February 2010
The Sudden Allure of P2P
Instead of just using a mobile phone or computer to reach out and call a friend, consumers may be using computing devices to reach out and pay them. That is, at least, what a raft of banks and their technology vendors are expecting as they have been rushing to partner up to develop and roll out person-to-person (P2P) payment services, which would allow consumers to send money to friends, relatives, or even independent service providers by e-mail or mobile phone.
Unlike a wire transfer or other previously available payment options, these new alternatives would only require the payor to have their payee's e-mail address or mobilephone number. No bank routing number and account number required. That makes these new options much easier and more appealing to privacy-conscious consumers.
"Consumers need the ability to move money ... and pay individuals as well as businesses in an environment where cash and checks are less and less [used]," says Jeff Lewis, an executive vice president for e-payments at Fidelity National Information Services Inc. "Consumers are saying, 'I need the velocity I want.'"
In November 2009, the Jacksonville, Fla., banking and payments vendor, which serves 14,000 financial institutions worldwide, announced a deal to integrate PayPal Inc.'s global P2P payment system into its own online bill-payment applications. According to Lewis, FIS has signed three unnamed U.S. banks and plans to be in pilot this month.
A handful of financial institutions, including PNC Financial Services Group, Mercantile Bank of Michigan, First Hawaiian Bank, and credit unions Patelco and BECU, have already publicly announced their intention to offer P2P payments within the first few months of 2010.
Technology vendors, including CashEdge Inc., Obopay Inc., Fiserv Inc., and S1 Corp. have launched P2P services in recent months, typically as an extension of the payment applications they already offer. S1 and its bank client, Mercantile Bank of Michigan, are also employing PayPal's infrastructure.
Natural Next Step
The interest swirling around electronifying P2P payments isn't surprising, given the size, scope, and readiness of the market, according to industry observers. Consumers make roughly 9 billion personal payments each year, the majority of which are made with cash and checks. In a June 2009 survey conducted by Fiserv, 70% of 1,022 U.S. consumers said they would be interested in making such payments electronically. Three out of four of those surveyed said that they would prefer a service offered by their financial institution.
Many banks see these typically smallervalue personal payments as simply an extension of what they already offer to customers with online bill payment and funds transfers. To them, P2P is the natural next step in both their online-banking and mobile-banking offerings.
"We were already providing customers with the ability to transfer funds electronically to a third party," says Jaylene Tsukayama, vice president and manager for home banking at First Hawaiian Bank, which in December began offering a P2P payment service to customers using CashEdge's Popmoney application. "Popmoney just expanded the means by which the customer is notified that they have a payment waiting and leaves it to the recipient to provide information on where the funds should be deposited."
Neil Platt, senior vice president and general manager of banking for CashEdge's U.S. banking division, points out that Popmoney, which the company launched in June, builds off of the vendor's TransferNow, a service used by about 400 banks. TransferNow allows customers to transfer money among their own accounts or to other people's accounts. Consumers used CashEdge applications to move nearly $50 billion in online funds transfers in 2008.
"Banks like PNC [also launching Popmoney for P2P] and First Hawaiian have been using our products for a long time ... But you had to know [the payee's] routing number and account number," Platt says. "Now you just need to know their e-mail address or cell-phone number."
Similarly, Mercantile Bank of Michigan had been a, customer of S1 for online banking before the bank became the first to sign on to offer person-to-person payments through the banking vendor's new service with PayPal.
"We'd been keeping an eye on P2P for a while ... S1 had a vision for approaching this [market]," says John Schulte, senior vice president and chief information officer at the Grand Rapids, Mich.-based bank. Leveraging thePayPal network, which boasts 78 million accounts worldwide, helped support that vision for getting consumers interested, Schulte adds.
Not to be left out, MasterCard Inc. last May launched its MoneySend service in the United States. MoneySend had already been available in 17 other countries. Although the service initially required users to retrieve funds using a prepaid MasterCard, the card network plans to offer issuers the opportunity to provide payments via mobile and PC through a partnership with mobilepayments vendor Obopay.
MoneySend functions as "an engine for clearing and settlement" for consumers who want to make payments to, say, a friend or the babysitter, just as MasterCard's system provides the same service for businesses that accept its cards, says Josh Peirez, group executive of innovative platforms for MasterCard.
Obopay offers banks "an on-ramp onto the payments superhighway" that is MoneySend, according to Michael E. Diamond, Obopay's senior vice president for business development. While Obopay has conducted mobile payments trials with Citigroup Inc., the company has no U.S. bank customers for its P2P service as yet.
The iPhone Effect
Why, after years of shunning the market as low-margin and uninviting, are banks and their technology providers suddenly stumbling over one another to roll out P2P products? Bankers, vendors, and industry observers point to a number of technological and market factors that have emerged to make this an opportune moment. "I really think the market is at the right place at the right time," says Beth Robertson, director for payments research at Javelin Strategy & Research, Pleasanton, Calif.
