‘Trust is great, but you need relevance as well’: Behind the Paze launch with Early Warning’s James Anderson

When Early Warning launched Zelle in 2017, it seemed a very big mountain to climb. For a bank-backed P2P payments app to replace or at least compete with Venmo seemed unbelievable. Venmo was clearly one of the most popular consumer fintech apps. But if you look at the growth today, Zelle slowly but surely surpassed PayPal’s favorite brand.

In early 2023, Zelle had 120 million customers with 69 million monthly unique Zelle users. Venmo, which launched more than a decade ago, had 90 million active accounts, with 60 million being active monthly. 

It took time but it shows the massive power of bank distribution. 

Early Warning and its banking partners are back with a new digital wallet called Paze. Of course there are more popular digital wallets on the market. Will the power of bank distribution propel Paze’s growth in the market the way it did with Zelle? 

Joining me on the show is Early Warning’s Head of Paze, James Anderson. We discuss everything about Paze – from its conception to functionality, from its features to its distribution. James asks whether the world needs another digital wallet and whether consumers will be open to using a service like this offered from their bank. What will it take to get Paze integrated into merchant checkout? It’s all about creating supply and demand in a two-sided marketplace and James is on it.

The Tearsheet

1. Purpose of Paze and Online Payment Challenges:
   • “What we’re trying to do with Paze is fix a set of long-standing problems for consumers and merchants around online payments and checkout.”
2. Genesis Story and Motivation for Paze:
   • “What drove Paze, in specific, was kind of two things. One is the long-term trend of online payments, online shopping, online payments… The second thing was a recognition that other people were out there offering experiences that delivered more value and more delight to the consumer.”
3. Competition and Unique Selling Points of Paze:
   • “Sometimes the easiest answer is right. Occam’s Razor, right? You could come up with 16 levels of complexity. Or you could just say, it’s easier to get it from the bank.”
4. Product Features and Security Measures:
   • “All the cards that are loaded into Paze are tokenized. So we take the network, we take a network token, instead of a real card number, we actually get the real card number, we then tokenize it. And so there are no real card numbers in Paze.”
5. Merchant Engagement and Market Approach:
   • “We recognize that we are not the first entrant to your point, same way Zelle wasn’t the first entrance in P2P. So we looked at all the kind of pain points on the customer journey of existing services and worked through saying, how could we eliminate those pain points?”
6. Rollout and Expansion Plans:
   • “We’ve got the brand and we’re working on the marketing campaign. So there’ll be marketing that is delivered, brand awareness marketing that comes from Early Warning around the brand and the product and promise, then there’ll also be a lot of in channel, in bank from the FIs participating. FIs will also be promoting it.”

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The following excerpts were edited for clarity.

Paze and trying to improve online payments

Paze is a new initiative. A lot of people probably know a little bit about Early Warning, which is a consortium owned by seven of the larger US banks. In terms of consumer facing applications, people have probably heard of Zelle, our P2P offering, which has been tremendously successful. It’s been around for about five or six years.

Paze is much newer — we started work on it last year, and I have the privilege of running it. With Paze, we’re trying to fix a set of long standing problems for consumers and merchants around online payments and checkout. It’s kind of surprising that after 25 years of people paying online, buying stuff, there are still challenges that people have paying for it. It’s true. So we want to fix that and deliver a delightful experience to consumers, deliver more value to merchants, and just help the ecosystem of online commerce work better.

Building products in a bank-owned consortium

Being a consortium owned by a set of financial institutions, we’re multifaceted. We’re not like a company that just gets up in the morning and says, there’s a hill over there, we’re going to take it. Our process involves the owner banks, and it’s a beautiful situation that they are both investors in the initiatives that we do — you could say, underwriters — but also they become customers. And that’s really important, as we talk about how we’re thinking about launching Paze.

