The emergence of new technology solutions in the past few years has affected almost every aspect of the financial sector, but one area where this is making a real difference is in the person-to-person (P2P) payments space, where a raft of new developments have given consumers more options than ever for sending money to their peers.
This is true in both developed and emerging markets – and in fact, the most successful P2P services so far have been those in places such as Asia and sub-Saharan Africa, where they have become an integral part of the financial landscape.
However, the innovations and use cases for P2P payments vary widely across different markets, with a wide range of methods, transfer speeds, technologies and business models in play, and they impact local markets in different ways.
A primary option
It was noted by Edgar Dunn in its 2016 Advanced Payments Report that the advent of mobile technology has been particularly key in developing markets such as Africa, due to a lack of financial infrastructure and low penetration rates for bank accounts.
More than 100 African mobile operators have launched mobile money services, such as Kenya’s M-Pesa, which has been around since 2007. As a result of this, 92 per cent of people in the country sent or received a mobile P2P payment last year.
Meanwhile, in Asia, P2P solutions are increasingly being packaged with mobile messaging apps. In China, for instance, more than 80 per cent of WeChat’s 550 million users have made a payment though the app since the feature was launched in 2014. During the 2015 Chinese New Year, WeChat users sent more than one billion virtual ‘red envelopes’ – a Chinese gift tradition – filled with money within 17 hours.
The most popular options
Edgar Dunn’s report noted that respondents to its survey “see promise” in some of the new innovations that are impacting on the P2P payments sector.
It found mobile wallets from the likes of Apple, Google and Samsung are seen as the most likely technology to win out in the P2P payments battle, with almost a quarter of professionals (24 per cent) naming these tools.
This was followed by real-time ACH systems, such as the UK’s Paym system, and social media firms such as Facebook, which both received 19 per cent. Meanwhile, 16 per cent of respondents thought Paypal or bank-owned systems such as Clear Xchange in the US would be the most popular.
Until now, new digital P2P solutions have not really take off in developed markets in the same way they have done in emerging economies, which Edgar Dunn puts down to the mature payment infrastructure and high use of electronic options such as payment cards and bank transfers.
In the US, the biggest player in the P2P market is Paypal-owned Venmo, which at the start of 2016 recorded monthly payments totalling over £1 billion. The major attraction to consumers of this service is that it’s free to use for a Venmo preloaded account, a US bank account or debit card. However, it is not an instant payment solution and as such has been known to be vulnerable to scams, such as a seller seeing a ‘funds transferred’ message and sending out goods, before the buyer cancels the transaction.
Opportunities for banks
Despite the disruption that new technology players are creating for the market, traditional banks still have an opportunity to tap into the burgeoning P2P market. One key factor in their favor is that as established brands, consumers are likely to trust them more than a new startup and believe their services will be more secure.
For instance, Edgar Dunn noted that in Sweden, a group of six of the country’s leading banks came together in 2012 to set up the Swish P2P service, leveraging their existing infrastructure. This now has 4.5 million users, in a nation with 9.5 million inhabitants.
Other similar initiatives such as Paym in the United Kingdom have also achieved moderate success, with this having been used for approximately 800,000 transactions with a total value of £42 million in 2015.
In the US, the big banks have taken note of the success of Venmo and are preparing their fightback. Developments to the ClearXchange service – soon to become ‘Early Warning’ – will see the banks come together under a consistent brand, and crucially, the next few months are set to see a big shift towards real-time payments, an area the US has been lagging in for some time.
To begin with, we can expect instant payments services to incur an additional charge, as they use the new same-day ACH clearing. It will be interesting to see which route users prefer – whether they will accept the slower processing times of Venmo in exchange for a free service, or if fee-charging real-time payments will take off. If it turns out to be the former, the banks may have to rethink their fee strategies for P2P services.