A Payments Proliferation

Is P2P a valuable canary in the payments mine?

By Collin Canright

Consumers have more ways to make purchases than ever and will have even more choices over the next few years. This is creating a highly fragmented marketplace in which it’s difficult for any single payment option to gain traction. Yet the fastest, most convenient and lowest-cost way for one person to pay another person—the primary definition of person-to-person, or P2P, payments—remains … cash.

Still, P2P and mobile payments technology continues to develop rapidly, with weekly announcements and service introductions. Core processor FIS Inc. in Jacksonville, Fla., recently launched People Pay, a bank-branded platform for P2P payments, while another core processor, Fiserv Inc. in Brookfield, Wis., operates the Popmoney P2P network. Across the financial services marketplace, JPMorgan Chase and Wells Fargo founded the first bank P2P network, clearXchange. Outside the financial services marketplace, Google, PayPal and Amazon have ewallet, point-of-sale cards and P2P solutions. Startup Dwolla Corp., the nonbank P2P service company in Des Moines, Iowa, offers banks FiSync, a real-time payment transaction network.

“The financial services industry is at a crossroads in leveraging its infrastructure as technology drives diverse and evolving consumer expectations for payments services such as P2P,” says Viveca Y. Ware, ICBA’s senior vice president of regulatory policy. “Now consumers expect payments that are online, always-on and fully integrated into their smartphones and tablets and online banking applications.”

One industry analyst tracks more than 100 financial technology companies that are working on mobile payments. Major retailers are banding together to create their own mobile payment networks, and firms like Groupon have added payments to provide additional services to merchants. Telecommunications firms are trying to pull their own network together.

What’s a community banker to do? Wait until the P2P dust settles? Or move now to get experience in the face of nonbank competitors?

“My biggest issue is nonbank competition,” says Bob Steen, chairman and CEO at Bridge Community Bank, a $75 million-asset community bank in Mechanicsville, Iowa. “I’m very concerned that many of my [community bank] peers don’t fully appreciate the importance that payments has on their franchise. If we lose customers to another payments solution, we will not get them back.”

Researchers and analysts who follow the “bank centric” line argue that banks should adopt P2P capabilities now, especially in the context of a mobile payments solution, as Bridge Community Bank did. Community banks can attract a younger and more upwardly mobile demographic by offering electronic services, which will also allow them to sell additional products and services to new and existing customers, many payments experts say.

“Payments innovation always includes the ubiquity and interoperability challenges as multiple providers work to satisfy consumers,” Ware notes. “Community banks will lose out on the opportunity to attract and retain the ‘wired’ consumers if they wait until all the challenges are addressed.”

It’s difficult to measure the exact size of the potential P2P opportunity. Figures reported by various market research firms generally focus on mobile commerce or payments, and true P2P payments may or may not be included.

“Consumers spent more than $20 billion just over the mobile browser or app in 2012,” estimates Javelin Strategy & Research, a technology research firm in Pleasanton, Calif. Using the strictest criteria, which include only purchases made with a mobile device and do not include the purchase of physical goods or digital downloads, the firm puts the total P2P market at just $400 million.

Opportunities await

Whether reported as an aggregate total or parsed into market or demographic segments, market research data show that mobile and P2P payment volumes are growing. Research firms also agree that nonbank firms, PayPal in particular, lead in market share, and that the multiplicity of P2P providers leads to a fragmented market ripe with opportunities.

Javelin Strategy believes that the lack of a financial industry solution is stalling P2P adoption. Although 91 percent of bank mobile solutions allow customers to transfer funds between accounts within the bank, only 26 percent allow mobile P2P transfers, which move funds between banks.

For their part, consumers care little about who provides a P2P solution, as long as it’s simple, works whenever and wherever they are, has a low cost and comes from a provider they trust, notes Ron Shevlin, a senior analyst at Aite Group, the Boston-based research group. An Aite Group study on business and government disbursements to consumers released last July reports that P2P payments “represent a formidable market opportunity—about $900 billion in transaction volume, predominantly in cash and checks, and another $200 billion in ecommerce payments.”

Banks have some advantages over nonbanks through their established relationship with consumers and their increasing mobile platforms, but those advantages are generally overstated, Shevlin believes. Customer interactions generally occur inside bank locations and on bank platforms while payments are made out in the world of commerce. For many of the transactions P2P payments are often suggested—paying the babysitter or splitting the dinner check—cash is faster and more convenient.

Research by First Annapolis, payments consulting firm in Linthicum, Md., shows that the most typical P2P payment transactions resemble bill payments and remittances made to individuals, like a rent payment to a landlord, roommates splitting household expenses or parents paying children allowances or living expenses. Those types of uses fit especially well with transactions that banks offer now, strengthening the case for integrating P2P payments into online and mobile banking solutions. The firm considers P2P to be an $80 to $120 billion market opportunity.

What makes electronic P2P payments most attractive to banks is the evolution of mobile payments and banking technology. IDC Financial Insights, a financial research and consulting firm in Framingham, Mass., forecast last November that worldwide purchase volume over mobile devices will exceed $1 trillion by 2017. Most will be for mobile commerce, payments at the point of purchase will be second, while P2P transfers will be a “distant third.”

As payments through mobile devices increasingly become integrated into retail point of sale, “there’s an opportunity for banks to deploy their own payments experience for customers without having to rely on nonbank providers,” says Paul Grill, partner at First Annapolis. “P2P is a gap-bridging offer between retail payments and traditional bill pay.”

Analysts and bankers agree that, taken as a stand-alone product, P2P has no business justification. Community banks need to look beyond simple P2P transactions and have an overall, coordinated strategy within which P2P, mobile and other payments offerings are a part.

“Any one new offering that is not a part of a coordinated strategy is highly likely to fail,” says Jim Van Dyke, CEO of Javelin Strategies. “Banks must understand the unmet needs of their customers based on demographics (such as age and income), proclivity to use new technology, penetration of related mobile methods and need to make international payments.”

Accordingly, Steen advises other community bankers to pay attention to P2P and mobile payments and capitalize on the relationship advantage a community bank has over larger institutions and nonbanks. Consumer adoption requires close attention by the community banking industry, he says.

“We have had good penetration on mobile banking, but it has taken a huge amount of hand holding, resources and proactive reaching out,” Steen says. “A lot of bigger banks just can’t do that.” endmark

Collin Canright is a financial writer in Chicago.