Has P2P's time finally come?

The payments industry as a whole is experiencing a new wave of innovation. Banks are facing competition from upstart firms touting innovative, easy-to-use payment models, some of which offer completely new payment paradigms and ways of doing business.

Many of these models have been made possible by social networking and web 2.0 technologies, and part of their user-friendly appeal is likely to stem from the very fact that they circumvent traditional banking channels. Concerned by these new arrivals' increasing popularity, consumer-facing financial institutions are starting to implement new payment systems themselves in an attempt to combat the loss of business threatened by the rise of these non-traditional firms.

Online payment provider ClickandBuy recently began to offer the 500 million users of Facebook - the world's most popular online social network - access to a peer-to-peer (P2P) payment application christened Buxter, which allows users to send or receive money up to a value of €50. Likewise, Hyves, Facebook's Dutch peer, has introduced a payments service in partnership with Rabobank, allowing users to instantly transfer amounts of up to €150 to anyone on the network.

Miss out the middleman

The value of these services for consumers - and perhaps the danger for banks - is that making payments to family and friends becomes part of everyday online socialising, rather than a chore associated with logging into online banking. For the start-up firms, piggy-backing on existing social networks offers an opportunity to work with a sizeable, existing customer base.

"Layering payments infrastructure on top of existing social networks means that you have a built-in network to work with and it makes things much simpler," says Don Brown, chief operating officer and chief financial officer of Twitpay, a US-based firm that allows payments by users of social networking and microblogging service Twitter.

It is, of course, unlikely that banks will ever become completely removed from payment transactions - the infrastructure required to process payments will be prohibitive for non-bank payment platform providers, and money will always have to come from a bank account, says Zilvinas Bareisis, a senior analyst at consultancy Celent's banking group. "To actually transact and exchange money, you need to have a link back to the money supply. And there are only two forms of money supply in any currency: cash or a bank account," he says. "Banks will always have a role as long as people have bank accounts."

However, the real risk for financial institutions is that they lose yet another point of contact with their customer base, says Brett King, author of a book called Bank 2.0. The increasingly ubiquitous nature of online banking already means that customers spend less time in the branch than ever before, rendering the internet as the all-important opportunity to reinforce the banking brand and sell new products and services.

Recovering revenues

The banking sector has had bigger problems to worry about than being isolated from its customer base over the past few years, but the ever-increasing popularity of online payment platforms such as PayPal has started to become a concern.

Moreover, many traditional sources of banking revenue are shrinking due to regulations such as the US Credit Card Act of 2009, which has affected credit card revenues. As a result, banks are looking for new ways to make money, says Gwenn Bézard, a co-founder and research director at research firm Aite Group. "They are paying more attention to small products," he says. "It may be that each product alone does not save the world, but it is incremental, it is there and it is adding something. They [the banks] are a lot more serious about putting their hands on anything that will make a buck and recover some lost revenues."

While US banks are now exploring P2P payments, such services have been widely offered by banks in Europe, Asia and parts of the developing world for some time. However, in the US - which is traditionally more reliant on cash and cheques - institutions have been somewhat slower on the uptake, a fact that has not been lost on non-bank payment providers. There has been a flurry of activity in recent months, however, and beyond the influx of alternative payment platforms, a number of US banks have started to offer P2P transfers, either via proprietary technology or through third-party networks.

Bank of America (BoA) is one such institution, and the firm's senior vice-president of emerging capabilities, Jason Blackhurst, admits that the threat of other providers beating banks to market with P2P platforms was a concern. "When you look at the marketplace, clearly PayPal has been in the market for a long time and now we've seen Amazon and Twitter getting involved with Twitpay's service," he says.

P2P payments are not a new development for some US banks, however. Transfers and payments between individuals were imbedded in the launch of ING Direct's Electric Orange high-yield current account when it was launched in 2006. What has changed is the level of attention from consumers, says Todd Sandler, head of product strategy with ING Direct USA.

About 20% of ING's 1 million Electric Orange account holders now use the P2P service on a regular basis - making an average of 2.5 to three payments per month. And the service is not just being used for minor transactions: the average amount handled is more than $500.

"That surprised us at first," says Mr Sandler. "I think what is happening is that people are using it for recurring payments for things such as rent as well as for large utility bills." However, he adds that payments are split between larger amounts that would normally have been sent via a wire or cheque, and micropayments, such as splitting a dinner bill - which would otherwise have been settled in cash.

Gwenn Bézard, a co-founder and research director at research firm Aite Group

Cleared for take-off

So why the sudden popularity of P2P payments? The technology needed to conduct them is nothing new. Indeed, many of the technology vendors currently dominating the P2P landscape, such as CashEdge, PayPal and Fiserv, were making initial forays into the market with P2P products a decade ago. The key difference now is in the potential customer base, says Mr Bézard. "For services such as P2P really to become possible, you need to have scale... Now there is massive adoption of online banking and mobile banking is picking up very quickly. The time has come for P2P finally to take off."

The consumer appetite certainly appears to exist. Nearly half of US customers that bank online are interested in using electronic P2P payments: 44% of US households reported making at least one online P2P fund transfer in 2009, up from 27% the previous year, according to the consultancy Javelin Strategy.

