Imagine a world with real-time payments, every day of the year, making the concept of a bank day obsolete. A world where payment solutions interoperate with each other, and payment processing services give us peace of mind in paying who we owe across all our personal and household transactions.
Consumer social behavior and expectations are bringing that vision closer to reality with a growing list of person-to-person (P2P) payment options that create new roles and opportunities for your bank.
In the US, we’ve grown comfortable paying our bills on smartphones and online. But P2P payments have been slower to adopt those practices. A 2017 Aite Group study found cash and checks – centuries-old payment methods – remained the most common form of payments between two people.
Now, as people become more comfortable doing direct payments, we’re seeing an increased appetite for direct and electronic payment options to individuals, not just businesses, throughout our everyday lives.
The financial industry has talked for some time about brokered P2P payments between unfamiliar parties – whether on a phone, tablet, wearable or other means.A Federal Reserve Payments Study, 2016: Recent Developments in Consumer and Business Payment Choices, showed person-to-person payments doubled in use from 2012-2015 and continue to grow at an accelerating rate.
Increasingly, people want to use direct means to pay individuals they owe. The person might be in your social circles, like when you lose a friendly bet, or they could be someone you don’t know (think garage sale or pop-up store).
PayPal got things started back in the late ’90s, but we needed the market to add functionality to a mobile device for more direct payments to really grab hold. Now we have an ever-growing number of ways to settle our personal payments, from PayPal to more recent online and social payment methods including Venmo, Dwolla, Square Cash, Circle, Facebook Messenger, Google, and Snapcash.
Interoperability is one of several factors that slow adoption of social payment options. People tend to use their favorite payment app, but many apps don’t connect with each other.
Let’s say you and your friends planned a big surprise party, each handling different expenses for the event. Now you need to settle up with each other. You might use PayPal to pay one friend, while another buddy sends you a message across Dwolla to settle what he owes you. But first you need to register with Dwolla to receive payment. The more people and brands of P2P payment methods involved, the more complex the process becomes.
Clearly, there’s a need for interoperability in the payments schemes so you and your friends can transfer among different social payment brands for real-time payments processing. Much like we all use different email services, but we can still message each other.
Additional variations add time and expense to P2P payments and a degree of pre-planning or post-payment administration. Some payment systems are near real-time while others only seem that way. Any delay in moving the funds increases risks to the two parties, allowing time for bad actors to execute fraudulent schemes during the lag between purchase and payment.
Many user agreements state you should use their payment system only with people you know – which removes these options from garage sales, street sales and other times when you don’t know the person and don’t have cash on hand.
Banks historically have played a trusted role in identifying account holders and brokering payments. But with bill-pay services and social payments, we see people wanting to pay “directly” to those they owe. In such transactions, the payer feels as though they are directly paying to the owed entity since they’re not asking the bank to make the payment.
Consumers’ growing “I-want- it-now” attitude is driving the expectation for immediate payments and secure transactions. Banks not only have a regulated role in these transactions, they also can play a more strategic and prominent role in meeting those expectations and establish stronger customer relationships.
Emerging bank-backed options, such as Popmoney or Zelle, and new capabilities just demonstrated by The ClearingHouse, are addressing the issues of interoperability and lag in P2P payments, with the added convenience of mobile banking. These solutions set-up instructions for a bank or credit union to execute the transaction, potentially in real time. The network of banks with the option of a direct account with Zelle or Popmoney continues to expand.
An important benefit to the payer and payee is the banking system’s proven ability to identify participants and move funds between two parties unknown to each other, as well as to move funds at optimal times.
Nearly 6 out of 10 Americans don’t have enough cash to cover a $500 unexpected expense, according to a recent Bankrate survey. With these cash flow challenges, the certainty that your payments are being made – whether in real time, on a future specified date or even a specified day and time – is becoming a service worth paying for.
The convenience fees people are willing to pay when using or tracking credit card payments are evidence of this growing acceptance to pay for service value.
The US Federal Reserve System recently released the final report of “The U.S. Path to Faster Payments,” culminating the work of more than 300 diverse industry stakeholders and experts. The report lays out several years of consensus building on the challenges, opportunities and recommendations for the industry to pursue faster, even real-time, payments in the US.
The real value of such payment systems is through open system integrations, integrations directly between and among accounts and accounting systems, and continuously clearing transactions.
Understanding the need to expedite payments, the financial industry started offering smaller batch windows within the same processing day, with Same-Day Automated Clearing House (ACH) payment transfer system and other methods.
Now people are asking for direct payments, instantly, to accelerate commerce and reduce risk associated with the dreaded payment lag time. Innovation is following with offerings that price in the risk and help move payments increasingly faster.
Although the use of checks continues to decline – from 19.3 checks per household per month in 2000 to 7.1 in 2015, according to the 2016 Federal Reserve Payments Study – the US still writes more than 2.5 billion checks per year.
Consider that a great opportunity for payment alternatives to continue to grow in terms of acceptance and use.
The US is experiencing faster payment-processing time, along with growing interest in making payment solutions work with each other. People won’t have to worry about maintaining dozens of payment methods simply to avoid using cash and checks to pay each other.
Interoperable payments methods, where brands can link to each other and compete instead on experience and other service factors, will accelerate the decline in cash and check usage for the social consumer.
Financial institutions that stop thinking about digitizing old ways of banking, and instead offer and market new services that today’s consumers value, will play a more strategic role.
What do you think? With this changing landscape, how do banks need to think and act differently?