Banks’ core roles: Setting the background in banking and payments

If you think about the journey from a large bank’s perspective, one of their core offerings is demand deposit accounts, checking accounts, and card products. Those are kind of core retail products. In the larger phase, we don’t just serve our owners, but the whole industry. All the banks are looking to continue to drive relevance and value for their customers. There’s a fundamental kind of trade that happens around a checking account, which is, essentially, consumers leave idle balances with the bank, and the bank lends them out. That’s kind of a core part of their balance sheet.

And on the payment side, one of the value propositions that banks offer to consumers is better access to their funds, which comes through a debit card. Then in the event that the consumer needs to borrow because they don’t have the cash on hand, obviously, credit products are core foundational there. Banks have been around for so long, people think that they have always been there, and that they’re just core elements of how consumers participate in financial services.

2 main drivers for Paze

But over the last 10 years, there’s been a number of people who’ve come in from outside the financial industry, who have taken little pieces, and sometimes larger pieces, of that business. What Early Warning exists to do is to help financial institutions be more relevant for their consumers. And I think what drove Paze specifically were two things.

One is the long term trend of online payments, online shopping — it used to be X percent, and it becomes 2x and became 3x. It’s a very material part of how consumers shop and pay these days.

And then the second thing was a recognition that other people were out there offering experiences that delivered more value and more delight to the consumer, and because of that, customers potentially get away from banks. That’s not something that the financial institutions want to have happen. So, I think Paze is really about driving that relevance of having one of those core payment products and delivering a better experience in one of the most important use cases for consumers, which is online payments.

What consumers are looking for from their bank

Sometimes the easiest answer is the correct one. Occam’s Razor, right? You could come up with 16 levels of complexity, or you could just say, it’s easier to get it from the bank. And there are some real advantages. If you’re doing P2P transactions, your money starts at the bank and you’re sending it to somebody else, whose money it is and who’s going to put that money most likely into her bank account. And so, why do do a big loop around? Zelle really just connects those two bank accounts and provides the directory and the fraud tools and everything to make it safe and secure. I think it’s just intuitive to consumers.

But if they’re going to push money from their bank account to somebody else’s bank account, why wouldn’t you go to the bank to start that transaction? And why wouldn’t it end up at the other consumer’s bank account. The notification comes from their bank. And so obviously, what we needed to build with Zelle was that coverage network of many thousands of financial institutions.

At Paze, we’re emulating aspects of that success model. So although we’re starting with the owner banks as our first customers, we’re actually going to start with another 1100 financial institutions who come to us through a distribution relationship. We are in advanced discussions with many non owner banks about participating in Paze. So although we are owned by seven banks, we exist to serve the whole financial ecosystem: financial institutions, banks, credit unions, from smallest to largest.

Growing a big install base

That gives us that opportunity to have ubiquity. Our mission on Paze is to be ubiquitous both on the consumer side, and that translates to mean that any consumer that has a debit or credit card issued by a US-based financial institution should be able to use it through Paze, and any merchant that accepts those products should be accepted through Paze, too. That’s our mission, our mandate. And we take that very seriously. We build all the technology, the economics, and all the constructs around delivering on that vision of ubiquity.

Paze: Product features and benefits

The widget itself is known as Paze. There are a couple of things that we set out to achieve. We recognize that we are not the first entrant, in the same way Zelle wasn’t the first entrant in P2P. So we looked at all the pain points on the customer journey of existing services, and worked through, saying, how could we eliminate those pain points? One of the very first pain points of existing players is that consumers actually have to go do something to create the experience. They have to create the wallet, and we felt like why would we? Why do we need to make consumers do that? We can do that for them.

The participating FIs we have relationships with have access to all the information about the consumer. They have access to the account information. And so we actually build a wallet for the consumer, and it’s a multi-FI wallet to be used with multiple financial institutions that are participating. The user goes through and chooses eligible cards. We have a set of eligibility criteria, and those criteria are all about delivering to the consumer the most relevant proposition that we can.

