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Peer-to-peer payments in the US had an eventful month in June. PayPal, one of the leaders in digital payments, announced that it would begin offering instantaneous bank transfers via Visa and Mastercard debit cards. In addition, Early Warning Services unveiled its new Zelle peer-to-peer payments service, which will be supported by over 30 banks over the course of the next year. Together, these two announcements illustrate the growing importance of peer-to-peer payments to financial service providers.
PayPal spent much of 2016 and 2017 building relationships with the traditional card networks – inking deals with Discover, Mastercard, and Visa. In June 2017, the company announced that it would be adding a feature which allows consumers to instantaneously cash out their balances to their bank account using a Mastercard or Visa debit card. The new option does come at a price, however, as consumers will be charged 25 cents per transaction, which could deter some individuals from using the service, particularly for smaller transactions.
Also in June, Early Warning Services LLC, a service provider co-owned by several of the largest banks in the US, introduced Zelle – its peer-to-peer payments platform. The platform serves as a successor to the earlier “clearXchange” peer-to-peer service. Zelle will be rolled out among more than 30 banks throughout the coming year, and will also leverage relationships with some of the largest acquirers to provide service through a separate app to additional financial institutions. The service cuts out a number of steps and makes it easy for consumers to make payments using only the email address or phone number of a recipient with a US bank account.
Peer-to-peer payments are not a particularly attractive endeavor from a pure value perspective. The revenue stream is fairly constrained because many consumers have a relatively low cost tolerance threshold for peer-to-peer payments. This could pose a challenge to PayPal’s fee-based model for bank transfers. For larger transactions, the cost associated may well be worth it, but consumers are less likely to pay a 25-cent fee to transfer USD5 for their share of the takeaway meal.
Where PayPal and Venmo do exhibit strength is in their large user base. Peer-to-peer platforms based on the systems of individual banks must contend with the limitations this places on their users. Platforms which can only transfer money to other users at a single bank – or other users of an Apple product as is the case with Apple’s new peer-to-peer Apple Pay offering – are inherently limited because they are not platform or bank agnostic. This is where Zelle may have a leg up. The large number of initial institutions on board with Zelle should make it easier to reach a critical mass of customers quickly, particularly if both Early Warning and its partner banks are willing to dedicate the necessary resources to advertise the service.
Zelle also jumps on the growing API trend in financial services by integrating directly into the mobile apps of its partner banks. Direct app integration serves two simultaneous purposes. First, it makes the feature more accessible, as consumers do not need to download an additional app in order to access it. Second, it fosters loyalty and engagement with the partner institution by funneling additional client interaction through the bank’s proprietary app. Much of the digital payments industry is fragmented, so by providing a money transfer service that is directly linked with existing banking interactions, banks not only remove barriers to participation but also capitalize on an opportunity to interact directly with their customers, increasing cross-sell opportunities and reinforcing their brand in the consumer’s mind.
Physical card payments have been incredibly successful in part because the growth of card networks created a centralized means of facilitating payments. Card networks thrive as they approach near universal acceptance, and help to ensure seamless processes behind the scenes. Initiatives such as Zelle have great potential to mirror this model in the digital landscape, offering considerable advantages over the patchwork of peer-to-peer options currently available to consumers. It remains to be seen how successful Zelle will be at driving consumer adoption, but if consumers are receptive, Zelle could prove to be a serious challenger to Venmo’s peer-to-peer market share.