Unlike earlier runs at this market in the late 1990s and early 2000s-ill-fated efforts such as Citgroup's c2it and Bank One's eMoney- Mail-these new developments can tap a greater readiness among consumers and leverage a more advanced and well-entrenched technology environment, according to Robertson. Perhaps the biggest factor has simply been consumers' own increasing familiarity with making payments electronically. In the past several years, consumers have become vastly more apt to make purchases online and, even more analogous to P2P, to pay bills online.
By some researcher estimates, the number of U.S. households paying their regular bills online nearly doubled in the latter half of the last decade. Javelin Strategy & Research estimates that 32 million households are already paying bills online, a number that will grow to 42 million by 2012. "When [P2P] services were initially introduced years ago, there was a much smaller segment of customers transacting online," Robertson says. "Consumer readiness is a big issue."
Many people have become more comfortable making electronic payments to non-businesses specifically, buying items from online garage sales like eBay or Craigslist. "People have grown up using systems like Pay-Pal to buy at online auctions," says Thomas Trebilcock, vice president of payments and e-business for PNC.
The ever-expanding capabilities of mobile phones and consumers' desire to use them for much more than voice calling has also made a huge difference. "The iPhone has been a huge driver. It's driven competition; it's lifted the whole marketplace to a new level," Schulte of Mercantile Bank says of Apple Inc.'s popular smart phone.
The iPhone gave rise to a thriving market for smart-phone applications that consumers can download easily, and often for free. Many of these are related to financial services. A recent poll by financial consulting firm Mercatus Group found that the percentage of U.S. consumers age 26 to 34 who had used their mobile phone to buy goods or services had doubled to 14% in the past year.
"People are getting used to conducting more complex interactions through their mobile device," says Mark Moore, vice president of strategy and business development for S1. "And now we have the devices and networks that serve up rich mobile content."
Some banks also worry about what they stand to lose if they don't meet customers' demands for new technology to access accounts and services. Even though his bank is just under $2 billion in assets, Schulte of Mercantile Bank says it is "important from our perception that we do this first."
Platt of CashEdge says he thought he would have to "spend a lot of time evangelizing why banks should offer person-to-person payments." But in talking to banks since last spring, he says, "I was surprised at how many clients [were sold]. It was not a matter of if they wanted to go forward, but when." Platt says he believes CashEdge may have Popmoney deployed to more than 100 banks by late 2010.
'Last-Mile Issue'
Non-bank P2P processor PayPal has also played a role in catalyzing banks' moves into the market, especially as it introduced mobile services in recent years.
Menekse Gencer, president and chief executive of MPayConnect, a mobile payments consultancy, says the PayPal juggernaut has "certainly been putting more pressure on banks for some time now" to move more aggressively into this market. "A lot of people see this as a necessary evil," says Gencer, a former executive with PayPal Mobile. "They ask themselves, 'If we don't do it, what's the opportunity cost?'"
Indeed, banks are fearing they could lose the core deposit account if they don't offer a P2P product. "It's not about revenue," says Trebilcock of PNC. "It's about retaining the customer [and] having a deeper share." Services like P2P payments, he believes, will help hook and keep emerging affluent Generation X and Y consumers in particular. "The customers who use this are the customers you want to retain, the best customers."
While the business case might not be the primary motivation, at least for some banks, those drivers do exist. Industry observers say that person-toperson payments offer banks the opportunity to cut costs, strengthen retention, and potentially generate revenue.
For banks, the cost of processing a P2P payment is a small fraction of processing a paper check, which is by comparison becoming even more expensive as check volumes decrease and courier costs and other related expenses increase. Schulte says he expects a P2P transaction to cost his bank about 25 cents, compared to the $1 to $2 it would cost them to process a paper check for the same payment.
Researcher TowerGroup Inc. estimates that U.S. consumers made more than 3 billion non-cash person-toperson payments in 2008, the bulk of which were paid via check at an estimated cost to banks of $255 million.
With as many as 25% of the online bill payments consumers make, banks or processors still cut physical checks, according to Dan Schatt, senior director and head of financial innovations for PayPal. "No one has been able to solve that last-mile issue there," he says. "As more and more people gravitate to online bill payment, paper just becomes an enormous problem."
Also, like online bill payment, person-to-person payment is seen as a "sticky" service that makes users less apt to surf their bank accounts elsewhere. It also could allow bank providers to add their logo or other branding or marketing messages, which would go out to payment recipients who may not already be customers of that bank.
'The International Piece'
And the service is another important arrow in the banks' quiver as the industry is forced by regulatory changes to move away from its decades-long dependence on overdraft and other penalty fees and develop service and product packages for which consumers might willingly pay.
