A few banks roll out person-to-person pay, but nonbanks have the lead
By John Ginovsky, freelance writer, and formerly contributing editor to Community Banker magazine
As ‘community’ is redefined in the electronic age, a new revenue stream and customer service channel beckons
Banks have long dominated the field of payments in all its guises—cash, checks, wire transfers, and cards of all descriptions.
On the horizon, though, looms a new prospect. “Person-to-person” or “peer-to-peer” payments (P2P for short) look like they will catch on, but only after a battle between the financial services industry and nonbank behemoths.
Formidable nonbanks are creeping into this area: Facebook, the online social network and the archetype of the new online community, has been inching toward its own payment platform; Amazon Payments LLC, a subsidiary of the big online retailer, announced in October it started offering “one-click” mobile payments; and Google is reportedly expanding its Google Checkout offering into a generalized payment platform.
Those are the newcomers. EBay subsidiary PayPal, which has been around for a dozen years already, dominates the micropayment environment.
“Consumers are just becoming more and more comfortable with money movement online,” says Catherine Palmieri, global head of product and marketing, CashEdge Inc., New York. “Email has become ubiquitous. We have a whole generation of consumers who have grown up with instant messaging and text messaging and virtual communities and constant, instant activity. You have that combination of things that are going to drive adoption.”
For the most part, however, these nonbank offerings generally can be classified as business-to-consumer, or B2C, rather than P2P. The common example of the latter is when several people go out to lunch and want to split the bill, but no one has cash. The P2P function allows each of them to call up their payment platform and have it transfer the money into the account of the person who pays the restaurant. All any of them need is the telephone number of the recipient.
It is precisely these types of transactions that pique the interest of banks, and which are different from what’s offered now from nonbanks.
How P2P works
CashEdge was the first of several banking vendors to enter this arena. Already, several banks have announced they are taking its product, POPmoney, live, albeit in soft introductions so far.
It works like this: The sender logs into an online account and selects “transfer funds.” An amount and then the email address or mobile phone number of the recipient are entered. Recipients are notified they have money waiting to be deposited. They complete the deposit by accessing an online bank account.
On the bank’s side, the transactions typically are handled through their online bill-pay systems, with slight modifications. Other vendors have announced similar offerings for their banking clients, although their actual rollouts won’t occur until later this year. Fiserv plans to offer such a service as an add-on to its CheckFree RXP online bill payment platform. FIS, through a partnership with PayPal, will integrate that well-known payment service with the FIS online bill payments system.
“The primary thing is the greater added convenience and security,” says Erich Litch, senior vice-president and general manager of consumer services at Fiserv. “[Today’s customers] look at the digital revolution and say, ‘Why can’t I simply initiate a payment and have it go to anybody I know very quickly and seamlessly?’”
The competitive landscape heats up
Over the past year a number of studies have concluded that the P2P competitive battlefield will heat up over the next few years.
“It’s really driven by a market need, a consumer need,” says Jeff Lewis, executive vice-president of FIS ePayment Solutions, adding that it would be attractive to several segments, including: Baby Boomers, who move money both to their children and their parents; the younger generation, who are comfortable with electronic payments; and people with families in other countries.
The crucial thing is that people tend to trust their financial institutions with electronic transactions much more than third parties. That’s why FIS and PayPal are teaming up, Lewis says—it’s good for the banks because PayPal is such a recognized brand, and it’s good for PayPal because it will get many potential bank clients.
It’s important to remember that this payments space is still developing. “Banks have had no competitive response,” says Palmieri, adding that CashEdge gives them a response to the other payment providers out there.
Litch, in talking about the value of keeping such a service strictly in house, asked: “How much are you willing to disintermediate yourself from your customer relationship?”
The trusted relationship between bank and customer must not be underestimated, adds Palmieri, “Because [the service] comes from a bank and is deposited into a bank, it’s a very secure service. It overcomes that last mental hurdle of the customer.”
What’s in it for banks?
The consensus is that banks could benefit in three main ways:
• Revenue: “We do see it as an opportunity to charge for the service,” says Litch. Lewis estimates that a bank could receive $2 to $5 per transaction, depending on market demand.
• Customer acquisition. Palmieri cites a study that indicated 22% of consumers would switch banks if they could participate in a P2P program, while 60% of unbanked consumers would choose a P2P bank. At the same time, she says, “You’re redefining your whole bank as being innovative and tech-savvy, which provides a point of differentiation for you from other banks out there.”
• Customer retention. “We’ve demonstrated clearly that getting a customer to come on line and do transactions like bill payments and things like that have a direct impact on the profitability of those customers,” Litch says.
Bank will use P2P as part of package
First National Bank of Omaha, , Neb., through its FNBO Direct electronic banking arm, went public with a pilot P2P program through CashEdge in January, the idea being to get the kinks out and then do a full-blown marketing blitz in March. Dan Harley, vice-president of online marketing, says the bank conducts biannual surveys of its customers as to the types of new products and services they want. “There was enough demand in the market based on research we’ve done. So it made sense for us to offer it,” he says.
The bank targets consumers who prefer to manage their own finances and are comfortable with self-service banking.
The top three drivers—revenue, acquisition and retention—were at work. The bank charges a modest fee per transaction, he says. Meanwhile, in a larger strategy of promoting new checking accounts, the bank is considering offering P2P at a discount, if not free, if new customers sign up. “It can be part of a package to entice people to switch banks,” Harley says.
The bank will take a two-pronged marketing approach, says Teresa Sloboth, senior marketing adviser. First will be through traditional bank periodicals and advertising, and second will be through “influential bloggers,” who can spread the word among the electronic community of consumers.
As for retention, again, the bank can “explore things like offering it at a discount or a free rate to customers who have multiple relationships with us,” Harley says.
Other banks that have announced offering this service include PNC Bank, Pittsburgh, and First Hawaiian Bank, both through CashEdge. In fact, CashEdge recently said that more than 100 banks and credit unions will roll out their own POPmoney service by midyear.
“It pretty much includes all types of financial institutions from top-ten banks to community banks,” says Neil Platt, senior vice-president and general manager of U.S. Banking at CashEdge. He says these financial institutions are responding to a strong demand from customers. “The demand is above our original expectations,” Platt said. BJ