P2P Payments: How it is and How it should be



Amit Goel

Co-Founder at LetsTalkPayments.com


The payments industry has always been dynamic. The opinions from the industry veterans are always divided on the topic of payments convenience versus payments security. One section always feels that convenience in more important while the other raises its voice for security. But why am I talking about these things? This is because, today, I will be discussing peer-to-peer payments or P2P payments. P2P payment is one such sub-segment in the payment space which has a lot of potential to grow, but before it grows, there are a lot of things that need to be crystal clear. This is the segment where the industry is heavily divided over the issue of convenience versus safety. But why is it so? There must be some issues which are hindering the adoption of mobile P2P payments.

Evolution of P2P payments

P2P payments have existed since the time we started transacting. Even digital P2P payments are nothing new. Since 1999, Paypal has provided consumers with P2P payments facility through processors (such as FIS People Pay or Fiserv’s Popmoney) and through banks directly (through clearXchange, a unit which was created by Bank of America, Chase and Wells Fargo to offer P2P payments). As mobile payments have taken off, the industry is now witnessing significant developments in this segment.

Mobile has now become a major channel of payments; consumers are turning to their mobile phones to pay their friends and families instantaneously. People are now using Venmo extensively to repay or collect money. Venmo has now become the payment application of choice among generation Y. The section of the society which pays more heed to convenience as compared to security has already drifted to mobile P2P payments. The older section, which focuses more on security in comparison to convenience, has still not accepted mobile P2P payments to a great extent.

How are companies playing in this segment?

Industry experts always believe that adoption level increases when institutions like banks start providing solutions. You will be amazed to know that more than 500 US banks and credit unions are offering some form of P2P services. Non-financial players like Facebook, Google Wallet and Snapchat are also providing P2P payments services for users, but the adoption level has really not picked up. But there is one such player who is not leaving any stone unturned when it comes to P2P payments. And that’s Paypal. In the last eight years PayPal has made eight acquisitions and among them are Zong (a telecom billing firm), Fig Card/StackMob/Paydiant (mobile payments/wallets), Braintree (Venmo P2P) and Xoom (global money transfer service).

What is missing in the current P2P Payments systems?

Although millennial have adopted P2P payments, why is adoption slow among Gen X? Millennials have always had a preference towards convenience over security, as I have said earlier. What is more worrying and, in fact, hampering the growth of P2P payments is the security concern and the time lag.

I tried to identify the major problems that are hampering P2P payments adoption. In case of banks, the major drawback has been the time lag. The time it takes for a user to receive the amount is sometimes too long. Although most systems are talking about moving towards faster payments, the actual scenario is different. I feel real-time payments will still take time. Another major factor is interoperability. If banks and financial institutions are able to eliminate issues and build a solution that has interoperability, the growth of P2P payments is inevitable. On this note, I would like to say that Immediate Payment Service or IMPS (India) which largely focuses on real-time person-to-person payments is coming up with Unified Payment Interface (UPI). Through a UPI, a Paytm mobile wallet user can make a payment to an HDFC Bank customer directly into their account on a real-time basis. Another important factor which many financial institutions ignore is an adequate user interface. If you need to bring millennials on board, your bank must have a strong and smooth user interface.

Payments startups have been overwhelmingly successful when it comes to peer-to-peer payments. But there are still a few elements which need attention. Firstly, security. In many cases, all that is required to initiate a cash transfer with a P2P mobile app is a login with a four-digit PIN. That means money can be in motion in less than a minute. The scary bit is that P2P accounts are directly linked to checking accounts generally, and in an instant, a checking account can be emptied by a crook. There are federally mandated fraud protections for checking customers, but they are neither as easy nor immediate as the protection systems against credit card fraud. Secondly, it is the fees associated with the service. If the fees are high, it is obvious that many will refrain from doing P2P payments. A solution which provides an additional layer of security along with low fees will be the one to succeed.

Non-financial players have understood the inherent potential of P2P payments and are optimistic about its success. However, the lack of trust has been the biggest factor that is hampering its growth. With time and increasing awareness, P2P payments services of non-financial companies might succeed.

What is the future of P2P payments?

P2P payments still has a long way to go; in fact, it has the potential to emerge as one largest segment of the payments industry. Nielsen Mobile Wallet Survey of 2014 also shows that 49% consumers of the age group 18 and older have used a P2P app to pay for dinner. Other favorite uses of P2P payments include gifts, entertainment and paying household bills. 60% of P2P users rely on it as their primary method of payment, so as more banks and non-financial institutions start providing P2P payments services, it is expected to be the norm of a transaction. Another survey conducted by YouGov, a global Internet-based market research and data company in 2015, says that out of a sample of 1,062 adults, more than 50% have used their smartphone to do peer-to-peer payments. Don’t you think it to be a great uptake?

Success factors for P2P payments:

● Build a service that is clear to users and has accountability—always do proper due diligence.
● Understand your customers’ desire for P2P.
● Set transaction levels for one-time, daily and monthly amounts for new users.
● Make sure to have fraud monitoring and transaction monitoring systems.
● Add additional “out of wallet” security features to prevent account takeover fraud.
● Interoperability is important.
● Increase the awareness and market the service to everyone, including business customers.

In the last 18 months, the P2P payments space has changed dramatically. In the next 18 months, we will surely witness adoptions soar and P2P payments will grow extensively. Just one thing—create a transparent solution which is secure and convenient.

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