart is letting Amazon eat the chili, and lots of big companies have at times been free chili bowls to everyone.

    The biggest free chili bowl of all time was when Bell Labs gave away the patent rights on the transistor. With a royalty of a penny a transistor by now they would own the world!

    But, I tend to agree: If attacking a big company and if are getting successful, then expect some counterattacks.

    In that case, really do want some solid means of winning. One way is to have the first good or a much better solution for a problem and where have some crucial core enabling technology that is proprietary, confidential, and difficult to duplicate or equal.

    Basically want to have a better mousetrap and be the only one able to make it.

    One of the best ways to do that now is with some original applied mathematics with some advanced math prerequisites. The basic raw material for new work in math for powerful, valuable technology is just paper and pencil with a big, soft eraser.

    For big, old companies, doing such original math on demand is, in practice, in US business now, essentially impossible. They don’t want to do it. Even if they wanted to, they don’t know how and don’t even know where to start.

    E.g., since some computations have to do with computers, their first approach will be to go to the best people they have in computing and/or computer science. Then they will try the best people in AI/ML. Then they will try some of the professors in some computer science departments. Of course none of those efforts will yield the needed original research in applied math with advanced math prerequisites.

    Going through all those steps with all those failures would be discouraging!

    The big boys

    Dance ’round and ’round and suppose while the secret sits in the middle, and knows!

    If they get really determined, then they will write out $500 million checks and offer one to the President of each of Cal Tech, Stanford, Berkeley, Princeton, and MIT.

    That might work!

    But that’s $2.5 billion, and …!

    A common response of a big company is just to buy out the startup.

    Gee, PayPal is at $62 billion now. That’s a big pig for even a big python to swallow whole!

    Okay, take the Zelle banks and have them come in as limited partners for a consortium to take PayPal private.

    I’m a little surprised they didn’t do that.

    I’m more surprised PayPal didn’t get bought out by a bank or consortium of banks back when PayPal was worth only a few billion.

    Or at one point, Darth Icahn saw that PayPal was in line to be very valuable; at that point, no bank saw the same thing?

    Lesson: Often the big boys don’t react until the startup is too big to take over easily. The main reason is that the big boys can’t evaluate a startup until the accountants can; the result is that the big boys don’t take a startup seriously until it is too valuable to buy out just from chump change.

    For a startup, commonly they get a lot of time to grow before a big boy wants to react.

    Lesson: No one in big US business is willing or even able to evaluate a startup’s plans or some new technology for a startup. Basically all the big boys can evaluate is what comes from traditional accounting.

  4. Amazing that only 18 yrs latter the “Dark Side” (read legacy) mounts a redirect. Yes they are ticked, Having worked in FinTech the powers were so embedded that they expected everything to pass before gaining user acceptance. I remember being at conferences 10 yrs ago were the only Legacy representatives were M&A with direction to be ready to pick up good stuff that begins to fail! Called that wrong!

    In the last 10 years we have all changed from no financial data on the internet to “Screw it we all get hacked and the bank will cover us” So now comes the big embrace and the legacy folks are still thinking we love them so much that we will cancel all other new cool financial instruments for their “like me” efforts.

    Yea, where do I go to bet against any legacy where the market has embraced change. My only hope is the people soon cast aside that biggest of all legacy sloths, The US Government!

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