P2P’s Newtonian Reaction

Call it Newtonian market dynamics. Sir Isaac Newton propounded the physical law that for every action there is an equal and opposite reaction. Now, in the suddenly vibrant market for person-to-person payments, we’re seeing an analogous reaction unfold. As our cover story on page 22 explains, financial institutions have made a strong comeback in P2P with their Zelle network. That’s a reaction opposite to the serious inroads made by nonbank providers such as Apple, Square, and, most prominently, Venmo.

Opposite, but is it equal? In some ways, “comeback” may be not quite right. Financial institutions were already processing large volumes of P2P transactions even before Zelle debuted last summer. They were doing it through systems like Popmoney, People Pay, and the Zelle forerunner clearXchange. They just weren’t getting much notice for it. Instead, the publicity went to systems like Venmo that catered to 20- and 30-somethings with a clever twist: social media. Not only can you pay a friend, landlord, or relative, you can let them—and all your friends—know about it in the Venmo feed.

Zelle’s average ticket is higher than that of Venmo, indicating it’s dealing with more than just split payments for dinners out, baby sitters, and theater tickets. Perhaps it’s seeing a bigger influx of rent payments or other quasi-commercial transactions. That profile should flatten out as more users adopt it for ordinary payments to friends and family.

What Zelle and its rivals will have to figure out is how to make some money on these services, all of which are offered free of charge to the user. It’s no good saying P2P doesn’t have to make money, that it can simply drive business to unrelated financial services that carry lucrative fees. There’s too much expense involved in building and maintaining a network, and volume-driven network economics will only get you so far.

Companies like PayPal, which owns Venmo, already see this. That’s why it’s pushing Venmo into retail stores—more than 2 million of them so far—in a program called Pay With Venmo. Payments are still free to users, but PayPal earns a merchant fee on each transaction.

Even Zelle is acting on this front. It’s beginning to process disbursements—things like payouts from insurance companies to policyholders—on its real-time network. Those fast payouts please customers and earn a fee for the participating bank, though Early Warning, the bank-owned company that runs Zelle, won’t disclose it at this early date.

Once the economics of P2P are sorted out, the market will really boom. Meanwhile, the bank vs. nonbank battle, played out in so many other arenas over the years, plays on in this one.

—John Stewart, Editor john@digitaltransactions.net