We say, Look, we want as many cards as possible, but what we really want is the cards that people use to shop online with today. So if somebody has a card that they got four years ago and stuck at the back of their sock drawer and never uses anymore, they’ve evidenced it’s not valuable to them. So we’re not even going to load that into Paze. But the credit or debit card that they use everyday to shop online, that’s what we want to load up and surface.

So the first thing we do is we create a wallet for the consumer, as opposed to making them create a wallet. The other thing we saw in terms of friction and pain points for the consumer was the need to have a new username and password. Consumers have enough — we didn’t want to put any more cognitive load on the consumers. So we decided that there would be no username and there’d be no password. So people identify their wallet with something that’s known to them like an email address, and then they authenticate through their phone, which again, the bank knows, because that’s part of their profile. No more usernames, more passwords to remember.

Security’s role and tokenization

And then the last piece is if a product comes from your financial institution, there’s an expectation that it’s safe and secure. But we wanted to make sure that we weren’t just talking about safety and security, we were actually delivering on it. And so one of our founding principles is that there are no real card numbers in place. All the cards that are loaded into Paze are tokenized. So we take a network token instead of a real card number. We actually get the real card number, and then we tokenize it. So a consumer never needs to worry — the actual card number on their plastic is not the number used.

And then by using network tokens exclusively, it also gives us the ability to add a cryptogram at the point of transaction. So every payload is completely unique. So we’ve tokenized it, so it’s not the card number that the consumer knows. And then we also overlay that with a cryptogram that’s unique, that is only decrypted by the network.

We have layers and layers of security to basically deliver the most secure experience we can come up with, at scale, and deliver peace of mind to the consumer, but also deliver convenience. We wanted to make it as easy as possible. We create the Paze wallet for the consumer. And then the consumer claims it. The easiest way to claim it is from one of our participating financial institutions. Users going to be messaged when they’re in online banking. And because they’re authenticated in at that point in time, essentially, the bank can send them to us, and attest that it is a real consumer. They go through and accept terms and conditions. And then they have their Paze wallet activated with all the relevant cards for them for ecommerce.

Paze initial target users

We’ve done some consumer research, as you’d imagine, figuring out where people are going to come from. I think we see that there are some don’t-use-wallet people. And obviously, those are strong targets for us. There’s a number of those out there. What we also see is there’s people who are kind of weakly affiliated to something: they use something, but when you ask them why they use it, they don’t really have great answers, and they don’t seem to exhibit a lot of passion. So we think that that’s really where the opportunity for Paze is really strong. Because the third part of that is, we hear from consumers when we do primary research that they do value the relationship that they have with their financial institution. And they do listen to what the financial institution says about better ways to pay and take care of your financial affairs.

So I think if you take the combination of people that aren’t using any of the competing products, people who are using them, but maybe with weak affiliation, and the ability to distribute and deliver that message from a trusted financial institution, we think it’s a pretty compelling combination of facts. There are some great companies that are in the space already, very similar to the fact that there were great companies in the space in P2P. We’re happy to compete with them. Hopefully we bring something new, a little different to the table and find our place in the market.

Adopting Paze: Offense and defense for banks

I think banks view it as delivering value to their core customer base. In any construct, in any business situation, it’s always simultaneously offense and defense, right? You’re trying to deliver more value. So you keep your best customers, and you also want to protect your customers from people attacking you. So I think the framework that we talked about with them, they tell us is really about how we deliver more relevance.

Look, clearly, they’re extremely relevant already. There are oftentimes surveys in the industry that say people don’t trust their bank and things like that. And I always say, that’s completely bogus — people trust their bank. And the evidence is that they send their paycheck there every two weeks. It’s self evident that they trust the bank. But trust is great, but you need relevance as well. And you need to be delivering value and products that make your consumers’ lives better. It’s pretty simple. It’s kind of Business 101.

