One of the dirty little secrets of electronic bill pay is that a lot of payments initiated electronically actually end up being paid by physical check. That’s because banks usually let their electronic bill-paying customers pay anyone, including landscapers, nannies and a host of other service providers who might not be set up to receive electronic payments.
Somewhat unexpectedly—while bringing to market what was thought to be an entirely different product—banks have discovered a way to address this problem. It turns out that one answer to making bill payments more fully electronic is person-to-person payments.
Over the last couple years, most banks bringing person-to-person (P2P) payments to market thought they were offering a convenient way for people to send small-dollar payments to each other, say for their portion of a dinner or lunch. In focus groups, consumers agreed that they expected to use the service that way.
In fact, the biggest reason consumers use P2P is to pay rent or settle other household expenses, like a shared telephone or cable bill. These were scenarios that had not made it onto the radar screens of most banks. “We had never even modeled it,” says Andy Hernandez, director of ATM and online channels at Houston-based BBVA Compass, a subsidiary of Compass Bancshares Inc., which is a wholly owned subsidiary of the $800-billion asset BBVA.
The payment scenarios emerging as natural for P2P are among the ones that electronic bill pay has had trouble addressing. In effect, P2P is filling a gap that has long been left by electronic bill pay. While bill pay providers have done an admirable job of eliminating paper, Hernandez figures that only about 80 percent of bill pay flow is truly electronic. “If this P2P thing takes off, it will take that number closer to 90 percent,” he says.
This fresh insight into how consumers are using P2P is good news for a service that has stumbled in the past. Attempts at P2P failed in the early 2000s due to inadequate risk controls, as well as lack of demand from consumers who, at the time, were not so prone to execute banking and commerce transactions over the Internet.
Now, a more Internet-savvy generation is primed to conduct all their transactions electronically. The largest category of P2P payments (25 percent) is for rent, while 16 percent is for shared bills, according to Popmoney, a P2P network of 1,600 financial institutions, which analyzed transaction messages of the 40 million online banking customers it reaches. Payments related to travel and gifts are the next most popular categories at 7 percent each.
The willingness of consumers to push serious household transactions through P2P is giving the service a much higher profile. The average transaction going through Popmoney is $389, says the company, which is owned by Brookfield, Wisconsin-based Fiserv. BBVA Compass estimates its average transaction is between $250 and $450. “We feel good about customers willing to send $400 regularly, versus the occasional $10 to $20,” Hernandez says.
As consumers take advantage of more ways to push money through P2P, the market is expected to grow rapidly. First Annapolis Consulting in Linthicum, Maryland, pegs P2P as an $80-billion to $120-billion market opportunity. Cambridge, Massachusetts-based Forrester Research predicted in a May report that consumers will use alternative payment methods for 23 percent of e-commerce transactions in 2016, up from 20 percent today.
While the Forrester report offers no breakdown of the market share of the various alternative payment systems, it notes that PayPal, which has been providing P2P for more than a decade, is the most popular. Banks meanwhile are just beginning to embrace the P2P market opportunity following their early false starts.
Even so, banks see themselves as pretty well positioned. Even community banks have the ability to easily partake in P2P through services such as Fiserv’s Popmoney and Jack Henry’s iPay. PayPal is also moving to collaborate, rather than compete with banks. Mercantile Bank of Michigan, a $1.4-billion asset unit of the Grand Rapids-based holding company Mercantile Bank Corporation, began to offer a mobile P2P service powered by PayPal in 2010, the first bank to do so.
A big advantage for banks is that they can offer a host of money movement services, such as electronic bill pay, account transfers and P2P payments, all from a single location. “Our competitors can do just one element,” says Larry McClanahan, director of digital delivery at Cincinnati-based Fifth Third Bancorp with $118 billion in assets.
