P2P
Mobile P2P users in the U.S. will grow from 69 million to 126 million by 2020
Credit and debit cards have become the non-cash standard way to pay merchants, due to ubiquitous acceptance and worldwide standards. But when it comes to paying another person, there is no standard way to do so, and many hurdles stand in the way of completing a person-to-person (P2P, sometimes called peer-to-peer) transaction. It certainly is not due to lack of need. Roommates splitting the rent and the utilities, diners sharing the bill, friends sending monetary gifts for a birthday, and travelers splitting vacation costs are the top 5 use cases for P2P payments, which represents $50 – $80 billion in payments. This number is hard to pinpoint, since the vast majority of these P2P payments are still being made using cash and to a decreasing extent, personal checks.
However, there is growing market demand to eliminate the need to make a trip to the ATM and then carry and hand over sometimes large sums of cash, and many vendors have stepped up to offer solutions. P2P solutions come in many flavors: bank-centric, that is, provided by a credit union or bank, or more specifically by a vendor to the financial institutions, and non-bank centric, that is P2P solutions that are not affiliated in any way with financial institutions. P2P transactions can be initiated on a website, either the credit union’s or bank’s website, or on a mobile app, usually provided by a third-party P2P provider. Funding for the payment can come from stored value, debit or check card, or direct debit from a bank account. And payment transfer is accomplished from the payer to the payee by one of several means, using ACH, using debit payments, or intra-P2P provider. There is an additional category for when the payments cross international borders. This is referred to as international remittances, and while technically can also be P2P, is not considered part of this market.
PayPal, Venmo and Dwolla. Three of the more popular P2P services have much in common: they are not affiliated with banks, and they are also wallets, meaning users store funds in their P2P account until sending a payment or offloading to a bank account. In fact, if PayPal were a bank, its collective holdings in all of the individual accounts would make it the 21st largest bank in the U.S. Oddly enough, PayPal didn’t start out as a P2P service. It was the way to pay a merchant on eBay. From there it grew to include 202 countries, 188 million active users who are sending, receiving and holding funds in 25 currencies. If PayPal is the largest, Venmo is the fastest growing. Specifically, Venmo processed $4 billion in transactions in Q2 of 2016, compared with $3.2 billion the quarter previous. This is a 25% growth per quarter, and 140% growth per year. Venmo’s phenomenal growth is driven almost completely by word-of-mouth, and almost exclusively among millennials, driven by Venmo’s embrace of a social model. Venmo is only available in a mobile app, which especially appeals to millennials.
In addition to sending and receiving payments like on PayPal, Venmo transactions are shared in a feed (without the dollar amount) so friends can see what each other is doing. Venmo also encourages splitting of bills. The average Venmo transaction size is $2, reflecting the usage patterns of the youngest millennials. Whereas PayPal is profitable ($9.2 billion in revenue, moving $282 billion), Venmo is not.
Even though millennials use Venmo to move more than $1 billion each month, the cost of operations and paying for ACH and debit transactions makes Venmo a money loser for its owner, which interestingly enough, is PayPal. One of the reasons for the lack of profit is that whereas PayPal started with, and still remains huge in the B2C space (paying merchants for goods and services), Venmo remains P2P. And Venmo is open to scams since it relies on ACH, which primarily occur when used to receive money from strangers who buy things on Craigslist. The buyer pays using the Venmo app and the seller gets the alert that they have been paid. But the buyer can cancel the transfer of funds after receiving the goods but before the money is taken out of the sending account. And, since Venmo is not regulated by the CFPB, users have little recourse. Venmo acknowledges this in their terms and conditions by saying: “Avoid payments to people you don’t know, especially if it involves a sale for goods and services.”
While Venmo continues to grow the number of users who download and use the app, Dwolla is trying to shed its app users and pivot from paying people to paying companies. Dwolla will now focus on providing payments application interfaces that can be embedded in companies own apps and websites to allow consumers to make payments from their Dwolla stored-value or from their bank accounts or credit or debit cards.
Bank-Centric P2P: Popmoney from Fiserv and Zelle from ClearXChange. Most of the major U.S. banks offer person-to-person (P2P) payment transactions through their mobile apps or websites. ClearXChange and Popmoney are the two largest P2P examples of vendors that facilitate these transfers for its member credit unions and banks. ClearXChange is accessed through mobile banking apps from seven (as of this writing) U.S. banks including Bank of America, Capital One, Chase, First Bank, US Bank and Wells Fargo. However, ClearXChange can be used for free even if one side of the transaction does not bank with one of the member banks. ClearXChange doesn’t do any of the actual transferring of funds but rather provides the information the member banks need in order to complete the transaction.
Since ClearXChange was founded by large, national banks, the security protocols that this P2P payment service uses are bank-grade and match what the banks use. This past September, Early Warning Services LLC, the parent company of ClearXChange, announced a rebranding of the product, to Zelle, in conjunction with the release of a mobile app, intended to better compete with Venmo. Release is expected in 2017 and 19 credit unions and banks have already signed on to be part of the launch with many more expected.
Zelle will add some features to basic P2P functionality not found in competitive offerings. Users can deposit a check and have immediate funds availability. They can also set up bill pay and make payments to merchants real-time. And Zelle can be used for B2C and G2C disbursements, such as tax refund checks, government benefits, and insurance claim pay-outs. Even with these features and no fees, it will be a challenge for Zelle to start from zero users and surpass Venmo in recognition, adoption, and usage.
