What’s Driving the Renewed Interest in P2P? It’s Not Always Payments

Navigator Edition: May 2015
By: Jeff Crawford and Ben Brown

Electronic person-to-person (P2P) payments have been on a roller coaster of interest over the last decade.  PayPal launched the first successful, widespread service in the late 1990s and has enjoyed a dominant position ever since.  Various players tried to attack PayPal by building “mobile-first” P2P solutions in the 2000s, but none succeeded in gaining traction.  The promise of a fast, easy, and safe solution has remained elusive and consumer adoption, while meaningful, has not matched industry expectations.  That could change, however, with the current wave of P2P solutions.

As smartphones become near-ubiquitous and consumers increasingly rely on mobile devices for financial services of all types, we are seeing renewed interest in P2P payments.  Over the last few years, several new or revamped services have been launched by a diverse set of players, from financial institutions to Internet platforms (such as Google and Facebook) to startups (like Square and Venmo), each hoping to finally make P2P the “killer app” that everyone adopts.

Figure 1: P2P Service Provider Overview

Figure-1_-P2P-Service-Provider-Overview1For individuals. 2Refers to bank account transfers. 3For Wallet Balance transfers, “week” refers to 5 day period. 4First transfer may take longer.
Source: First Annapolis Consulting research and observations.

Given the diversity of these solution providers, it is important to understand not only the services they provide, but also the providers’ motivations for entering this space.  We briefly discuss both topics below.

The traditional model for a P2P service was to get consumers to load funds to a stored value account and then enable instant “on-us” transfers between users in the network.  Google, PayPal, Dwolla, and Venmo are all constructed this way – with prepaid cards or pooled accounts at their core.  This has the advantage of facilitating near-instant transfers as long as the sender has funds stored in account and both parties are members of the network.

Popmoney and clearXchange seek to work with banks by adding a directory – an easier way to identify people than their account number – on top of the ubiquitous ACH system to enable bank-to-bank transfers.  This approach solves the adoption hurdle of asking people to load money, but banks and consumers still have to sign up, so neither system is universal.  As in traditional P2P models, the services are only as good as the size of their network.  This is less of a challenge for the likes of clearXchange (whose bank owners have more than 100 million online banking customers) or Google (with 500 million active Gmail users worldwide), but for start-ups, building a new network is daunting.

The newest offerings from Square and Facebook are using a different approach to address this issue.  These services enable money transfers from debit card to debit card using a new type of transaction – the Original Credit Transaction – via Visa Direct, MasterCard MoneySend, and similar services.  These services piggyback on the card network rails and therefore benefit from their ubiquity.

Another interesting evolution has been the pricing of P2P services.  Most of the “pure play” P2P services launched in the 2000s to compete with PayPal tried to charge a fee, and nearly all failed.  Services like Popmoney, Dwolla, and Venmo are mostly free to consumers, with fees for marginal transactions like funding transactions with credit cards, faster payments, or high-value payments.  And the newest services are completely free:  Square Cash and Facebook Messenger do not charge any fees.  This does not mean that these are free transactions for the providers.  There is, in fact, a non-trivial cost to providers in both processing fees and fraud risk that is not currently being passed on to consumers.  This dynamic begs the question:  what is the value that service providers are trying to provide to consumers, and what are their motivations for offering these services?

For “pure play” payment specialists like PayPal, clearXchange, and Dwolla, it may be primarily a matter of scale:  getting more customers to use their service more often builds their network and value.  For others, the answer may be less obvious.  Google and Facebook are hugely successful businesses that, on the face of it, have very little to do with payments.  These companies are Internet platforms that make money from advertising, and, for platforms like these, payments are likely part of a broader commerce strategy.  Google and Facebook may be contemplating how to not only provide a way to find goods but also buy them right on their sites using cards on file, thereby making their advertisements more valuable.

On balance, for consumers, these recent product launches create faster, easier, more convenient ways to send and receive money.  Millennials, in particular, are showing interest in the socially-integrated experiences of Venmo, Snapcash, and Facebook Messenger.  Services that capture the attention of Millennials could be a part of their financial lives for a long time to come.  For the industry, though, the newest P2P offerings may represent a threat to existing products and business models.  It is hard to compete with providers who give away a service.

In any case, it is clear that ubiquity, speed, and low cost are value propositions that will continue to drive consumer adoption of P2P payments.  As the newer launches suggest, P2P may be a precursor to broader ambitions, so it is a space that warrants close attention.

For more information, please contact Jeff Crawford, Manager,, specializing in Debit and Prepaid; or Ben Brown, Senior Consultant,, specializing in Credit Card Issuing and Payments Innovation.

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