Can PIN-Debit Networks Keep Banks in the P2P Game?

Now that companies like Dwolla Inc., Facebook Inc., Microsoft Corp., and Square Inc. are making headlines with actual or expected services for a booming person-to-person payments market, financial institutions are scrambling to come up with solutions for their customers.

One popular option is to leverage the automated clearing house network, as bank-controlled P2P services like clearXchange and Fiserv Inc.’s Popmoney have done. Another, newer choice is to make use of the same PIN-debit networks that switch point-of-sale and ATM transactions for banks.

Services that rely on PIN-debit switching include Fidelity National Information Services Inc.’s People Pay, Co-Op Financial Services’ Sprig Wallet, and Acculynk Inc.’s Payzur.

One other example of this alternative is the Johnston, Iowa-based Shazam network, one of the largest debit networks in the country still owned and controlled by financial institutions. In February, Shazam launched a real-time P2P feature for its 2-year-old Bolts mobile app. Shazam now has enrolled 22,300 users who are eligible to make P2P payments and is processing 500,000 monthly transactions.

In August, the Bolts P2P service will expand nationwide, taking it beyond Shazam’s network of 1,300 institutions and making it possible to send money to anybody in the United States with a demand-deposit account, according to Dan Kramer, a Shazam senior vice president. Where Shazam, which operates in 37 states, doesn’t have direct connections, it will rely on gateway agreements with networks that do.

Kramer says the key to success with today’s consumer is real-time, or at least near-real-time, clearing. As a result, competing P2P services like Dwolla, based in neighboring Des Moines, have stressed ultra-fast transaction times. “Just like on a football field, speed kills,” says Kramer. “We’re in a race to zero.”

As a PIN-debit network, he adds, Shazam is in a “unique position” to bring real-time capability to banks and make them competitive with non-bank services. This is a critical risk issue, he adds. “We need to make sure the financial institutions continue to be in the game. Most of the [P2P] disruptors are non-financial institutions that can present some risk to the financial system,” Kramer says.

To help control risk, Shazam requires users to authenticate themselves with their PIN when they enroll in the app with their email address and other information. PIN entry, however, is out-of-band, meaning it takes place on a separate device the user owns. After that, the user can send money using the receiver’s email address. Also, the Bolts app allows users to freeze their accounts if they suspect any of their credentials have been stolen or lost.

Shazam is already expecting a surge in usage when it expands its service later this summer. “We would anticipate a fairly significant increase in volume,” Kramer says.

Shazam and other services controlled by banks may have a built-in trust advantage with consumers. Some 30% of consumers transferred funds to another person in 2014, up from 24% in 2013, according to a survey by Mercator Advisory Group, a Maynard, Mass.-based consultancy. Of that 2014 group, 59% used a primary financial institution to perform the transaction, while 41% used a non-bank service. But it turns out that many who used a non-bank service would have preferred to use their bank if only the bank offered it, according to the survey results.

“Consumers prefer to use their bank in general,” says Karen Augustine, a senior analyst at Mercator.

Shazam levies a fee Kramer characterizes as “in the pennies” for P2P transactions. Members are then free to reprice the service to their customers. “Some do, some don’t,” says Kramer.