September 15, 2015
Today, banks across the world agree to the fact that person-to-person (P2P) electronic payments have a far-reaching impact. Banks have always focused on deposits, loans and other financial services which are basically their main businesses, and have considered payments as a value-added service. Now, things have changed with a lot of startups foraying into the space and offering payments products. Banks have now realized that payments can also be one of the sources of revenue. The P2P payments product launched by Facebook is a real eye opener as technology companies barge their way in.
Today, most of the banks across the world have a P2P payments solution which either works on systems like ACH or clearXchange. In a few cases, the cost of transactions through banks are higher than third party providers and also time-consuming.
In this article, I would like to summarize why the P2P payments market is undertapped and what benefits banks can reap by launching same-day or faster P2P payments solutions, which everyone seems to be looking for.
Before I discuss why P2P payments are really important for banks, I would like to put forward my views about P2P payments solutions by banks. I have been tracking P2P payments for quite some time. I have seen people talking about P2P payments and that it is disruptive. Many say that P2P providers like Venmo, Square cash can pose a great threat for banks. I do agree that companies like Venmo, Square cash are doing a phenomenal job, but I would be biased towards these companies if I say that they are disrupting. It is much easier for them to launch a P2P payments solution compared to a bank. Banks have always been bound by the legacy system. In fact, I would like to appreciate all the banks that have come out from their comfort zone and have tried out something new like P2P payments.
How can a bank benefit by launching P2P payments?
No matter what, people trust their banks and its solutions Today, most FinTech companies across the globe publish their user base on a quarterly basis. Millions of users are using some sort of solution from FinTech firms, but the largest customer base is always with banks. Let’s Talk Payments conducted a survey few days back and we were amazed to see that 99% of respondents (which also included millennials) trust their banks. So if banks launch solutions like P2P payments which everyone wants, it is sure that it will succeed.
Increase in revenue and engagement of the mobile application Mobile has evolved as a major channel for payments. Increasing adoption of smartphones is a big boost for the payments industry. One thing that people never forget to take while stepping out from his/her house is a mobile phone. Today, people want to use their mobile devices for making payments for food, buying at retail stores, sharing bills, etc. and this trend is sure to continue. People will use the device that they always carry for making payments, be it P2P or something else. If banks build mobile applications focusing on P2P and low costs as well, there is no way that people will move to other providers because people trust their banks and they feel much more secure compared to providing information to other P2P providers.
P2P payment transactions will help banks to earn more revenue. They can now charge for a whole range of value-added payments that so far have been done outside the banking network—whether it is something like a cross-border transfer or the ability to send gift cards within a banking relationship. Additional revenue is not the only thing that banks will gain by launching a P2P payments system. There will be a significant rise in engagement with the banking mobile application which all banks across the globe want.
The P2P payments market is still at infancy, unlimited opportunities await for banks The global peer-to-peer payments transaction value is around 1 trillion. So, there lies enough potential for banks. At this point, P2P payments are a relatively small part of the payments pie but in the next three to five years, it will increase rapidly; and there will be new competitors. This essentially means that banks cannot just sit and look at the market. P2P is hot and banks need to strike when the iron is hot. P2P payments will go viral in the next few years among younger, mobile-friendly consumers and that is when banks should use their brand to catch them early. Banks that are technologically advanced can build their solutions organically through their in-house team; others financial institutions can partner with third-party providers like Popmoney from Fiserv. Banks can also run accelerator programs and fund FinTech firms for developing a robust P2P payments system.
Today, the average transaction size of P2P payments might be low—mostly used for payments at restaurants, bills, sharing bills—but the average P2P transaction size might drastically increase as people might use P2P payments for sending house rents. When it comes to large-value transactions people trust banks more. Also, because of low transaction fees compared to non-banks, the chances are high that there will be an uptake of bank-led P2P payments solutions.
Reduction in operational cost and better analytics to serve their customer better P2P payments systems will lead to a reduction of costs of processing paper-based payments, which is a big benefit for banks. Apart from that, engagement and loyalty towards banks will increase drastically. The average time spent by a user with the bank will increase as well. This will help banks to get more insight about the buying and spending nature of a user. Analytics is something which most of the banks across the globe are doing; with the help of analytics, banks will be able to send more relevant offers to its users. Banks will soon realize that there is a lot of opportunity within its customer base which is yet to be explored and could be addressed easily; they don’t need to look intensely for customer acquisition.
What should be the focus of banks across the world with respect to P2P payments? Firstly, the creation of a bank-centric, faster P2P payments network is probably one of the most significant developments that can happen today. With that happening, we might also see P2P payments happening on a real-time basis, which is again one of the pain points that need to be addressed. The non-bank P2P payments providers have realized it early and have been focusing on this.
Secondly, the implementation of interoperability in P2P payments. Creating a unified payments interface where bank A’s user can make a payment to bank B’s user on a real-time basis.
Multiple banks in developed economies have already started participating in the P2P payments market. In the case of developing or underdeveloped economies, a strong P2P payments banking infrastructure is still not in place. P2P payments are growing irrespective of economies. As more banks across the world make their way into P2P payments, I feel that we will soon see same-day or faster payments and an interoperable P2P banking system in place. That will boost the entire P2P payments ecosystem.