Democratizing Money

Peer-to-peer payments are taking center stage as banks, processors, and tech companies roll out new ways to displace cash. But will providers cash in?

The headlines mostly tell of the problem-plagued EMV chip card rollout in the U.S. or wishfully hope that mobile payments will finally catch on with consumers and merchants. But the more exciting action in 2016 is in peer-to-peer payments, where new services and new players abound.

There’s more than a hint of déjà vu, too: The P2P, also called person-to-person, space is the newest battleground in the age-old war between banks and credit unions on one side and non-bank technology firms on the other to provide consumers with payment services.

It’s no wonder that P2P payments are hot. A November 2015 report from Aite Group LLC estimated the market at $1.2 trillion annually. What Aite calls “legacy” forms of payment—primarily cash and checks—accounted for 51% of P2P transactions in 2014 and 47% of spending volume, the report says. That leaves plenty of room for electronic P2P payments from PCs, laptops, smart phones, and tablets to grow.

And growing they are. For example, PayPal Holdings Inc. reports that its Venmo P2P service, which is very popular with Millennials, processed $7.5 billion in payments in 2015, up 213% from 2014.

A recent Cardbeat survey of 800 credit card holders by New York City-based Auriemma Consulting Group found that one-third of them now use a P2P service. The most frequently cited purpose, at 94%, is sending money “far away,” indicating many users view P2P as an alternative to wiring money or even as a way to make online purchases, according to Auriemma.

P2P “is getting some more traction,” says Marianne Berry, managing director of Auriemma’s Payment Insights group. She says the survey’s finding that a third of consumers use P2P services is “higher than I would have expected.” The demographics of current users, particularly young adults, portend further growth, she adds.

It well could be that the growth in P2P marks a turning point in electronic payments, according to a PayPal executive.

“If you look in the broader context, we’re in the midst of the revolution in democratizing money,” says Meron Colbeci, senior director of global core consumer products at San Jose, Calif.-based PayPal. “It is essentially to replace cash and make it as easy and simple and contextual as possible to exchange money.”

This revolution is shining a new light on the divide between financial institutions and non-bank technology firms, which are quickly piling into the P2P space. Early tech entrants included PayPal and Des Moines, Iowa’s Dwolla Inc., which is working to make the automated clearing house network faster, but they’ve since been joined by a host of competitors.

To name just a few: Social-network giant Facebook Inc. last year added P2P functionality to its Messenger service. Alphabet Inc.’s Google unit stripped away the point-of-sale payments functions of its struggling Google Wallet and converted it into a P2P-only service. Merchant processor Square Inc. has its Square Cash and also powers Snapchat’s Snapcash.

‘Consumers Have Voted’

Besides banks and credit unions, these well-known names compete with countless lesser-known upstarts. Oh, and Apple Inc., which launched its Apple Pay in 2014, reportedly is working on a P2P service.

But financial institutions have some things in their black bags that, apart from PayPal, very few of the non-bank firms have: massive customer bases, and, beyond sheer numbers, a reputation among consumers as the go-to places for secure payments.

A few big banks bring their own technology and massive marketing resources into the P2P space, but thousands of mid-size and smaller institutions turn to processors such as Fiserv Inc. and Fidelity National Information Services Inc. (FIS) to keep them in the game.

“Consumers have voted time and time again … they would prefer to get these services from their institution,” says Chris Burfield, senior vice president of digital market strategy at FIS. “We are keeping the bank, the credit union, at the center.”

FIS offers its clients the People Pay service, which they can brand as their own to their customers. About 200 financial institutions offer People Pay, double the number about six months ago.

Brookfield, Wis.-based Fiserv, meanwhile, offers Popmoney to its bank and credit-union clients, a service it picked up in 2011 when it bought CashEdge Inc. for $465 million. More than 2,400 banks and credit unions offer Popmoney, including 185 that enable it for real-time payments.

Big Daddy

The Big Daddy of financial-institution P2P services is clearXchange, which was founded in 2011 by Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. as a way to enable payments among their millions of customers. U.S. Bancorp and Capital One Financial Corp. joined as co-owners later.

Early this year, the banks sold clearXchange to Scottsdale, Ariz.-based Early Warning Services LLC, a bank-owned fraud-control firm with considerable ownership overlap with clearXchange.

In all, the clearXchange owner and user banks represent more than 100 million online-banking users, about a quarter of which have signed up for the P2P service.

Today, Early Warning is focused on selling clearXchange services to other financial institutions rather than bringing in new banks as co-owners, according to Melissa Lowry, head of product and marketing at clearXchange.

