One of the side benefits of the mobile technology boom is the ability to access data anywhere at any time. Consumers armed with smartphones can access books, maps, videos, tickets, anything available in a digital format, and that includes cash. If you think of most banking transactions as bits and bytes sent between bank computers to handle transactions, then data becomes cash. Just look at Bitcoin. Once you turn pennies into bits and bytes it opens up new transaction possibilities for anyone armed with a computer or a smartphone, which is why the peer-to-peer payments market is thriving, especially with new products emerging as part of social media.
First There Was PayPal
PayPal was one of the first peer-to-peer payment systems and has evolved with time. Originally, PayPal started as a means to buy goods online, launching with eBay in 2000. The concept was simple enough – simplify online transactions by creating a secure means of transferring funds easily, without a credit card. Today PayPal has grown so that many e-commerce sites accept PayPal as routine payment, and it has become a standard for payments between small businesses and individuals.
While PayPal is incredibly convenient it is not free. PayPal charges a 2.9 percent transaction fee for payments. While it’s useful for online purchases where the vendor picks up the fees, it’s less valuable for peer-to-peer payments since someone has to pay the transaction fee.
Google Wallet has been the closest competitor to PayPal and is accepted on a number of e-commerce sites as well as storefront locations like Starbucks. To promote Google Wallet adoption, Google has teamed up with major AT&T, Verizon, and T-Mobile to make sure that Google Wallet is installed on all Android smartphones for near-field communications (NFC) transactions.
Payments Go Social
The newest trend is social payments. Venmo, for example, was launched by PayPal in 2011. Unlike PayPal Venmo is completely free when used with a bank or debit card, and has a 3 percent transaction fee for credit card transactions. What makes Venmo different is social connections. Venmo is designed to connect friends and family and includes a newsfeed in addition to money transfers. And Venmo is popular. Forbes reports that Venmo hit $314 million in Q4 or 2014 matching pace with the Starbucks’ mobile payment app.
Peer-to-peer payments are being integrated into social media services as well. Facebook and SnapChat have added peer-to-peer payments. Just send your roommate the rent over Facebook Messenger, or touch phones to split the bar bill. Moving money to pay friends and family has never been easier, and you don’t have to write a check.
If You Can’t Beat ‘Em…
So how does this affect banks? Consumers who use these services have to tie them to a bank account, debit card, or credit card, so banks aren’t losing customers. However, banks are still losing an opportunity to increase their share of wallet.
Most of the big banks offer some kind of mobile payment or peer-to-peer payment system, but they are not open. SurePay is available from Well Fargo but to send money, both the sender and recipient have to have to be set up for the system. QuickPay from Chase is useful only after you have logged in to enroll in the service. U.S. Bank has an instant payment system for $3.50, next day payments for $0.75, or three business day payments are free. The beauty of all the emerging peer-to-peer payment startups is they are free and open, so it doesn’t matter what bank the end user has. And these services bypass the Automated Clearing House (ACH) which typically delays transactions a few days.
Some banks realize it’s going to be difficult to compete in peer-to-peer, so they are embracing third-party payment services. BBVA Compass recently announced that it has allied with Dwolla to deliver real-time payments. By using Dwolla, BBVA can deliver real-time transactions by circumventing ACH. The service is not free – Dwolla charges a flat fee of $0.25 for transactions above $10 – but BBVA customers get to use their bank for real-time transfers, with Dwolla serving as the transaction engine.
As the BBVA case shows, peer-to-peer payment services may really be considered coopetition. They do offer services that banks can’t do well. such as instant peer-to-peer payments, and many do it for free. However, banks are still essential for providing the funding foundation for these services. Maybe it’s time banks took a closer look at some of these services and found ways to bring them under their own services umbrella, as BBVA Compass has done – customers get the convenience from their bank, rather than a third party. Any strategy that allows the banks to deliver the perceived value promotes better customer service, more customer loyalty, and bigger share of wallet.
The Latest from ProductBuilder Alert
Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week: