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Opening closed networks: P2P payment innovation at community banks

A 60-strong coalition of institutions is working together on CHUCK, similar to Zelle but without requiring the sender and receiver to use the same network.

May 11, 2022 / Payments

You go out to dinner with a friend and want to divide the tab. But your friend uses a community bank and you use one of the leading peer-to-peer (P2P) payment apps, so instantly e-paying each other is complicated. Enter CHUCK, a new payment solution designed to open up closed networks such as Zelle, PayPal and Venmo.

CHUCK is the brainchild of the Alloy Labs Alliance, a group of nearly 60 community banks working together to innovate as the industry faces a declining footprint—following the rise of interstate banking and years of consolidations, the number of community banks has tumbled by more than half since the 1980s. Digital innovation from industry behemoths, meanwhile, is luring the younger generation away from community banks—particularly from those that have bypassed services such as Zelle, says Richard Crone, CEO of Crone Consulting LLC.

Available for U.S. banks, CHUCK bills itself as an open network for instant payments. It offers financial institutions “a choice when it comes to providing instant payment capabilities,” says Jason Henrichs, Alloy Lab’s chief executive. These institutions “no longer must settle for a more expensive, restrictive and closed network.”

The network was unveiled with the backing of a handful of community banks, including Reading Cooperative Bank, a $730 million Massachusetts bank said to be instrumental in leading the effort; Mercantile Bank of Michigan, with around $4 billion in assets; American State Bank, based in Iowa with $1 billion in assets; and Citizens & Northern Bank, a $2 billion player in Pennsylvania. CHUCK is set to expand to additional banks this year.

CHUCK is embedded in the existing mobile and online banking experiences of participating institutions. The sender clicks a button to send money to another person, enters the person’s phone number or email address (if they haven’t sent money to the person before), adds the amount to be sent, and then presses “send.”

While CHUCK follows the same sending process as Zelle and other closed networks, it eliminates the requirement that sender and receiver use the same network. It also eliminates the need to open another application if you already use a P2P app, Henrichs explains. The recipient receives an alert and chooses where the funds go without having to download an app or open an account, Henrichs says. And senders don’t have to join or download a separate app, either: If their institution offers CHUCK, they can start sending payments right from the bank’s existing mobile application or online account.

Was there really a need for yet another payment method? “Closed networks are great for the network operator but not necessarily the users,” Henrichs explains. “Building a more customer-centric approach and promoting inclusivity to the digital payments are key objectives of the new network.”

To be sure, some community banks are happy to join closed networks. Early Warning Services LLC, Zelle’s network operator, has reported that 85% of its network participants are regional and community institutions with assets less than or equal to $10 billion, with the vast majority of them holding assets of $1 billion or less.

But CHUCK is built on the desire for openness. “There are still unmet needs in the payments world,” Henrichs wrote in a recent blog post. “We also believe that filling those needs shouldn’t be about building another private network but about connecting those who haven’t opted into a P2P network to that digital world.”

CHUCK maintains that it isn’t a low-cost version of Zelle, “even though it turns out to be more cost-effective for participating banks,” Henrichs points out. Without this effort, he says, “the largest institutions and incumbents (Venmo, Cash App and, to a lesser extent, PayPal) would have a highly concentrated hold on the future of payments. Banks below the top few, credit unions, most fintechs and nonfinancial institutions that need to move money would be depending on these other players for access and innovation.”

While Crone says avoiding the cost of Zelle is perceived as the problem being solved by CHUCK,

he says a larger potential issue for community banks over the longer term “is falling further behind when solutions exist today, (which is) vital to retaining and attracting younger cohorts for new account acquisition.”

Dawn Wotapka is a BAI contributing writer.

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