“One of the core things we’re focusing on is ubiquity,” Lowry says. “And with clearXchange becoming part of Early Warning, it’s really elevated the profile of the organization.”

Faster Payments

The second big thing clearXchange is up to, as are many of its competitors, is so-called real-time payments. P2P services often do not settle their payments until one to three days after the sender initiates payment. That’s a lot less instant that handing a co-worker a $10 bill as payment for the office-lunch outing.

Some clearXchange members were doing real-time P2P payments among their own customer bases, but in February customers BofA and U.S. Bank did the first real-time transactions among two different banks.

“We’re really excited about having a real-time payments solution in the market,” says Lowry. “We are driving towards the whole customer base of our banks.”

The processors, too, are working on bringing real-time payments to their clients. Under the hood, both Fiserv and FIS offer a variety of settlement times that leverage the ACH, their PIN-debit networks—Fiserv owns Accel and FIS owns NYCE—and their proprietary technology.

Tom Allanson, Fiserv’s president of electronic payments, says Fiserv is keeping a close eye on faster-payments initiatives under way with ACH governing body NACHA, the Federal Reserve, and The Clearing House, owner of one of the nation’s two ACH switches (the Fed runs the other).

“We’re excited about the level of focus on real-time payments,” Allanson says. “We’ve been involved with all of them.”

Person-to-Business

Among the non-bank providers, no company is all over the P2P space the way PayPal is. PayPal offers P2P services under the PayPal brand and those of Venmo and Xoom. Venmo has a social-network twist and came to PayPal in 2013 when PayPal bought its parent firm, e-commerce processor Braintree.

In November, PayPal completed its acquisition of online wire-transfer provider Xoom Corp., which provides cross-border payments from the U.S. to 40 countries, including Mexico and the Philippines. Xoom, which also offers bill-pay services to seven countries, handled about $7.1 billion in payments last year.

Colbeci won’t disclose the total P2P volume PayPal handles under the three brands. But, anecdotally, he notes that PayPal relaunched its mobile app in February “with P2P as a more central part of that app.” P2P transactions in the mobile app have more than doubled in the past two years, he says.

Behind the scenes, PayPal is melding some operational functions of its P2P services, especially with Venmo, Colbeci says. But each service will maintain its distinct identity.

“We don’t have any plans for consolidating brands at the moment,” he says.

As PayPal and the other players compete for share, the lines between strictly personal electronic payments and business payments are blurring. Square, which made its name signing up part-time sellers and micro-businesses for mobile card acceptance, in March 2015 introduced a business version of Square Cash.

Fiserv last October added P2P functionality to its bill-pay services. Allanson notes that consumers often wonder, especially if they’re paying a plumber or other tradesman or service provider that comes to the house, if they’re paying an individual or a business.

“We’re trying to eliminate all [that] confusion,” he says. “It doesn’t take away P2P; P2P is still a viable service, but it’s much bigger than that.”

PayPal is testing a service called Pay With Venmo that lets a user pay with a Venmo account within a merchant app, much as he would do with PayPal. The service is in test with Gametime, a vendor of concert and sports tickets, and Munchery, a meal-delivery service. More merchants may be added this year.

“That’s a great example of how Venmo is starting to leverage more of the PayPal functionality,” says Colbeci.

Multilevel Marketing

This new business orientation also could bring more revenues to P2P providers, many of whom do not charge consumer senders but might find less price resistance from merchants. Generating more revenues “is absolutely a concern of our clients,” says Norman Marraccini, vice president and director of digital payment product strategy at FIS.

Square quietly raised the price of the business version of Square Cash from 1.9% to 2.75% after adding a credit card funding option to the previously debit-only service.

U.S. Bank, a clearXchange member, recently announced a $6.95 fee for instant payments, which instantly generated speculation among analysts about whether it can stick.

Regarding the top line, however, P2P providers get a break on marketing expenses that few other businesses do, notes Auriemma’s Berry. That’s because P2P senders often have to explain to intended recipients how a particular service works. These recipients sometimes become senders.

“It’s like you become an advocate in a sense for the product because you want to use it, so you have to sort of recruit your desired recipient,” she says. “It’s almost like multilevel marketing, you go out and get your customers to recruit other customers.”

That’s part of the personal, interactive aspect of P2P, which is one reason why new entrants are eyeing the market, according to PayPal’s Colbeci.

“It’s a relationship,” he says. “We’re trying to digitize more and more of our lives. This is what the tech companies are trying to do. This is a natural extension.”