The P2P Revolution

Mobile peer-to-peer transfer has led to ubiquitous, real-time payment in a social context. But can anyone make any money in this business?

Nobody can say for sure when the first electronic person-to-person payment took place, but payments historians are pretty sure they can pinpoint the first official P2P transfer using a mobile device.

It was a whopper.

It happened in December 1999 when James Doohan, famous for his role as “Scotty,” chief engineer of the starship Enterprise in the 1960s Star Trek TV series, promoted a new PayPal service by using a Palm Pilot to send $1 million to “thousands of lucky Web users … across the country,” according to a press release PayPal put out at the time.

“I’ve been beaming people up my whole career, but this is the first time I’ve ever been able to beam money!” Doohan exclaimed, according to the gushing release.

Doohan died in 2005, not long before smart phones superseded the Palm Pilot, but PayPal lives on, albeit with plenty of competition.

Everybody and his mother, it seems, is scrambling to bring P2P services to market that were little dreamed-of at the time of that ‘99 Christmas-time demo. You want to pay just about anyone at any time? Check. With at least near-real-time effect? You got it. In the midst of chatting on networks like Facebook or Snapchat? Yep. And you want it free? Yes, ma’am.

If today’s P2P user sounds demanding, that’s because she is. “They just want to do everything,” says Karen Augustine, manager for primary data services at Maynard, Mass.-based payments researcher Mercator Advisory Group.

‘Fantastic Growth’

Suddenly, P2P is a hot ticket in the payments industry as people seek out fast and easy ways to pay anyone from a friend to a babysitter.

In 2009, consumer-to-consumer was the only category of paper-check exchange that was still growing, rising to 2.8 billion items from 2.2 billion in 2006, according to the Federal Reserve. But by 2012, electronic forms of P2P had already shrunk that number to 2.1 billion.

Growth now is such that the dollar value of mobile exchanges alone, which stood at an estimated $5.3 billion last year, will more than double by 2017 and reach nearly $17 billion in 2019, according to a forecast by Forrester Research.

The Fed’s estimate is even more robust. While it doesn’t make forecasts, its 2013 Payments Study figures P2P via mobile apps had already reached an annual volume of $14.2 billion in 2012.

“It’s a huge market, [with] lots of opportunity,” says Mike Kennedy, chief executive of clearXchange, a network of major financial institutions founded in 2011 to make P2P easier for bank customers. “We think we’ll continue to have fantastic growth.”

Payment as Conversation

Lots of companies and banks sniff opportunity. When PayPal shelled out $800 million in 2013 for online-payments provider Braintree Inc., it also got its hands on Venmo, a hugely popular mobile P2P service Braintree had only just acquired the prior year. Now Venmo is soaring. Last year, its volume rocketed from $468 million in the second quarter to $700 million in the third, the latest numbers available, for a 50% jump in just three months.

With its comments capability, Venmo is a social network of sorts. And now some of the big guns of social networking are getting in on the action. In March, Facebook Inc. introduced a P2P service on its Messenger app that lets users transfer funds on debit cards. “Money is something that people are already talking about on Messenger, and now when they have those conversations they can easily send a payment right from the conversation rather than … navigate to a different app,” says a Facebook spokesperson in an email.

Facebook isn’t alone. Snapchat, a service that lets members send each other photos that vanish within seconds, is using Square Inc.’s Square Cash P2P engine to enable similar debit-based transfers.

Mobile wallets are also focusing on P2P. It was easily overlooked in all the hoopla, but when Google Inc. in May launched its Android Pay service, it also said its 4-year-old Google Wallet would be relaunched (yet again), this time for P2P duty. “We haven’t disclosed a date yet,” says a Google spokesperson.

Earlier this year, signs emerged that tech giant Microsoft Corp. could be readying a mobile-payments entry that would include P2P. A unit called Microsoft Payments Inc. has applied for money-transmission licenses in all 50 states and registered with the U.S. Treasury Dept.’s Financial Crimes Enforcement Network. These are steppingstones to launching a P2P service, but so far Microsoft has kept mum.

Banks’ efforts include Popmoney, a service from bank processor Fiserv Inc. that lets customers send money with either an email address or a mobile number. The network reaches 56 million bank customers.

Then there’s clearXchange, which was started by banking giants Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. Other owners that signed on later are Capital One Financial Corp. and U.S. Bancorp. In May, four years after helping found the service, Chase finally went live, bringing 38 million online accounts into the network.

With Chase on board, clearXchange last month launched a real-time service that includes business-to-consumer as well as P2P payments.

The Blink of an Eye

Person-to-person payments, sometimes called peer-to-peer payments, are nothing new. Banks have been offering them for at least a decade.

But these payments were slow and clumsy, requiring the sender to know and enter data like the receiver’s bank-account number, and clearing in days rather than minutes. And the user couldn’t be sure that any particular bank could get funds posted to a receiver’s account at some other bank.

PayPal improved on the process, offering the ability to send money to just about anybody at the speed of an email message. And all the sender needed to know was the receiver’s email address. But this process put cash not into the receiver’s bank account, where he could immediately begin using it, but in a PayPal account.

That worked fine, but it required the user either to send the money within the PayPal network (or spend it on eBay, which acquired PayPal in 2002) or to take the extra step of transferring the funds into a bank account. And if the receiver didn’t have a PayPal account, he had to open one to get the money.

What changed? Lots of things, but chiefly the advent of the smart phone. When Apple Inc. popularized this technology with the first iPhone in 2007, it also popularized capabilities like mobile email and text messaging that allowed users to reach just about anybody instantly and on the go. These instilled in consumers a host of new expectations that would have been unthinkable only a few years earlier.

