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Person-To-Person Payments SINCE 1994, THE EXCLUSIVE MONTHLY REPORT ON INTERNET BANKING PRODUCTS & MARKETS . Number 174/175 Dec. 10, 2009 STRATEGIES FOR Person-to-Person Payments 2.0 FINANCIAL Does mobility provide the tipping point for bank-branded P2P? INSTITUTIONS ____________________________ erson-to-person payments received much attention at November’s BAI Retail Delivery conference with four Internet banking Pcompanies making big announcements: First Data, FIS, S1, and PayPal (see pp. 38-39). Marketing When we first wrote about this area 10 years ago (OBR 54, Nov. Security 1999), three major U.S. banks had P2P systems in the works: Wells Fargo, Bank of America and Bank One. By 2002, all Mobile were shuttered; knocked out cold by the biggest financial- services success story of the dot-com era, PayPal. Payments PayPal now dominates eBay commerce and has become a force at Innovations other online merchants as well. But still, PayPal’s volume of pure P2P, casual payments between non-commercial parties, hasn’t taken Personal finance any material share away from paper-based solutions. For the most part, people still pay each other in old-fashioned ways: cash, checks, and IOUs. Because electronic transactions are often more expensive, INSIDE they won’t catch on until their convenience solidly trumps paper. P2P Payments Mobile banking may be that path to ultra-convenience. Gartner seems Overview ......................................... 4 to think so. The research company put money transfer as the number- Market size..................................... 6 one most important application for smartphones in 2012 (see p. 8). 15-year forecast ......................... 10 So what exactly is driving the rekindled interest in P2P? ............................ 12 Product design • People are carrying less cash; especially younger FI opportunities .......................... 16 consumers who do most of their shopping via debit so Pros & cons .................................... 17 Revenue streams ........................... 18 don’t have a need for cash (or checks). Recommendations.......................... 19 • PayPal has educated the market to expect this feature. FI examples.................................. 20 ING Direct....................................... 20 • More importantly, the ubiquitous mobile phone is the Mercantile Bank of MI..................... 22 right technology and form factor to make electronic Patelco Credit Union....................... 23 Univest National Bank & Trust........ 24 transactions more convenient than paper ones. Wells Fargo mobile......................... 25 The question isn’t whether electronic P2P payments will eventually P2P players .................................. 26 Overview of 13 providers............... 26 replace paper; they will. It’s who will control the service, financial AmEx/Revolution Money ............... 27 institutions or third parties? PayPal already has a substantial head start CashEdge POPmoney .................. 28 iPay Technologies ......................... 30 with a 72% penetration rate among U.S. online shoppers. Nice, but Obopay (MasterCard & Nokia) ...... 35 banks have relationships with 100% of checking-account customers. PayPal ........................................... 38 Finovate Videos Jim Bruene, Editor & Founder now available.......................... 40 [email protected] ONLINE BANKING REPORT.COM P2P PAYMENTS Key research questions 1. How many end users are currently using various person-to-person payment options and what does the future look like? 2. What is the business case for launching an electronic P2P service in 2010? 3. How important is mobile access to the service? 4. How important are international remittances to the success? 5. How do major consumer-direct services work today? 6. Which vendors offer solutions for P2P payments? About this report This report is an independent effort from ONLINE BANKING REPORT. It is available at no extra charge to subscribers of ONLINE BANKING REPORT and can be purchased by others through our website. We have no affiliations with any of the companies mentioned, other than as subscribers to our publications and/or participants in our Finovate Conferences. About Online Banking Report Founded in 1995 by former banker Jim Bruene, Online Financial Innovations is a Seattle- based research company. OFI is best known for publishing the Online Banking Report, a regular newsletter featuring in-depth analysis, relevant data, and informed recommendations to financial services executives in 50 countries. Copyright 2009: ONLINE BANKING REPORT (ISSN 1095-2829) is published monthly by Financial Insite Inc., 4739 University Way NE, Suite 1002, Seattle, WA 98105, USA. Phone: +1(206) 517-5021, Fax: +1(206) 524-0351, [email