Overview
As technology is continuously crafted to simplify the daily tasks in our lives, it is no surprise that peer-to-peer (P2P) mobile payments have revolutionized the way we spend and transfer money. The market demand for these payment systems has been monumental, as the ability to pay friends and family was previously inefficient and had significant potential to be alleviated by technology. Instead of scrambling to find exact cash or writing a check every time you owe someone money, mobile payments provide a convenient way to send funds in real-time. Because these payments have kept up with the fast-paced, digital nature of society, mobile P2P payment solutions have skyrocketed in popularity and, by the end of 2018, were used by over 82.5 million people in the U.S. alone. China, a country that lacked a legacy payments system, has seen rapid and widespread adoption of P2P mobile payment systems. By the end of 2019, China’s two leading payment platforms, Alipay and WeChat Pay, boasted more than 1 billion and 900 million users respectively.
Although mobile payments make the life of the consumer easier, they pose a major challenge for banks and other financial institutions who now face high competition from the financial technology companies (fintechs) that led this transition to mobile P2P payments. These mobile payments have completely transformed the way people manage their transactions and are increasingly becoming a standard use in America. If banks and other legacy financial institutions want to remain competitive, they will need to discover creative solutions and forge partnerships to stay relevant in this digital landscape.
History of Mobile Payments
Long before Venmo and Zelle, PayPal initiated peer-to-peer mobile transfers in the late 1990s. Paypal’s platform allowed users to make safe online transactions by sending payments through its third-party system that protected consumer’s bank account information. Consumers were receptive to adopting Paypal due to its fast and effective payment system and protective measures, and businesses were eager to include it in their payments process in order to win trust and attract a colossal customer base. As a result, E-commerce soared and catalyzed the creation of a bustling online marketplace.
After the initial success of Paypal and the continuing technological revolution, banks and debit card networks were inspired to develop their own mobile P2P services. In 1999, Bank of America and Citi developed Cashedge, a standalone mobile payment system created to send funds from one financial institution to the other. Backed by the support of these financial institutions, Cashedge developed a safe way for their customers to transfer money. Mastercard took this same concept and applied it to their customer base in 2009 with their mobile P2P system MoneySend. Through MoneySend, Mastercard cardholders could make payments on a mobile app to other Mastercard users from anywhere in the world. To transfer funds through MoneySend, a user had to sign up for a prepaid account using either a credit card, debit card or bank account, and then send a text to the fund recipient who was required to join to receive the payment. These P2P systems further developed PayPal’s idea of sending money between consumers, but it did not have the same ease and efficiency that modern online transfers have today.
A major innovation for mobile P2P transfers in the United States came in 2011 with the development of social network mobile transfers. Venmo, a mobile transfer system favored by millennials in the U.S., started in 2011 as a simple way to send funds to anyone who also has an account. Because anyone could easily open a Venmo account and connect it with their bank of choice, it was accessible to most people with a smartphone and a bank account. Venmo’s idea to operate as a social network turned a mundane task like transferring funds into something enjoyable, where users could come up with lighthearted captions for their payments or see what their friends were sent. After the success of Venmo and other fintech services like Cash App and Apple Pay, banks decided to create their own mobile payments systems. The most popular mobile P2P payment service right now is Zelle, which comes pre-installed in many online banking apps and so does not require users to download a separate app.
Impact on the Financial Services Industry
In this new world of mobile transfers, the value proposition of banks is under threat as consumers shift their focus to mobile P2P third-party applications. These fintechs have much less regulatory oversight, which allows them to spend more time focusing on the customer experience. Whereas banks have historically been the main reference point for a consumer’s banking relationship, they now risk being viewed as a back-end service for transactions made on other platforms. This may make it difficult for banks to differentiate from one another if they are simply seen as a custodian of funds rather than the provider of the mobile applications that customers interact with on a day-to-day basis.
However, banks still have one advantage. They can receive and transfer funds as a direct deposit, whereas third-party fintech firms like Venmo and Paypal require a manual transfer from the app to the bank account. This smoother solution allows customers to see their current account balance before making a transfer. A downside to bank P2Ps is that participating banks typically all need to be using the same mobile transfer system, whereas Zelle has over 350 participating banks and credit unions in their system. Even though Zelle does not allow banks to differentiate themselves, it creates a platform where banks can still stay relevant, albeit collectively, in a market increasingly dominated by fintech startups. Despite concerns that fintech P2P solutions will diminish banks’ importance to consumers, banks remain relevant by playing to their advantage of being able to direct deposit funds and provide insights into the customer’s account balance.
As it stands, both Venmo and Zelle are winning in the U.S. mobile P2P market. According to data from Q4 2018, Venmo has more active users and is extremely popular with millennials, which bodes well for its market share growth potential. However, Zelle has a much larger transaction volume. During 2019, Zelle’s transaction volume was $744 billion compared with $101 billion processed by Venmo. This is due to the transaction amount per person – the average Venmo user sends $60 per transaction whereas the average Zelle user sends around $300.
It is hard to tell how the competition between Zelle and Venmo will play out. By partnering with more banks and building an association with trusted financial institutions, Zelle could create an image of providing a safer and better-vetted transfer system than other P2P solutions. However, this might not be enough to sway millennials and Gen Z from their brand loyalty to Venmo, a system many of them started using during their adolescent or college years. Additionally, Venmo’s partnerships with popular companies like Chipotle, GrubHub, and Uber have only increased its popularity with younger generations. No doubt, Venmo and other fintech firms will continue innovating to differentiate themselves from bank-associated P2P systems like Zelle.
Conclusion
Overall, mobile P2P payment systems have dramatically eased the once arduous payments process and will continue to become a more important part of the payments ecosystem. Before mobile P2P solutions, the payments process was cumbersome and inefficient; today, payments can be sent seamlessly with a few taps on a screen. The U.S. mobile P2P market has been split between fintech-based and bank-based solutions. Although there is no clear winner between the two approaches, the race for mobile P2P superiority will ultimately reward the platforms that adapt to customer expectations in a rapidly changing payments landscape.
Lexi Sisko is currently attending the University of North Carolina at Chapel Hill, pursuing majors in both Economics and Sociology. Her interests include the intersection between economic policy and social repercussions, the disruption of financial technology on brick-and-mortar financial institutions, and the future of AI.
Image: Pixabay
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