For one thing, these mobile users expect ubiquity, the ability to send money to anyone. As exchanging money is intrinsically a social act, they also want to be able to send and receive cash as part of a mobile conversation. But most of all, they want the money to be there at the blink of an eye, just as if they had handed a $20 bill to someone standing next to them.

‘The Winning Solution’

Startups have emerged to meet that so-called real-time expectation, though definitions vary of just what real time means.

“What we wanted to do was to create a network that allowed people to move money,” says Jordan Lampe, who holds the title of builder at 7-year-old Dwolla Inc., a Des Moines, Iowa-based company that enables both P2P and consumer-to-business payments. “P2P was an organic byproduct of that. P2P was an interesting story, it kept coming up.”

Frustrated by the couple of days it took for users to transfer funds between their bank accounts and their Dwolla accounts via the automated clearing house network, Dwolla developed a solution it calls FiSync to zip money at lightning speed.

In April, the first connection to a major bank, Houston-based BBVA Compass Bank, went live allowing customers to transfer funds in seconds to other customers of BBVA and to customers of another FiSync-connected institution, Veridian Credit Union in Iowa. Dwolla is talking to more financial institutions.

Others, meanwhile, are relying on a long-established payments network, the debit card system, to meet the demand for speedy payments. Square Cash, for example, works by having Square, acting as a merchant, receive the sender’s debit card payment, then perform a reversal through the network as a merchant would do in cases of returned merchandise. The credit, however, goes to the receiver.

This maneuver relies on something called an original credit transaction (OCT), which has been around for about 10 years and is now offered by both Visa Inc. and MasterCard Inc. for P2P. “Square, Facebook, and Snapchat are my clients,” notes Visa’s Jim McCarthy, executive vice president for innovation and strategic partnerships.

Sensing opportunity, the two big networks are rapidly expanding the concept. In May, MasterCard introduced MasterCard Send, a service that lets holders of any debit card brand send money to any other debit card holder, again regardless of brand. The network says it is making the service available as a sort of “back-end” switch for any emerging or existing P2P service.

The OCT is creating a stir in P2P circles. It “works pretty slick,” says Derrick Bretz, director of payment services product management at Computer Services Inc., a Paducah, Ky.-based vendor of bank technology and processing services. “This is ultimately going to be the winning solution for P2P.”

CSI in 2013 introduced its own OCT-based P2P service, called SPIN, for Social Payments Instant Network. SPIN, which works with both Visa and MasterCard, has one key advantage over providers like Square or Facebook: only the receiver must have a debit card. The sender only needs to have a checking account. This is because, unlike Square and Facebook, CSI has links directly to the banks, allowing it to verify the sender’s funds.

In the near future, says Bretz, these transfers could be triggered by near-field communication (NFC) or bump technology between phones, relieving senders of the need to enter receivers’ debit card numbers. “We’re very excited about where this can go,” he says.

But the OCT isn’t the only debit ploy P2P providers are using for faster payment. Increasingly, PIN-debit networks like Shazam and Co-Op Financial Services have introduced services that leverage their near-real-time bank connections.

And Acculynk Inc., a 7-year-old Atlanta-based software company, is literally allowing users to enter their debit card PIN on a desktop or mobile screen. The service, called Payzur, launched early last year and is sold to financial institutions through third parties.

Receivers generally see a credit in their accounts in less than 30 minutes, says Steve Ostroff, general manager for Payzur. P2P, he cautions, “is the [financial institutions’] game to lose. FIs are looking for ways to fight back and regain their customers.”

From zero in 2009, PIN debit was already generating 1.4 million P2P transactions annually by 2012, according to the Fed Payments Study.

‘Savvy User Base’

But can any of these services, emerging or existing, ever make money? To the user, payments on Dwolla, Square Cash, and Facebook Messenger are free. Services that process for banks, such as Popmoney and clearXchange, leave it up each institution, but many don’t charge.

“When you go back a few years, there was a strong focus on how do we make money on P2P,” says Tammi Shapiro, vice president of electronic strategy at Fiserv, which runs Popmoney. “But even those that went to market with a fee are re-evaluating that.”

The reason: competitive pressure. The banks that don’t charge put pressure on those that do. Meanwhile, non-bank services like PayPal and Venmo are free as long as you don’t use a credit card as your funding source. “For a large majority of our transactions, we are providing a free service,” says Meron Colbeci, senior director of global consumer product management at PayPal.

There are exceptions. Super-fast payments, for example, may be able to fetch a fee. Fiserv’s Shapiro says 185 Popmoney banks have signed up to offer real-time payments via Fiserv’s internal switching software, its Accel PIN-debit network, or other networks.

Most are live on the service, and of these, more than 90% levy a fee, with the median price working out to $3 per transaction. Ordinary Popmoney transactions rely on the ACH network, which can take one to two days to settle funds.

There may be other rewards, however, to P2P providers. “Revenue is important and we do want to cover our costs, but something we are looking at alongside [revenue] is engagement,” says PayPal’s Colbeci. P2P users, he says, simply interact more with PayPal’s range of services, including the ones that generate revenue.

P2P also builds up a valuable customer file, says Steve Ledford, who as senior vice president for product strategy at The Clearing House Payments Co. LLC is helping to build the New York City-based company’s real-time payments capability. TCH processes for most of the country’s biggest banks.

“P2P payments create an enrolled and savvy user base for whatever digital-payment service you want to offer,” says Ledford. That’s a lesson Square, for example, has put to good use as Square Cash piles up debit card numbers and email addresses.

In the end, whether the service makes money or not, the provider can’t escape those new customer expectations: ubiquity of reach, real-time speed, and social context. Free service may be a stretch, but so far that seems to be one of the expectations, too.