Mobile P2P

The obvious next step is for banks to move P2P payments to the mobile sphere, says Mr King. This is the third of three "phases of disruption" he identifies in the relationship between the bank and customer (the first two being online and mobile banking). The reason mobile payments are going to be so troublesome for banks is because of the behaviour they enable, he says. "Mobile payments remove the physicality of the financial instrument. You do not need a plastic credit or debit card, you do not need a cheque, and it is just so easy to do with a device that you are already carrying around."

Catherine Palmieri, global head of product and marketing for CashEdge - which is providing P2P payment systems for a number of US banks - says that here too the US is far behind other parts of the world. She argues that this is partly because of issues between different mobile standards such as Global System for Mobile Communications and Code Division Multiple Access, which the US was slower to address than some other countries. Ms Palmieri says that thanks to the growing predominance of modern mobile devices, however, things are finally starting to change.

"That's another reason why we see P2P in the mobile space as being such an opportunity, because it seems to be an up-and-coming opportunity in the US as opposed to an accepted way of doing business, as it is in some other countries," says Ms Palmieri.

"Things are changing fast now. The adoption of smart phones with much greater capabilities and functionality is speeding up, and people are seeing this as offering connectivity to everything, including the bank account. So it is a change of perception in the consumer's mind in addition to the behaviour change."

Not everyone is convinced that the time has come for P2P payments in the US, however. Institutions such as ING Direct have seen good uptake, but its customer base is comparatively small, and is likely to be skewed towards the young and tech-savvy, given that it is an online-only banking service.

In the rest of the US, the proportion of payments being made online or via mobile devices is still relatively small and some feel the time is not right for P2P payments. Twitpay, despite being cited by BoA's Mr Blackhurst as a potential threat, is in the process of shifting its attention to its 'giving' service - which allows customers to donate to businesses and non-profit-making organisations - as well as a forthcoming gaming product.

"People have been trying P2P payments in the US since the internet was [first] around and no one has managed to pull it off despite a lot of money being poured into it," says Mr Brown. "There are enough [payment] options in the US - as opposed to third-world emerging markets - that people can give each other money without having to work for it."

Usurping the cheque

Certainly, vendors, analysts and banks alike agree that for online or mobile P2P payments to usurp the cheque (which is universally accepted in the US, wholly interoperable and easy to use), the P2P experience has to be just as easy to understand and free of hassle, says Ms Palmieri. "We've focused an awful lot on making the [P2P] user experience simple, which I think is the competitive advantage," she says. "A lot of the payment providers practically require your first-born child in order to complete the transaction."

Banks certainly feel that ease of use will offer them a clear competitive advantage. "We see ourselves as offering customers the security they do not get in those other channels and the simplicity so that you do not need to establish another account with PayPal or give your credentials again," says BoA's Mr Blackhurst. "We're really trying to leverage the fact that we already have their transaction information and usually their balances... So they do not have to establish this new relationship and can just use that means of electronic payment today."

The same logic dictated the implementation of Wells Fargo's (WF's) recently introduced mobile P2P service. WF has provided customers with the opportunity to send money to other customers online since 2003, and recently extended this to iPhone, Blackberry and Android-powered mobile devices. Secil Watson, senior vice-president for WF internet and mobile banking, says the mobile platform was kept as similar to the online version as possible. "We tested out a system that was unique to mobile as well as what we ended up doing, which was the same offering as we have online," she says.

"This means people can manage their payments without needing to know a different set of credentials or processes... We think that increases customer adoption and also reduces the hurdles customers have to jump to reach another way of doing things."

Secil Watson, senior vice-president for WF internet and mobile banking

Security fears

Another potential issue cited by both bank and non-bank P2P system providers is customer concern about disclosing bank account information online. First National Bank of Omaha (FNBO) in the US recently implemented a P2P system from CashEdge, and is now ramping up e-mail, newsletter and trial incentive promotion efforts in an attempt to boost customer adoption.

"It [P2P payment] is a very new technology for the industry, so it takes a little bit of education," says Teresa Sloboth, marketing manager for FNBO Direct. "While we had a good solid base of customers who were saying they wanted this - and they tend to be the highest users of the service - there is still an opportunity to educate our customers on what it is and to convince them to move away from visiting the ATM and paying a $2 fee to give their friends cash and instead just to go ahead and do it through their mobile phones or their FNBO direct account."

Another potential sticking point on the road to mass adoption of P2P payments is highlighted in the limitations of WF's platform: the payment recipient has to have a WF account. It is not hard to imagine how this lack of interoperability could curb widespread adoption.

However, Ms Watson adds that broadening the system so that payments can be sent to customers of any bank is "definitely the next step" and "makes a lot of strategic sense" for WF. "We would like our customers to be able to send and receive money to and from anyone in the US and internationally," she says. "That is our vision and it will, of course, take many incremental steps to get there."

Interoperability between banks may be the next logical step for proliferation of P2P and other payment models to really take hold. But in the US, at least, it remains to be seen whether customers are ready to embrace these new payment models or prefer to stick to what they know.