A Look at P2P Payments

Posted by Innovation Team on 12 Sep 2017

Awareness and adoption of digital payment options are at an all-time high. Consulting firm Capgemini estimates digital payment transactions will total $3.6 trillion globally in 2017 alone - a 20% increase since 2015. Mobile phones, connected devices, and other emerging technology all contribute to increased consumer demand for speed, efficiency, and convenience. Peer-to-peer or “P2P” payments are likely to become more popular as consumers adopt new technology and switch from physical payment methods to digital alternatives.

There was a time when cash was king, but credit and debit cards recently replaced it as a more popular way to pay. As their technology use increases, consumers are now showing a preference for mobile wallets, contactless payments, and P2P payment services.

P2P payments were first made popular by payments giant PayPal, which made it possible to transfer money to other PayPal users via web or mobile. The market soon expanded to include similar services from Google, Dwolla, and others, but PayPal continued to dominate the space. Relative newcomer Venmo recently took center stage as a fast-growing P2P payment service in 2016, largely due to its acquisition by PayPal and dominance among young consumer markets.

While the service is free, users of P2P payment platforms were subject to certain card fees before Venmo. PayPal users, for example, can send or receive money for free via a linked PayPal or bank account but must pay a 2.9% transaction fee for payments received via debit and credit card.

Venmo quickly captured attention by offering users the option to send and receive money via bank account, debit card, or prepaid card without incurring a fee. It was acquired by payment service provider Braintree in 2012 before PayPal absorbed the parent company in 2013. More options, a social component, and a millennial-appeasing mobile-centric approach have made Venmo a front-runner among key demographics.

Venmo processed $1 billion in payments in January 2016, and a total of $17.6 billion for the year. This prompted Facebook to launch its own P2P payments service last year; other social networks followed suit.

Though it’s remained in the periphery of the battle for the P2P payments space thus far, Venmo’s success also prompted a response from the banking sector. Individual banks have long offered their customers the ability to send and receive money to and from other customers, but due to a lack of centralization, none of these services were formidable competition to services like PayPal.

The top banks in the U.S. have now joined forces to form a consortium known as Zelle, providing a feasible bank-owned alternative to popular P2P payment services. Like Venmo, Zelle enables users to send money directly from one bank account to another without incurring any fees. All major U.S. banks are part of the consortium, as well as a growing number of credit unions and network partners like MasterCard and Visa. The service is currently available to over 85 million consumers.

The shift away from cash to cards was a move in the right direction, but it left a major void in peer-to-peer payments. Cards are not an ideal payment method in a lot of real-world situations either, especially in an age when people carry a smartphone more often than they carry cash. P2P payments services are finally filling that void, making it easy for consumers to split household expenses, pay a friend back for picking up the tab at a restaurant, or even pay a vendor for services. These trends are likely to continue with further development of technology like wearable devices, the IoT, and chatbots.

Check out our blog for more on payments innovation.

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Innovation Team

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