Wednesday , July 18, 2018

The Banks Strike Back

Long outclassed by nimble tech players, financial institutions are finally scoring points in the P2P payments game with the rapidly growing Zelle network. But nobody’s conceding defeat in this much-coveted market.

Keeping track of the players in peer-to-peer payments is like following an ensemble cast—a playbill is needed to identify all the companies jumping in.

From fintechs to financial institutions, P2P is hot. Among the fintech innovators looking to carve out a piece of the P2P pie are such giants as Google LLC, Apple Inc., Square Inc., and Facebook Inc. Even Amazon.com Inc. is rumored to be looking to dip its toe into the P2P waters. Many of these players have taken the plunge by integrating P2P payments into their respective mobile wallets.

And don’t forget Venmo, the perennial favorite among Millennials that PayPal Holdings Inc. acquired in 2013. Among fintechs in the P2P space, Venmo has captured the most volume, processing $35 billion in payments in 2017.

Venmo’s volume pales in comparison, however, to that of Zelle, a collaborative effort by some of the nation’s largest banks to create the pre-eminent P2P service in the United States.

Zelle racked up $75 billion in transaction volume in 2017, and shows no signs of slowing down: Volume totaled more than $25 billion in the first quarter, a 15% increase from the fourth quarter of 2017. At the same time, the number of transactions also shot up, totaling 85 million, up 14% from the fourth quarter.

‘Plenty of Volume’

So, after years of languishing in the shadow of the tech players, have the banks finally found the key to cracking the P2P code? Not so fast. Industry experts are quick to point out that P2P has only begun to scratch the surface of cash and check volume, which is at least a $1.2 trillion market, according to Boston-based Aite Group.

With so much volume at stake, many payment experts believe that fintech providers will not only survive, but thrive. “Banks have the majority of the volume right now, but there’s plenty of volume for everyone,” says Talie Baker, a senior analyst for Aite. “There are a lot of other players than banks that are growing rapidly.”

Indeed, just in December 2017 alone, Square generated $90 million in transaction volume on its Cash Card, which enables consumers to send, receive, and spend cash from the Square Cash app. At that rate, Square projects the Cash Card will generate $1 billion in annual transaction volume. There were more than 7 million monthly active customers in December 2017, the company says in its annual report.

And Venmo is still red-hot. Its annual volume grew 97% in 2017 and topped more than $12 billion during the first quarter of 2018, up 80% over the same period in 2017. It was the second time Venmo’s quarterly volume exceeded $10 billion, the first occurring during the fourth quarter of 2017, when volume hit $10.4 billion.

Certainly, Zelle’s quick success has tightened banks’ grip on a business many observers say they should have owned all along. But, given the fast growth players like Venmo, Zelle, and Square are experiencing, controlling this market is only part of the challenge. Equally pressing are the questions of how P2P providers can differentiate themselves, sustain their upward trajectories, and find profits in a business where consumers expect the service to be free.

For non-bank P2P players, the key to ongoing success in the near-term, payments expert say, will be to add features that enhance the cool factor of their apps, such as expanding usage to the point of sale and adding more social-media experiences.

Zelle, meanwhile, will continue to rely on the strengths the banking system can provide consumers: interoperability between member banks, real-time transfer of funds directly into bank accounts, and consumer trust in the banking system’s ability to digitally move money safely.

“The goal for Zelle is to make the customer experience around P2P frictionless and ubiquitous so it becomes natural to make real-time payments through Zelle,” says Ian Macallister, vice president of sales and customer success at Scottsdale, Ariz.-based Early Warning Services LLC, which operates Zelle. “We are looking to build consumer confidence in the Zelle network.”

‘Mobile-Buying Experiences’

The fintech payment apps haven’t slacked off in the face of Zelle’s landing with such force in their midst. As part of its push to evolve the customer experience, Venmo has been devising new ways for users to split and share payments.

In April, Venmo teamed up with online and mobile takeout food-ordering marketplace Grubhub to allow diners to pay their portion of the bill directly to Grubhub when placing an order through its Grubhub, Seamless, or Eat24 apps.

Before, Venmo users split the tab by having one person pay it and then collect from his friends through the app.

Once a consumer makes a purchase using a Grubhub app, the purchase automatically appears in the consumer’s Venmo app with the option to split the payment among multiple parties, provided everyone in the group has Venmo.

“This makes it easier for friends to pay for and split group food orders using Venmo,” says a PayPal spokesperson. “Food is a top use case for our customers, with pizza the most-used emoji, so we’re bringing the social-payment experience our customers love to the mobile-buying experiences we know they already enjoy.”

Venmo allows users to attach an emoji as part of its messaging capabilities. As for Grubhub, digital payments are not new as the company already accepts PayPal.

Since more than 60% of Grubhub’s orders are placed using a mobile device, Grubhub says it is looking for ways to make it easier for its users to find and order food they want, when and where they want it. “Adding the ‘split-the-bill’ feature provides an additional level of convenience our diners have come to expect from us,” Sam Hall, Grubhub’s chief product officer, said in a prepared statement.

‘A Ubiquitous Digital Wallet’

In many ways, the Grubhub deal builds on Venmo’s strategy of evolving itself from being just a P2P app to a payments platform. Venmo took a major step in that direction last fall when it announced Venmo users could make purchases at more than 2 million retailers that accept PayPal for purchases in the United States. PayPal’s merchant base includes Walmart, Target, Lululemon, Forever 21, and Foot Locker.

“Offering a way to pay at millions of retailers is a major step in the evolution of Venmo,” Bill Ready, chief operating officer of PayPal, said at the time of the announcement. “Our vision for Venmo is to not only be the go-to app for payments between friends, but also a ubiquitous digital wallet that helps consumers spend wherever and however they want to pay, regardless of device.”

While the move makes it possible for PayPal to monetize Venmo by charging merchants acceptance fees on purchases, it’s significance reaches much further, because consumers have the option to share their activity on Venmo’s social-media feed, along with any messages that accompany the transaction.

That’s something most Venmo users opt to do. Chip in on wedding-shower gifts using Venmo, and it’s there for others to see. Go out for a drink after work with friends, and Venmo provides the details.

That level of information sharing can also work as a viral form of marketing for merchants accepting Venmo payments, says Richard Crone, principal at Crone Consulting LLC, a San Carlos, Calif.-based financial-services consultancy.

“Sharing with friends the name of the merchant where you just made a purchase is an endorsement for that merchant,” Crone says. “Merchants already ask consumers to like them on Facebook, and the byproduct of accepting Venmo is word-of-mouth marketing. Merchants will pay for that exposure.”

Social-media marketing is very popular among Millennials, who have few qualms about sharing details of their lives in the online world, and who have been known to keep tabs on what their friends are up to through Venmo. Besides being heavy users of P2P apps—four out of five young adults in the U.S. use P2P, according to Maynard, Mass.-based Mercator Advisory Group—this demographic also pays attention to the wisdom dispensed by so-called influencers who use social media to make their opinions about merchants known.

“Seeing what their friends are up to through social media is important to those under the age of 30,” says Rachel Huber, an analyst with Pleasanton, Calif.-based Javelin Strategy & Research’s payments practice. “Why wouldn’t a merchant want a Pay with Venmo button to get free promotion through Venmo’s social ledger?”

But not all payments experts are sold on the notion that social-media marketing will provide a big lift to merchant sales. While Venmo users are comfortable sharing information about their purchases, the success of Zelle, which includes the option to attach a note to each payment but offers no social-media experience, suggests that social media are not necessarily a must-have when it comes to P2P payments, argues Norm Marraccini, vice president of product management, digital payments, for Fidelity National Information Services Inc. (FIS), which resells Zelle to financial institutions.

Zelle, like Venmo and Square Cash, is targeting consumers in their mid-20s to early 30s, the group that is the heaviest users of P2P payments.

Wow Factor

Business-to-consumer payments is another feature P2P providers have been developing. In March, Square began enabling direct deposits of paychecks to Square Cash users’ accounts.

To initiate the service, Square Cash users need only provide their employer their account and routing numbers. Users are notified as soon as the funds hit the account. Square announced the service over Twitter with the headline Payday! accompanied by a bag-of-cash emoji.

“Square Cash has been at the forefront of the digital P2P payments movement since inception, and per the media, has been a solid competitor to companies such as PayPal and Venmo,” Aite’s Baker said in a report titled “Digital Person-to-Person Payments in the U.S.: The Competitive Landscape.” She continues, “Square has become a brand recognized for innovation that challenges the status quo.”

Square Cash users are charged a 1% fee to withdraw money the same day it’s received. Users preferring to avoid the fee can wait until the next business day to get their money. Users can also use the app to make purchases through merchants, which generates transaction revenues.

Square isn’t the only P2P provider pushing to transition to a full-fledged payments platform. Last December, Apple introduced the Apple Pay Cash card. Consumers making P2P payments through Apple’s Messages messaging platform can send or receive funds using the card, which is issued by Pasadena, Calif.-based Green Dot Corp., an issuer of prepaid cards. Transactions made with the card run over Discover Financial Services’ network. Neither Apple nor Discover would comment for this story.

Another wow factor making its way into P2P payments is voice activation. In March, Google announced in a blog post it was adding Google Pay to its Google Assistant. Google Pay users can send or request money from their contact list using Google Assistant on Android and iOS phones in the U.S. P2P transactions are free. Down the road, Google Pay users will be able to send money on voice-activated speakers such as Google Home.

“We’re embedding P2P into apps that people use every day and many times in the context of exchanging value, such as Android Messages and Gmail,” a Google spokesperson says. “Our focus is on providing users the best and most delightful experiences that allow them to pay others however they like.”

Google Pay recently passed the 100-million milestone for downloads, the company says.

FIS is also looking at ways to incorporate voice activation into its People Pay P2P app, Marraccini says. Those features most likely won’t be available until 2019 at the earliest.

‘A Common Brand’

But if the non-bank players aren’t standing still, neither are the nation’s biggest banks. Unlike many of its competitors, Zelle is not scrambling to add more bells and whistles to its core offering. Instead, banks are making Zelle a core feature of their mobile-banking applications.

“P2P payments are table stakes in mobile banking now,” says Mark Monaco, head of enterprise payment for Charlotte, N.C.-based Bank of America, one of Zelle’s founders. “Zelle is a tool to make payments more mobile and digital, which fits with how people are increasingly living their lives and interacting with others.”

As it stands, Zelle is primed to push into business-to-consumer payments, such as disbursements for insurance payouts. Making such payments digitally can significantly reduce the cost of writing, sending, and processing a check, which can run between $4 and $5, says Macallister. Reducing that cost is a service businesses will pay for, provided the cost is substantially less than what they pay now, payments experts say.

While some Zelle members are reportedly moving into, or planning to move into, the B2C arena, the immediate focus for Zelle remains to drive adoption and increase volume. That’s why Zelle and its members have embarked on a marketing strategy of creating a ubiquitous network brand that banks can promote as the engine behind their P2P apps.

“Our member banks have their own brand and we don’t want to undercut those brands,” says Macallister. “Our aim is to create a common brand that banks can leverage as they choose when marketing their mobile-banking services.”

Bank of America, for example, promotes Zelle as a way to send money quickly and securely within its mobile-banking app and through its Web site.

BofA, which has about 3.5 million Zelle users who have made at least one transaction in the past 30 days, offers users the option of splitting a bill between multiple contacts, such as a group dinner check, and the ability to add a personal note along with the payment transfer or request.

‘It’s the Future’

Despite all the maneuvering by P2P providers to dazzle customers and get them comfortable making a P2P payment, the big question for all P2P providers is whether they can make the service profitable. By making P2P free to consumers, payments experts agree that P2P providers let the genie out the bottle and can’t put it back.

So how can P2P providers monetize their services? Besides expanding P2P to the point of sale, which nets merchant fees, some providers such as Zelle and Square are betting P2P is a gateway to services that can be monetized, such as loans and other financial services for which they can charge.

“Zelle doesn’t have to be monetized, because it successfully deepens customer relationships and opens the door to offer users other revenue-generating products,” says BofA’s Monaco.

However P2P providers look to make money, they can all be counted on to jazz up the consumer experience, because that what’s going to onboard more consumers and get them to shift their spending away from cash and check.

“P2P payments provide value, speed, convenience, and secure payments,” says Monaco. “It’s how people increasingly want to engage when it comes to payments. It’s the future.”

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