protected]. Subscriptions: US$1,795 per year worldwide, includes paper and electronic editions with online archive access. Editor & Founder: Jim Bruene, [email protected]; Analysts: Andrea Wood, [email protected], Chris Young, [email protected]; Business Manager: Kate Schultz; [email protected]; Marketing Director: Eric Mattson, [email protected]; Circulation: Anita Schultz, [email protected]; Webmaster: Gerry Soroczak, [email protected]; Copy Editor: Jennifer Russell Warning! Federal copyright law prohibits copying this report. Contact [email protected] for reprints or electronic rights. page 2 ONLINE BANKING REPORT Number 174 & 175 © December 10, 2009 P2P PAYMENTS Definitions Primary term: P2P Payment/Transfer (aka person-to-person, peer-to-peer, or consumer-to-consumer): A payment made to another individual without knowing their bank account info; typically all that’s needed is the person’s email address or mobile phone number. For the purposes of this report, we are excluding services such as Bank of America’s online transfer function that allows customers to send money to other Bank of America customers and ING Direct ACH service which allows users to send money to any other person at any bank as long as routing and bank account numbers are known. Other terms used in this report: Account-to-Account Transfer (A2A): The movement of money from Bank A to Bank B usually with the customer having ownership of both sending and receiving accounts. Most major financial institutions and many smaller ones support this service. CashEdge is a major provider of this service; powering 650 programs which accounted for nearly $50 billion in transfers in 2008 (see pp. 28-30). Some banks also allow A2A transfers to other individuals as long as account and routing numbers are known, a service offered by ING Direct for Electric Orange customers (see pp 20-21). Bank-Account P2P: Similar to customer-to-customer, but payment can go to anyone at any bank as long as the sender knows the recipient’s bank account and routing numbers. Customer-to-Customer or Member-to-Member Transfer: A subset of person-to-person transfers where both parties have accounts at the same financial institution. Usually the sender must know the recipient’s account number to set up the transfer. Bank of America (p. 16) and Patelco Credit Union (p. 23) both support this type of transfer within their online banking suites. Mobile P2P Payment: Same as above, but initiated from a mobile device. Typically, recipient’s mobile phone number is used to notify recipient of the payment. Online P2P Payment: A P2P payment initiated from an online banking session, typically using the The front page of our first report on P2P payments recipient’s email address to send the payment pondered a question being asked at the time” Are P2P advice to the recipient. payments the killer app for online banking? Today, the same question is being asked of mobile banking. Text P2P Payment: A subset of mobile P2P, where the payment is initiated through text message using the recipient’s mobile phone number for notification. page 3 ONLINE BANKING REPORT Number 174 & 175 © December 10, 2009 P2P PAYMENTS Overview he goal of this report is to help you decide when and if you should offer person-to-person payments. And if you decide to move forward, how to best position P2P payments within your T overall product set. To spark your decision-process, we’ll look at: • Overall trends • Market size and forecast • The business case • What others are doing • What solutions are available Overall trends Let’s dive into these three overall trends. 1. Carrying less cash: For anyone born before the Beatles broke up, there are already good and ubiquitous person-to-person payment mechanisms in place. One is free and easily portable, cash. The other costs about $0.50 if used remotely, a check. But I’ve come to realize that cash is kind of old-fashioned. We had a family gathering on the other side of the country this year, and upon arrival my two twenty-something nieces didn’t have $10 cab fare between them to get to their NYC hotel. One of them NEVER carries cash, even when traveling. MasterCard’s year-end 2007 survey showed that worldwide: • The majority of respondents (56%) believe that one day the world will be a cashless society where credit and debit cards will replace cash and checks for payments • 75% of respondents believe that it is no longer necessary to have lots of cash on hand • Two-thirds of respondents (66%) use cash less often than five years ago to make purchases PayPal is a major force in ecommerce accounting for 9% of global ecommerce and 15% of U.S. volume (includes eBay volume). page 4 ONLINE BANKING REPORT Number 174 & 175 © December 10, 2009 P2P PAYMENTS 2. Educating the market: The reason PayPal was able
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