Mobile P2P Payments: Not a Priority for Most Banks

One of the challenges for bankers in the area of payments is determining the appropriate priorities for investment. For example, the recent launch of Zelle as a rival to Venmo, Square Cash, and others has brought peer-to-peer (P2P) consumer mobile payments to the fore. Is this a capability that most banks must offer in order to remain competitive? An examination of the basic facts regarding mobile consumer P2P may help to inform the deliberations on whether to invest in such capabilities.

Prospects for Growth
The rapid growth in mobile P2P usage is expected to persist as consumers become more comfortable with mobile payments and the number of younger, digital-savvy consumers continues to increase. The roll-out of Zelle, which is free of charge to customers of participating banks, will likely further spur growth in consumer P2P. However, it should be noted that consumer mobile P2P activity is dwarfed by that of credit cards. Admittedly, credit cards and mobile P2P payments are not perfect substitutes. But the transaction levels compared to credit cards indicate that consumer mobile P2P will remain a niche payments product for the foreseeable future. This raises the question as to whether a bank would be better served investing in credit cards rather than consumer mobile P2P.

Demographic Appeal
Surveys have consistently shown that, while mobile payment usage is low overall, younger people (18-34 years) are much more likely to use mobile payments than are older consumers. Consequently, many banks are offering, or are considering offering, mobile payment services to garner the loyalty and business of Millennials. Indeed, research shows that digital capabilities are the primary driver of consumers’ perception of convenience, which is a primary factor in determining where consumers open their checking accounts.

This means that mobile functionality to perform core banking tasks such as balance alerts, account transfers, spending controls, budgeting tools, and digital account opening are crucial for customer acquisition. However, the level of importance that consumers assign to mobile P2P within the array of digital services is unknown. Customers can easily obtain P2P capabilities through Venmo today, yet they still look to their bank for other digital capabilities. Therefore, bank executives might assign a higher investment priority to digital account opening and offer mobile consumer P2P through a partnership with Venmo or another fintech provider.

Competitive Dynamics
Today, PayPal and its subsidiary, Venmo, are dominant in P2P payments. Venmo is particularly popular among Millennials in part because of its social media aspects, which Zelle currently lacks. Venmo is also more ubiquitous: it can be linked to any debit card, credit card, or deposit account at any financial institution.

Zelle’s competitive advantage may lie in the fact that it is integrated into a customer’s mobile banking app. Zelle may also benefit from the perception of being more secure because it is bank-sponsored. Also, with Zelle, money is transferred between users’ bank accounts in minutes if both accounts are with participating banks (transactions may take one to three days to clear if the recipient’s bank is not a Zelle partner).

Soon, Apple will offer consumer mobile P2P capabilities. The P2P payment aspect of Apple Pay will be integrated into Apple iMessage when iOS 11 is released in the coming months. Apple Pay has a competitive advantage owing to its strong brand-recognition and the integration of its P2P payment feature into the iMessage application. The service will also be convenient for consumers as no additional sign-on will be required to access it: consumers simply scan their fingerprint to approve the transaction.

Profit Dynamics
Today, consumer mobile P2P is not a source of revenue. To rectify this, Venmo’s plan is to expand from merely a peer-to-peer payment mechanism into retail purchases. For this plan to succeed, the convenience of paying with Venmo, which is generally linked to bank accounts, will have to at least equal the value that consumers receive in the form of the rewards that they earn when they use their credit cards. Venmo will also have to gain much greater acceptance among merchants.

Like Zelle, Apple will provide its service free of charge. By doing so, it hopes to spur the use of Apple Pay and garner a share of the associated interchange fees. For Zelle, the competitive rationale is that the service is vital to retaining consumers, especially Millennials. It is not clear, however, that offering mobile P2P is a major factor in retaining clients for banks. Also, it is unclear whether the advantages of using Zelle will be compelling enough for consumers to opt to use it over Venmo, Apple Pay, or other providers.

Conclusion
Consumer mobile P2P is a niche product and its importance relative to other mobile functionality in attracting and retaining younger consumers is unclear. The field is already crowded with formidable competitors and the product will not generate revenue for the foreseeable future. In light of these considerations, many community and regional bankers may decide to place consumer mobile P2P lower on their lists of investment priorities.

Information on the payments investment priorities of banks can be found in the 2017 Payments Strategy Survey by the American Bankers Association and Capital Performance Group. Contact Claude Hanley for more information.



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