Popmoney works similar to ClearXChange in that it draws from, and deposits directly to a savings or checking account, rather than a separate stored value account. And like ClearXChange, it is usually accessed directly from the credit union or banks’ online or mobile banking site. Thousands of banks and credit unions offer Popmoney to their members and customers. Popmoney transactions are handled by Fiserv, an online banking service that handles around 70 percent of all bill payments made at U.S. financial institutions.
Social Media P2P: Facebook Messenger, Snapcash (and Square Cash), Google Wallet. The number of U.S. mobile P2P users will grow from 69 million in 2015 to 126 million by 2020, according to Javelin Strategy & Research. Smartphones are expected to become the primary P2P channel with over half of all U.S. mobile device owners predicted to use mobile P2P. So, it’s not surprising that two of the social media giants, Facebook and Snapchat, have embraced P2P payments within their respective mobile apps. Facebook Messenger has become ubiquitous for people to chat. Facebook embedded the ability to pay other Facebook messenger users from within the app, in March 2015, quickly climbing to sending over 1 million payments a day.
Payments are sent to/from a Visa or Mastercard debit card, and can take two to five days, depending on the underlying bank. Facebook has recently started encouraging companies to sell products through their Messenger bots by adding a buy button, giving the ability to people to buy products from a bot without needing to leave Messenger. But like Venmo’s mobile app, fraud scams are frequent, and Facebook warns its users to “only send to or receive money from people you know” and to watch out for fraudulent schemes such as romance scams, lottery scams, donation scams, inheritance scams and loan scams.
Another popular social media giant, Snapchat, launched its P2P service, Snapcash, about four months before Facebook adding P2P to the text-chat function of the popular mobile app that allows users to send pictures or videos to other Snapchat users with the photo or video self-destructing within seconds of being viewed. The Snapcash function works like Facebook’s in that the user sends or receives payment directly to/from a debit or credit card.
Snapcash was built on top of Square Cash, the P2P service provided by Square, which is the largest payment processing service for small business and individuals. And since Square has been in the business of processing business payments since 2009, it grew up with security as a core requirement. Square Cash P2P payments, and therefore Snapcash payments, are PCI DSS secured at the level of Square’s ecommerce transactions, so they have the same internet security as online businesses. And since Snapcash is built on Square Cash, users on either service can send funds to each other.
Google’s history with P2P has taken many twists and turns to become what it is today. Google first released its Google Wallet payment service in late 2011. It consisted of a stored-value account linked to a bank account or debit card, a mobile app that could be used for payments where NFC was accepted, and a plastic card which could be used to access the stored-value account where NFC was not available.
Then in 2015, Google acquired the mobile wallet Softcard, which was a payment app offered by the major U.S carriers AT&T, Verizon and T-Mobile. The Google Wallet would come bundled with Android phones offered by those three carriers as a competitor to Apple Pay. This Google Wallet app on these Android phones was renamed Android Pay. The Google Wallet nomenclature was re-defined to denote the P2P payment service, including the stored-value account, accessed from a new mobile app (separate from Android Pay, but now also available on iPhones), from Gmail, and from the associated plastic card. But in early 2016, Google announced that it was dropping support for the plastic card. Recently, Google added access to P2P payments from its web browsers.
And the Winner Is? Which P2P service will dominate this growing piece of payments, and more importantly, replace cash and check with a seamless, intuitive and secure method of payments? Only time will tell, but there are some clues based on who’s ahead in the market today.
The Best App.The best service needs a great stand-alone mobile app that is easy to use by every generation, even on first use. Venmo certainly wins in this category, but the Zelle app shows great promise.
Recognition. PayPal has the most name recognition when it comes to P2P payments. It had a major head start. Google has one of the most recognizable brand names world-wide, but they may not be the brand that comes to mind when paying a roommate. Venmo has great brand recognition for P2P, but only among the under 30 generation. Zelle and Popmoney have virtually non-existing name recognition among consumers, primarily because banks and credit unions have buried their P2P service in their digital banking platforms three or four clicks down. For banks to grab a hold of this industry, they need to put access on the mobile app home screen or online landing page.
Sharing/Social. One of the biggest factors for Venmo’s success is its use of social network sharing. Facebook and Snapcash have an advantage in that they are social platforms before they are payments platforms.
Fees. As can be seen in the comparison chart, fees are all over the place. But there is a deep-seated perception that P2P is an alternative to cash and checks which cost the sender and receiver nothing. So, P2P should work the same way. Charging fees to cover credit card transactions should only be in the case where the merchant pays those fees, not the sender. It may be a better strategy to not accept credit cards for P2P rather than charge fees to use a credit card for P2P. Fees introduced early in the process will easily kill adoption.
The great news is that there doesn’t need to be, nor should there be, just one winner. Visa and Mastercard have existed side-by-side in the payments space since the 60’s. But the P2P market is much more fluid than the early days of payment cards, and users can easily migrate from one service to another, as soon as something better comes along. P2P is about creating a better way for people to pay other people, and at its very core needs to be wide and inclusive. At the same time it needs to be trustworthy, secure, instant, and seamless, a tall set of requirements for any one provider to meet. But working with credit unions and banks, social media and app developers, digital P2P will replace cash and check payments by the end of this decade.