I think it’s really about how we continue to reinforce the value of having those relationships with the financial institutions. And then also how we create a platform for the future and for future innovation. We’re starting where we start, but once you have a place in the market, you have the optionality about where you take it. I think that’s important. We haven’t decided we’ve got to get live, we’ve got to get scale. We do have to to delight customers around the first use cases. But I think it’s pretty clear as you go around the whole economy that things are going digital in every domain — payments is certainly no exception, because essentially, it’s ones and zeros.

How do you stay relevant? In that experience, you’ve got to have good digital tools, you got to have good digital experiences. Financial institutions have great digital experiences when you’re interacting directly with that financial institution. The mobile banking apps are fantastic. With the exception of Zelle, they haven’t played much of a role in payments. It hasn’t been part of it. And fundamentally, that’s because the use case of a payment, you’ve got a counterparty who’s not a bank — it’s a merchant. So really, you can think of Paze as the bridge between the banking world and the merchant world.

There have been attempts to go all the way from the banking world and the online digital banking experience, all the way to the merchant world. But unfortunately, or fortunately, the way the market is structured, even the largest banks are really not big enough to land that story — it just doesn’t land in a merchant world, because the merchants are saying, Yeah, you have a very big bank and you have lots of customers, but I have lots of customers who don’t bank with you. How does that work?

Ubiquity is super valuable for the merchant. The idea that all of your customers who shopped with you are eligible to have a Paze wallet — that immediately is compelling. Because that says, I just have to worry about usage. But the idea that anybody who’s a customer can use this wallet to make their life better, that’s a checkmark, and we’re not making you choose 20% of your customer base and not choose the other 80%. Everybody can participate.

Populating the merchant side of the Paze marketplace

The joys of a two sided market in payments….I spent a number of years at a large payment network and one of my jokes was that after a year in the payment network business, the one thing you realize is you’re always behind. It’s just a question of which side you’re behind on. You just have to get used to being late on one front. But look, we spent a lot of time and we’ve had a lot of great partnerships with some of our owner institutions who have large merchant-facing businesses. So we’ve been working with them to bring some of their merchants to Paze and we’ve been successful there. We’ve made a couple of announcements and we’ve got more to come. It’s going to be good.

Merchants obviously are good at doing payments. They know how to deliver experiences. But one of the things we came to the market with was a recognition that if you’re selling successfully online, then you know a lot about your consumers, you know a lot about how they shop and pay. So we came in with a position where we were deliberately not prescriptive — we weren’t telling them, Hey, this is the flow you have to do. We came in saying, Hey, we’ve got this very large customer base that’s going to be loaded into Paze and we’ve got four or five different ways you can get access to that base, depending on your business model, depending on how you sell. And let’s work together to figure out what’s the best way.

So for some merchants, it is classic guest checkout replacement, and we embrace that, we love that, particularly smaller merchants, where card on file is not going to happen for them. Those are great examples of where we can just increase the classic e-com conversion rates and help them make more money, which is fantastic. When you get to the larger merchants, a lot of them don’t even offer guest checkout anymore, it’s just not a thing they do, because either they know your data, or they want to have a direct relationship, because they want to do marketing or whatever purpose. So we allow the data that’s in Paze to be used with consumer permission to create an account in merchant land.

We give the network token for the first transaction, but we also support them if they want to swap that network token out for their own token to use for subsequent transactions. So that’s very appealing for large merchants who want to build their customer base. We also have use cases where very large merchants, because they have tens or hundreds of millions of consumers, one of the problems they have is that every month a certain number just fall off, cards expire, cards get cancelled, things happen. And for them, they’re constantly trying to renew and get that recurring revenue. So we’ve built what we call a back to good flow, where if a merchant knows a consumer’s email, they can ping the Paze directory in the background. If they find a wallet there, they can actually create a bespoke flow that says, Hey, Mr. Miller, your card has expired. We know you’ve got a wallet — that Paze wallet — click here to use your Paze wallet to load a new card. Subscriptions — that’s an increasingly popular use case for remote payments and ecommerce.

