Peer-to-Peer (P2P) payment systems materialized nearly 20 years ago as the ideal payment solution when it came to online auctions, such as eBay. This independent online auction process was the perfect way for sellers to discard unwanted items for a reasonable profit while often providing a hard-to-find item for the buyer.
One complication, however, was securing the right payment method for the medium, reports the Federal Reserve Bank of Kansas City. Non-banks were the first entities to step up to offer a safe, reliable and guaranteed payment solution. In 1998, PayPal began facilitating electronic P2P payments, allowing buyers to submit their checking account, credit or debit card information.
Banks would only give the P2P world a try a few years later, as PayPal reported an estimated $6-8 million payments moving through its system daily back in 1999. Eventually, the person-to-person payment model would also become the perfect way for businesses to pay freelancers and for people to send money to family, friends or charitable causes.
The P2P payment industry is such an invaluable business model around the globe—particularly with millennials—that people often use their provider as a verb, as in "I'll Venmo you the money for dinner." Can banks compete with the many P2P powerhouses and all the benefits of their longevity in the industry?
What Has Taken Banks So Long to Launch Their Own Person-to-Person Payments?
This year's launch of the Zelle network is not the first time banks have entered the person-to-person payment arena. In 2000, Wells Fargo Bank joined efforts with eBay to design Billpoint, which was an electronic P2P method, developed specifically and solely for eBay sellers. This service allowed eBay buyers to use their credit card without exposing the buyer's or seller's confidential account information. Ultimately, Billpoint was shut down due to its inability to compete with PayPal.
Just two years later in 2002, Bank One and Citibank tried their hand at delivering online payment services. Bank One's eMoneyMail was the first P2P payment system that allowed customers to make online payments using the recipient's email address, no matter where the recipient did their banking. This system only lasted six months before closing, due to a high rate of fraud. Citibank's c2it was free for customers, in an attempt to attract PayPal users. The plan did not work, and a survey indicated that only 1 percent of P2P customers used c2it, compared to 33 percent who chose PayPal.
There have been some attempts to re-enter the P2P market over the years, but they just haven't found the magic bullet to compete with the PayPal-dominant P2P market. Additionally, banks have found it difficult to compete with all the other nonbank person-to-person payment services that have burst onto the scene over the past decade.
Why Is It a Good Time for Banks to Revisit Peer-to-Peer Payment Systems?
It seems that financial institutions may find that there is comfort in numbers. Led by the bank-owned risk management firm, Early Warning Services, a coalition of the largest U.S. banks is ready to offer customers the power to send instant cash to family and friends with Zelle.
Mobile Payments Today gives two compelling insights into why now is the right time for Zelle to hit the market. First, non-bank peer-to-peer providers do not account for their users' "mental cost" of using the service, leaving them with the heavy lifting of performing their own itemization and accounting for individual dues. Second, working with non-bank P2P services leaves customers disconnected from the rest of their financial lives.
Early Warning Services has tapped into the idea of streamlining customers' efforts by tying the social convenience of P2P payments with the provided accounting services and all-in-one-place peace of mind of traditional banking. All of this combined, as well as being a part of a multi-bank network with a strong marketing campaign, makes it the perfect time for banks to find their footing in the person-to-person payment systems market.
How Does the Early Warning Zelle Peer-to-Peer Payment System Work?
The Early Warning team has enlisted a team of IT professionals to ensure the highest level of security to ensure the protection of customers' data at every phase of each transaction and beyond. This all-inclusive network is open to all banks and credit unions in the U.S., and only the U.S. at this time, and like non-bank competitors, allows customers to send easy cash through the connected convenience of their banking account. Users can enter their bank's mobile app to tap into Zelle and have no need to download an additional app. Once entering the Zelle system, customers can choose the person to whom they want to send a payment then the amount. Once the transaction is complete, customers have a full accounting of the transaction in their bank account.
Who Are Banks' Main Person-to-Person Competitors?
Financial institutions that are members of the Zelle network face some stiff competition, including Apple Pay with iMessage, Venmo, Square Cash, Circle and Snapcash, notes the Los Angeles Times. Facebook and Google are even developing their own P2P capabilities to add more obstacles for banks out to stake their place in the market.
Should Non-Bank P2P Providers Worry About Banks Re-entering the Market?
No matter how entrenched entities like PayPal's Venmo, Apple Pay and Square Cash are in the market, they will certainly be monitoring the success or shortcomings of Zelle. Their own development, marketing and accounting teams will be ready to make changes to their new competitor that also offers free services, as well as many additional services that they do not.
What Can You Do to Prepare Your Business for the Changes in the P2P Marketplace?
Whether you are thinking of starting your own independent P2P app to dive into the market, or your bank is about to take the P2P leap, building your team is the cornerstone to success. Build a fully communicating peer-to-peer team, made up of your mobile app development group, account professionals (to map out customer account tracking), and a creative and energetic marketing team (to ensure that your customers understand the value of your services, especially compared to the competition).
At ICS, we are here to help you determine your talent needs when you are ready to launch your peer-to-peer payment system.