Tuesday, August 1, 2023

Zelle outage at JPMorgan Chase is a red flag for banks



An outage at JPMorgan Chase disrupted Zelle transactions Tuesday, inciting user complaints that spilled over into the following day. The fallout for Zelle and its banks could last much longer.

It was the second Zelle glitch in six months that involved a bank tied to Early Warning Services, the P2P app's owner. The JPMorgan Chase interruption follows an outage at Bank of America that disrupted Zelle payments in January. Both banks are among the seven co-owners of Early Warning.

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Glitches often occur when digital payments flow through older core banking platforms. That problem could grow as more transactions occur on networks integrated with The Clearing House's RTP network and the Federal Reserve's real-time-payment processing system FedNow.

"Instant is great when it works. But when it's broken, we find out about it right away," said Peter Tapling, a payments consultant and former Early Warning executive. "That intersection of brand new modern systems, and clunky old bank systems is going to become more evident."

JPMorgan Chase took responsibility for the disruption after Zelle blamed the outage on the bank. The $3.9 trillion-asset banking giant declined to comment on what had caused the outage and said the issue had been resolved by midday Wednesday, even while users continued to issue complaints on DownDetector, a site that collects user outage reports.

Other banks that support the Zelle network did not report disruptions during JPMorgan's outage. JPMorgan has the largest share of payments on the Zelle network. Twenty-two percent of Zelle transactions involve JPMorgan consumer or business clients, according to Crone Consulting LLC, which estimates that the bank handles more than $2 billion in roughly 27 million transactions between 54 million unique users through Zelle per day.

More than 1,500 users reported problems accessing Zelle Tuesday on DownDetector before complaint volumes began to taper the following day. Chase and Early Warning declined to comment on how many banks and consumers were affected.

When one of the largest banks on a network goes down, "you can't help but have some disruption generally," Tapling said. "But those don't represent outages of Zelle. Those represent outages on one side of a two-sided payments exchange."

Payment network disruptions that originate from banks highlight that challenge that results from real-time payment networks designed for app-based payment systems colliding with bank systems built originally for paper checks.

"At the network level, FedNow, RTP — those are generally written under modern architectures that have modern system resilience, failover capabilities, etc.," Tapling said. " While efforts have been made to modernize core infrastructures, those core systems are really hard to replace."

Portend trouble

When a large bank like JPMorgan Chase suffers an outage, it could portend trouble for real-time-payment networks as even more consumers, businesses and financial institutions begin to expect payments in real-time.

"These kinds of issues are going to come up. And [they] won't be fixed until the industry goes to a true real-time processing scheme for their core systems, which is not likely to come any day soon," said Richard Crone, CEO of Crone Consulting LLC.

"The unexplained outage at Chase and its implications for Zelle point to the challenges of integrating real-time payment systems like FedNow with legacy batch-based bank systems designed over 70 years ago, which have to be adapted to accommodate non-repudiation and real-time processing requirements."

Zelle's readiness to blame JPMorgan Chase, which is the largest owner of Early Warning, may reflect the gap between the modern frameworks that payment providers use and the grandfathered systems that banks integrate them with.

WEST HOLLYWOOD, CALIFORNIA - JUNE 22: (L-R) Melissa Lowry and Mindy Kaling speak during Thrive Through Summer with Zelle and Mindy Kaling at Pendry West Hollywood on June 22, 2022 in West Hollywood, California. (Photo by Stefanie Keenan/Getty Images for Early Warning Services, LLC)

Zelle directs consumers to issuing banks when outages occur — including other Early Warning co-owners like Bank of America, Wells Fargo and PNC — when it receives service queries from users.

"What's interesting here is that very few, if any, payment networks ever point the finger and blame the issuing bank," Crone said. "That has brand implications and trust implications for financial institutions, and they have to manage their publics like any other crisis management."

Both Early Warning and JPMorgan declined to comment on whether that public affairs message had been coordinated before it was issued. Participating banks are responsible for managing their own fraud protections and responses.

"I think they're just trying to make clear that it's not a network resilience issue," Tapling said, noting that JPMorgan's sizable ownership stake in Early Warning suggests that their relationship was not souring. "The network wants to make sure that the public sees the network is being stable and reliable. They are protecting their own interests."

Zelle could also open itself to risk, regulation and liability if it doesn't make clear that the issuing bank is responsible for a failure, according to Crone. "Admitting anything less opens up Pandora's box," he said.

Inherent risk

Given the inherent settlement risk of Zelle, it has to be 99.999% sure that the system is processing correctly, and if it isn't they'll shut it down, according to Crone.

Aged tech could also hinder Early Warning's ambitions for Paze, a digital wallet it recently piloted with its seven bank owners and hopes to expand later this year.

"A digital wallet such as Paze has even more critical dependencies with greater potential for processing interruptions. This outage threatens Early Warning's Paze launch, highlighting settlement and processing risks, which may hinder adoption by retailers, issuers, and other stakeholders in the payments value chain," Crone said. "It is not an isolated incident, and it doesn't bode well for trying to gain pilot customers and showcase customers to try Paze, either merchants or issuing banks, beyond the seven owners."

Banks and their investors may frown upon the payment providers' quickness to point the finger at them when outages occur, Crone added, particularly if disruptions occur that affect RTP or FedNow. That could signal a need for more involved public affairs contingency planning.

"This should be a warning, and really be a wake up call, to having your crisis management plan in place before launching RTP or FedNow," Crone said. "[If] the settlement value chain were to break down, the real time part of RTP or the non repudiation of real time payments — that promise could be affected."

But to mitigate outages, it may be more important for banks to upgrade payment systems for modern times, Tapling said.

"They could have had a minor outage and nobody would have noticed it. But now you have mobile banking, where you could be looking at your bank app seven times a day," Tapling said. "As we move more towards instant payments, those financial institutions that exist in more fragile environments are going to be exposed."

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