Also giving momentum to banks is the rollout in May of clearXchange, a joint venture of San Francisco-based Wells Fargo & Company; Charlotte, North Carolina-based Bank of America and JPMorgan Chase & Co. in New York. The network currently handles transactions only between customers of the three banks, but aims to eventually support a national, bank-driven P2P service. Even competitors see the emergence of clearXchange as positive. “It’s further evidence that P2P is going mainstream,” says Neil Platt, senior vice president and general manager of payments at Popmoney.
While P2P trajectory may be on an upswing, it’s less clear how banks might actually make money from the service. As with bill pay and online banking, “it’s very difficult to get consumers to pay explicit fees,” says Paul Grill, a partner at First Annapolis. That’s especially true when the alternatives are free. “We’ve got this thing called cash and it works pretty well for casual payments,” notes George Peabody, director of the emerging technology advisory service at Boston-based Mercator Advisory Group. “It’s worked for millennia.” PayPal also bills its money transfers as “usually free.” (Using a debit or credit card to make an international transfer carries a small fee.)
Even so, some banks are succeeding in charging fees for P2P. Fifth Third, which has been offering the service for about a year, has been charging customers 99 cents for payments delivered in three days, and $2.99 for next-day payments. About one-third of the payments are next-day, McClanahan says. “We’ve not had any pushback on the fee,” he notes.
San Francisco-based Bank of the West, a subsidiary of PNB Paribas with $62 billion in assets, has more or less the same fee schedule ($1 for standard payments and $3 for next-day). It initially made the service free to raise awareness of it, and then added fees. Usage spiked when the service was free, says John Finley, senior vice president of digital channels. “But we have found a lot of repeat users see the value of it.”
He adds, “If your payment is going to be late, it’s worth $3 to know it will get there next-day.”
U.S. Bancorp, the Minneapolis-based holding company of U.S. Bank, took nearly the opposite approach. It was one of the first big banking companies to have P2P when it began offering the service about two years ago. Since it was ahead of the curve, it felt justified in imposing a fee for the first year. Then, “as more banks started to have it, it became less innovative and more like table stakes,” said Niti Badarinath, senior vice president and head of mobile banking at U.S.Bank. As with bill pay, P2P has become a customer experience and retention play, he says. “It’s almost a must-have,” he notes. “This is the race we’re all in. Customer expectations keep rising.”
BBVA Compass also pulled back from imposing fees. It had revenue opportunities in mind when it began offering a fee-based P2P service about a year ago. But it dropped the fee after about nine months, calling it a barrier to usage. The value of P2P comes from the fact the bank’s most profitable and loyal customers are the ones who take advantage of both online banking and money movement services, Hernandez says.
Platt of Popmoney takes issue with the idea that banks cannot generate direct revenue streams from P2P. “We very strongly feel and have seen that the way for banks to make money on this is either by charging a nominal amount or charging for expedited payments,” he says. Further, small business P2P services, such as the ability to pay a group of employees or request multiple payments against an invoice, could afford banks the opportunity to charge businesses $10 to $20 a month, he says. Popmoney is also working on real-time payments. These would be transacted through the card networks and could easily carry a fee.
The next frontier for P2P payments is mobile. So far, only 8 percent of consumers have used their mobile phone to transfer funds between their own accounts, according to an August report from Javelin. Consumers transferred $178 billion online from their accounts in the past year, compared to only $13 billion via mobile phone.
But that volume is expected to increase substantially as more banks move to offer P2P via mobile. Currently, only 16 of the top 100 banks do, according to First Annapolis. BBVA Compass is among those that does not have mobile P2P yet, but will soon. With mobile, it expects its number of P2P users to double in six months. “It’s just too easy,” Hernandez says. Customers will be able to execute payments at the moment they remember, rather than waiting to log on to a PC, he says.
In essence, the name of the game is to follow customers wherever they want to go, if only to keep up with everybody else. “Not doing so is no longer an option,” Badarinath says. “The cost of not doing something is greater than the cost of doing something.”