Steve Shaw, director of strategic marketing for electronic banking services at Fiserv, says that while some banks might charge directly for the service, other banks see this as a way to build a package of products that would give customers the sense they were getting more than just a plain-vanilla checking account. Moore of S1 suggests that banks may eventually charge some customers for the service but offer it free to customers who have higher balances or use more of the bank's products.
While Mercantile and PNC have no plans to charge customers, First Hawaiian Bank will charge senders $1 per payment. Tsukayama of First Hawaiian says that, since the P2P service is an enhancement to the bank's existing external transfer capability, which charged a $1 fee already, "we opted to just keep the fee structure status quo while we introduced this new service."
Even banks that are not charging outright for transactions within the U.S. may eventually be able to charge for payments that take place across borders. Industry observers say that offering the opportunity to send money abroad could attract unbanked consumers who may be sending remittances through nonbanks, especially as these capabilities move to the mobile phone-a platform that is much more entrenched for payments in many foreign countries. In this way, banks could gain entry into the unbanked market and the international remittance business at the same time.
"The international piece is very interesting," says S1's Moore, adding that 10% of the U.S. population sends money abroad. "There's an opportunity for banks to play more in those transactions."
Some point out that P2P could play a critical role in sparking organic growth for many banks. "All the big deals [industry mergers and acquisitions] have been done," says Obopay's Diamond. "The question is now, 'How do you get the underbanked to move over?' The mobile phone is the language they all speak."
Mobile As the Driver
Ironically, while mobile is a major driver, it's not the initial platform for P2P-yet.
While mobile banking has seen steep growth in comparison to other financial technologies, its usage in the United States is still a tiny fraction of online banking usage. Similarly, while smart phones like the iPhone, Blackberry, and Palm Pre are fast replacing more basic handsets,they're far from the majority.
Forrester Research Inc. says smart phones, those that use a high-level operating system, were only used by 17% U.S. cell-phone subscribers in 2009, up from 11% in 2008. "Sometimes, the mobile phone is not sophisticated enough," MasterCard's Peirez says. "And the consumer experience cannot be clunky."
As a result, PNC, First Hawaiian, and Mercantile all have plans to offer their P2P services online initially. Still, most observers see the mobile platform as the place that P2P will truly hit its stride.
"Mobile is going to drive this," says Schulte, pointing up the ubiquity and the immediacy of cell phones. Schulte and his team are already actively discussing issues like whether they should develop a specific interface just for the category- killer iPhone, or see what the uptake is on the recently released Motorola Droid.
"Everything is moving to the phone," Schulte adds. "It's the next natural leap in payments." DT
The PayPal Question
When it comes to offering person-to-person payment, two camps are emerging among banks and their vendors: those that want to try to beat PayPal Inc. and those that want to join it. PayPal, a unit of eBay Inc., has long been the leader in the electronic peer-based payment space. As some banks and vendors see it, this makes the company a well-positioned partner. For others, this makes PayPal a potent threat to their own business.
"Fundamentally, our model is built [on the concept] that the bank or the credit union is the site," says Steve Shaw, director of strategic marketing for electronic banking services for Fiserv Inc., pointing out that in the PayPal P2P model, the recipient must have a PayPal account into which funds are deposited. "The idea of transferring money out of the bank account is so counter-intuitive to what bankers want to do."
Jaylene Tsukayama, vice president and manager for home banking at First Hawaiian Bank, says that her bank's decision to work with CashEdge Inc. was predicated on crafting a service that is "available to customers through their existing, trusted,and secure relationship with First Hawaiian Bank. Customers don't need to establish a new relationship or set up a new account with some third-party provider that they don't know."
However, Beth Robertson, director for payments research at Javelin Strategy & Research, contends PayPal has two key advantages: widespread market recognition and understanding of its service and its name; and its global presence. "This could allow [PayPal] to help transactors not only in the U.S. market, but those who want to send money outside it," she says.
Dan Schatt, senior director and head of financial innovations for PayPal, says he understands why banks may have some historical reluctance about working with the online payments giant. But he argues the business, and PayPal's focus, have changed.
"PayPal has grown up and has no interest in becoming a financial-services supermarket [or] a bank ... we're really solving problems that banks have," Schatt says. "PayPal is just another rail that can be leveraged quite effectively."
John Schulte, senior vice president and chief information officer for Mercantile Bank of Michigan, says he was eager to partner with PayPal on person-to-person payments because of its established network and its experience. "When PayPal came out, they were viewed as a threat," he says. "But now it's just part of the infrastructure."
"There are financial institutions that absolutely see PayPal as the enemy," says Jeff Lewis, an executive vice president for e-payments at Fidelity National Information Services Inc., which is also working with PayPal. Still, he says, "At the end of the day, banks and PayPal need each other."