What we’ve heard is a refreshing point of view, which is, yeah, we’ve got a set of assets, and we think we can help. Let’s sit down and roll up our sleeves and work together to figure out exactly how we can help and where we can help. We’ve had some very fruitful conversations with some of those larger merchants about different problems. And that’s driven some of our product development activity as well. The merchant side of this equation is always the hardest because it’s very big. And there’s a lot of heterogeneity from the largest to the smallest merchants, all of whom use cards to effect payments.

We’re also signing up the distribution because when your objective is ubiquity, we’re not going to build a team that’s going to go sell to three million merchants direct. I don’t think there’s a budget for that. So we’re leveraging all the people who sell merchant processing today. So that’s obviously acquirers, PSPs, PayFacs. They’re all able to be what we call distributors of Paze. And they’re able to go sell it, they are able to bundle it into their merchant processing offerings. And that’s fantastic.

What we’ve also seen, which is pretty interesting, because ecommerce obviously has become very complicated and sophisticated, is any one specific merchant deployment might have three or four vendors who touch data and do different things in the flow, but they’re not the entity that sells much processing. And so we also created a distribution structure, which we call technical integrators, which are entities that offer a piece of a solution. They can pre integrate Paze, they can make it part of their offering, and then that makes it easier obviously for the merchant to implement and easier for a merchant to accept.

The place we’re seeing a lot of demand and a lot of interest is really in those entities who serve the longtail merchants. We announced that GoDaddy has implemented Paze and it’s live. And you know, they serve tens of thousands of merchants, all small. And those are the people with the classic kind of guest checkout replacement. Somebody sees a local business or an online business, maybe comes out of social media, clicks through and they want to buy something. They’ve never shopped there before. The customer delight typically stops when they see 17 white boxes that they have to type into and a bunch of people click away. That’s an ideal use case for Paze for those longtail merchants — suppose you click a button, authenticate, and all the data is there. That’s very easy ROI. We’re seeing a lot of interest from those longtail people who sell to, service, and support smaller merchants. That’s very fertile ground right now.

Looking ahead with Paze

The great thing is that we start with the seven bank owners, and also I mentioned there’s another 1100 FIs who are coming along through one of those owner relationships. So we start with a huge advantage. I kind of joke that I showed up on day one, and I had seven of the largest banks as my customers, and I’d never even made a sales call. So you know, that’s a huge asset that we have. And we think that with that, we have already a kind of critical mass to launch. It’s going to be north of 150 million ecommerce active cards that we load from day one. So it’s a massive base.

But we’re also in very advanced discussions with non owners, because those non owners, if you zoom out to the problem statement we’ve talked about, which is relevance for the consumer, they just happen not to be owners of Early Warning, but they have the same aspiration and the same desire to continue to enhance the relevance of their offerings to their consumer bases. So we’ve got non owners, very close announcements expected soon. I think we’re in great shape in terms of the world of FIs.

We’re building out the merchant footprint quickly, and we’ll never be done with that. We recognize that that will be an ongoing, evergreen task. We feel good about the base that we’re going to start with, and we’ve got a strong pipeline of people who are saying, Yeah, I get it, maybe I’m too busy right now, or maybe I want to see it live and make sure you follow through, but come back to us.

We’re particularly excited also to sign up what we call resellers who can bring us access to longtail FIs, smaller FIs on a mass scale and we’re expecting banking software providers, those types who provide the software and the services smaller banks rely on to deliver services to their consumers. There will be some announcements soon on that front. We’re building out all the pieces of the puzzle.

We love the brand, too. It’s resonates very well. We’re working on the marketing campaign. So there’ll be marketing that is delivered, brand awareness marketing that comes from Early Warning around the brand, product, and promise. Then there’ll also be a lot of in channel, in bank from the FIs. Participating FIs will also be promoting it. So yeah, we’re working busily away, but I think we’re moving. We’re definitely moving the ball down the field on all fronts, and we’re excited to get live and get into the market and start serving consumers and merchants.