P2P Payments: Why Banks Need to Dive In Now

Banks and financial services providers increasingly are jockeying for position in the peer-to-peer payments space, and for good reason. Most experts agree that the continuing acceleration of mobile adoption will mean a surge in growth for the P2P market.

In February financial services giant Fiserv (Brookfield, Wis.) combined P2P payments programs Zashpay and Popmoney into one service (still called Popmoney); combined, the two programs have partnered with more than 1,400 financial institutions to offer P2P payments to customers. And since then, three of the country's top banks have joined forces to offer their own P2P service -- Wells Fargo, Bank of America and JPMorgan Chase customers will soon be able to make P2P payments through the first bank-owned P2P payments service, clearXchange.

P2P payments are widely seen as a natural feature for mobile banking apps, which will allow users to make P2P payments in real time anywhere they go. The service is a value-added convenience for customers, and most banks already have the security and risk management mechanisms in place to make the payments secure. With this in mind, experts say, banks would be crazy not to start offering their own peer-to-peer payments services as soon as possible to grab a slice of the P2P pie.

"The proliferation of smartphones will mean strong prospects for P2P," predicts Jim Bailey, managing director of payment services in North America for Accenture, who is based in Atlanta. "Right now P2P is a relatively small part of the payments pie. But we expect that in the next three to five years it will increase, and there is a lot of new competition out there."

Strike While the Iron Is Hot

There are various strategies that banks can pursue to offer P2P services, according to Bailey, but expected growth in the P2P market and the increasing number of competitors in the space mean that banks no longer can sit on the sidelines. "No one [strategy] is right or wrong," Bailey remarks. "The only bad strategy is to let it go by."

Bailey says he expects P2P will go viral in the next few years among younger, mobile-friendly consumers, and he notes that, "It's wise [for banks] to position your brand as being viewed as an early adopter of P2P" to attract those customers. Banks with well-developed technology platforms and highly integrated mobile and online services might want to develop their own P2P services, while other financial institutions can look to partner with third-party providers, Bailey adds.

[Western Union Bolsters P2P Payments Operations.]

Tukwila, Washington-based Boeing Employees Credit Union (BECU, $10.6 billion in assets) adopted P2P early on. The credit union started using Popmoney back in March 2010 and is now finalizing the integration of the P2P service into its mobile services, reports Howie Wu, the institution's VP of virtual banking. "As mobile adoption increases, mobile P2P services will be expected by customers -- it will become standard," he says. "Mobile really is the optimal rail for it, rather than online."

Wu advises banks that are looking to introduce a P2P service to offer it first via their mobile apps before offering it online. And marketing, Wu asserts, is key to the success of the service; it's too early for banks to expect the service to grow organically on its own. When BECU rolled out Popmoney, Wu says, it introduced the services with various email campaigns to customers explaining how the services worked, and it also included notifications in customer statements. Now the credit union handles $20 million in P2P transactions and enrolls 3,000 new customers in the service each month, according to Wu.

A Big Opportunity

Perhaps surprisingly, like many other Popmoney clients, BECU is seeing customers use the P2P service for large transactions, in the hundreds of dollars, according to Neill Platt, SVP and general manager of payments for CashEdge, the division of Fiserv that manages Popmoney. "We're seeing people using P2P payments for more formal transactions, such as rent payments -- paying their landlords or paying their roommates," Platt says. "These [transactions] are normally done with checks. We think there will be less use of checks in the future and more P2P transfers." The average Popmoney transaction size is $389, according to CashEdge.

While it currently can take up to one day to process a P2P transfer, Platt expects that within a year P2P services will be able to offer real-time instant transfers. The ability to make those instant transactions from a mobile device, he predicts, will jump-start customer adoption of P2P. Platt adds that the risk management measures required around a P2P service are the same as those that banks already have established for online bill pay services, so it should be relatively easy for banks to integrate P2P into their security infrastructures.

According to Platt, Fiserv partnered with banks to offer Popmoney because banks are well-positioned to capture the growth in P2P transfers in the coming years. With their wide customer base and ability to handle large volumes of transactions, banks have a distinct advantage over non-bank competitors in P2P, such as PayPal (which partners with banks as well), Square and Isis (see related article, page 6), he says.

Some of the biggest U.S. banks seem to share that notion, as Wells Fargo ($1.33 trillion in assets); Charlotte, N.C.-based Bank of America ($2.18 trillion in assets); and New York-based JPMorgan Chase ($2.32 trillion in assets) jointly introduced earlier this year the first bank-owned P2P service, clearXchange, in an attempt to nab some of the P2P market for themselves.

"We shouldn't tell our customers to go to a software vendor [to make P2P payments] -- we want to meet that financial need," says Mike Kennedy, head of enterprise payment systems and innovation at San Francisco-based Wells Fargo and chairman of clearXchange's board. Customers of any one of the three banks can use the service to send and receive P2P payments with each other using the recipient's email address or phone number. Kennedy says clearXchange also is negotiating with other banks to join the service, but he declines to comment specifically on any of those negotiations.

Kennedy notes that there is a great deal of financial interaction among the customers of the three banks involved in clearXchange, adding that combined, the banks already control 50 percent of the online banking market. That gives clearXchange a clear advantage over other, non-bank P2P services that could threaten to disintermediate banks in the payments space, he contends. "Banks already have great brands," Kennedy says. "In order to prevent disintermediation, you just need to provide a great customer experience."

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio