The Future of P2P Payments
USE ARROW KEYS OR SWIPE
THE FUTURE OF P2P PAYMENTS
At the turn of the 21st century, solutions like SMART Money and later GCASH in the Philippines rode a wave of SMS and text adoption to enter the remittance market. These geographically localized mobile money solutions simplified the process by which peer-to-peer (P2P) payments, both cross-border and domestic, could be made. In 2002, eBay acquired PayPal to facilitate payments between buyers and sellers on its marketplace. And in 2007, Vodafone’s M-Pesa service launched in Kenya and quickly expanded to what is now 24 million users—almost 50% of the country’s population.* The rapid consumer adoption of these mobile money schemes served as a rallying cry for banks, non-bank financial service providers, digital platforms, and mobile network operators (MNOs) to enter the P2P space. Smart devices and cellular data are increasingly available. New use cases have grown consumer demand both as senders and recipients of these financial transactions. New service providers have both widened the tent for consumers to exchange money every day and steepened the trajectory of P2P volume growth. The result is an environment where a growing share of the global population can easily accept and receive electronic payments; where providing P2P payment services is increasingly turnkey; and where the delivery of these payment services becomes an attractive pathway to other forms of consumer engagement.
P2P payments volume grew significantly in 2019
2018 total volume
Volume in first three quarters of 2019
The proliferation of mobile, connected devices (particularly smartphones) and growing availability of internet access are enabling the growth of P2P. There are well over 7.7 billion mobile device in use today.* Between 2008 and 2016, the average price of a smartphone fell more than 20 percent. As ownership continues to rise globally, more individuals will gain access to P2P services.** Emerging markets will continue to drive the expansion of mobile and internet access in the coming years as evidenced by a recent history of high growth rates. Between 2015 and 2018, global internet access in emerging economies surged from 40% to 60% driven by young adults in developing economies who are increasingly using smartphones. Between 2013 and 2018 for example, the percent of consumers aged 18-34 with a smartphone in India, Nigeria, Kenya and South Africa grew by an average of 27%. In Brazil, growth in smartphone ownership among young adults exceeded 60% over the same period. As today’s youth comes of age, we’ll see an entire generation of digitally savvy new consumers demanding digital services such as P2P. Similarly, banks and payment networks have vastly expanded the number of payment accounts from which consumers can transact with one another. Over the past few years, billions of consumer debit accounts have been connected as sending and receiving endpoints for P2P transactions. The result is a nearly ubiquitous ability for bank customers to send and receive money across any licensed digital P2P platform.
Around the globe, the growth of P2P is being driven by three underlying factors. These factors include foundational elements such as the near-ubiquity of connected devices and P2P-enabled financial accounts. They also include market forces such as the increased demand for P2P services.
of the Swedish population is reached by the country’s SWISH service—an account-to-account service created by the largest banks in Sweden***
SWISH transactions grew by 30% between 2018 and 2019 with volumes exceeding $20 billion***
*** RealWire, European card growth slows to 2.7% as digital payments start to bite, February 2020.
* GSMA, GSMA Intelligence Tracker, 2017. ** Pew Research, Smartphone ownership is growing rapidly around the world, but not always equally, 2019.
INCREASING AVAILABILITY AND USABILITY OF P2P SERVICES
P2P payment services launched by established digital marketplaces (e.g. Alibaba), device manufacturers (e.g. Apple, Samsung, Google) and social platform providers (e.g. Facebook, Tencent) are taking advantage of their existing user bases to quickly scale the size of these new payment networks. In launching P2P services, digital platforms are seeking to drive customer engagement with the site/app through yet another dimension - payments. In doing so, digital platforms hope to drive increased utilization of other services offered through their apps or devices by existing users, and acquire new customers due to the inherent viral effect of P2P. At the same time, the P2P space is also growing thanks to the increasingly intuitive and user-friendly experiences delivered by these P2P apps. By simplifying tasks such as identifying counterparties for transactions from the consumer’s contacts or embedding P2P services into chat apps, sending money has become as simple as sending a text or instant message. On top of this, sound effects, emojis and other tricks of the mobile app trade are being employed to acquire and maintain consumer engagement.
of P2P users in the U.S. say it is more convenient than cash/check
say online and mobile P2P gives them added control
Lastly, demand for digital P2P services continues to rise. Consistent with the overall shift from paper to digital payments, consumers are increasingly turning away from cash and check-based P2P transfers. Among U.S. users of P2P services, 45% say that online and mobile P2P is more convenient than cash or checks, while 30% say it gives them added control.* Consumers are also increasingly using P2P platforms for use cases beyond traditional friend and family transfers. For example, demand for P2P among consumers doing freelance work is rising. A large share of the future labor force (nearly 200 million workers in the next decade and by some estimates over 50% of U.S. jobs by 2027**) will be freelance workers who, instead of consistent salaries, will receive ad hoc payments for intermittent work. For independent freelancers, P2P solutions may prove to be the preferred method of payment, either because they are believed to be more fit-for-purpose or because of a perceived lack of alternatives. If these freelance workers do not qualify for traditional merchant accounts, or are unaware of them because they fall outside the definition of an acquirers’ target customer, they will make use of more readily available and likely familiar solutions. Similarly, consumers are using P2P platforms for digital tipping. It is becoming increasingly common to see QR codes enabling P2P transactions replacing the traditional tip jar. This behavior eliminates the potential for theft from the recipient and also makes it easier for consumers to provide a tip when cash is not readily available. Commercial and government promotion of P2P is also helping fuel consumer demand. For example, gig platforms such as Uber and Lyft use P2P technology to provide on-demand disbursements of earnings to their drivers as a fee-based service. Insurance companies and NGOs are using P2P solutions to facilitate payments to consumer accounts in cases of natural disasters and other emergencies. And countries such as Thailand, India and Australia are promoting P2P as an initial use case to encourage adoption of national payment schemes.
Source: Puey Unophakorn Institute for Economic Research: The Journey to Less-Cash Society: Thailand’s Payment System at a Crossroads
ThailaND - Digital paymenT oveRview (yeaR-end 2018)
ThailaND - General Overview
Registration Numbers 46.5 Million
Daily Transaction Volume 4.5 Million
Average Transaction Value 5,000 baht
Transaction Volume Growth 20% per month
Population in Thailand 69 Million
E-commerce Market Value $26.2 Billion
Internet Penetration 53%
Bank Account Penetration 81%
CASE IN POINT
PromptPay is a government-led payments modernization program to support financial inclusion and the roll-out of electronic payments in Thailand. It is operated by National ITMX Ltd, a national payments service provider in Thailand. PromptPay runs on Mastercard’s Instant Payment Service (IPS) and, combined with our Multi Proxy Service, offers residents and businesses in Thailand access to real-time payments via mobile, online and ATM channels without the need to know or share bank account details. Mastercard designed, developed and implemented the solution in conjunction with National ITMX. The solution included training, implementation support, test planning and support, and we are providing ongoing enhancement of the software via planned releases each year. Since going live in January 2017, PromptPay has contributed significantly to the 83% rise in digital payments between 2016 and 2018.
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As P2P grows in both availability and consumer awareness, demand for these low-cost, friction-lite payment options is expanding beyond the initially intended use cases. On the small merchant side, this is already happening to a degree. M-Pesa offers payment services for businesses including bill pay and commercial payments. Apple Cash accounts used to send money between phones are funded in part by the rewards earned by consumers using an Apple Card. Venmo began supporting consumer-to-merchant payments at select online and brick-and-mortar retailers in 2017. Over time, the traditional lines separating consumers, businesses and individuals will continue to blur. As providers of P2P solutions grow to meet the needs of these new use cases and users, three opportunities may deserve further attention: enabling interoperability across platforms, sustaining profitability and mitigating fraud.
Today, P2P schemes largely exist as a set of walled gardens. Transactions must be originated and received on the same platform. From a strategic standpoint, this is not unexpected; digital ecosystems are incentivized to keep consumers on their platforms and have a history of pursuing—at least initially—closed-loop platforms. However, these fragmented ecosystems introduce added friction for both consumers and service providers resulting in higher costs for all parties. Senders and recipients must identify and agree on a shared platform. For platform providers, a lack of interconnectivity can increase the cost of customer acquisition and retention, and—given enough uncertainty—depress overall industry adoption. In at least one example, though, financial service providers are launching services to integrate disparate networks. In 2018, money transfer service SimbaPay and Family Bank Limited launched a service in Kenya allowing M-Pesa users to transfer money directly with WeChat users. In response to growing Chinese expansion into the Kenyan economy, the service enables Kenyan importers to more cost- effectively pay Chinese producers.* Stitching networks together in this manner not only increases the overall size of the network but can strategically unlock pools of volume and subsequent revenue opportunities.
U.S. mobile P2P volume is projected to triple to over $500 billion by 2024*
Mobile P2P is defined as any peer-to-peer payment or transfer conducted using a mobile device, including both smartphones and basic feature phones.* Business Insider Intelligence, The Payments Ecosystem, 2019.
* Quartz Africa, Kenya’s M-Pesa mobile money service now works with China’s WeChat Pay, 2018.
American Banker recently reported that only 11% of consumers think banks should be able to charge for basic P2P services.* Not surprisingly, many (though not all) P2P transactions are provided without any transaction fees for consumers. For banks and other issuers of financial products, the benefits from P2P are generally found in the subsequent consumer spending and account services that follow a transfer. Additionally, by enabling card portfolios and accounts to receive P2P funds, institutions increase the relevancy of their products across multiple digital platforms. In this way, P2P acts as the tip of the spear to both bringing in new and profitable digital customers and driving increased revenue from existing customers. It should be noted that providers including Venmo have been able to capture fees associated with certain actions such as funding payments via card. While this does generate substantial revenue (to the tune of $300 million**), fee revenue is only one path to profitability. Instead, digital providers often follow a parallel path to banks, where consumer engagement is monetized through other platform services. Instead of relying on consumers to pay for transactions, non-bank providers can (and do) use P2P to further drive engagement with other services offered on their digital platforms. In this way, P2P is similar to other tools (games, social feeds, messaging, etc.) used by digital ecosystems to attract and sustain consumer engagement. Case in point: During WeChat’s six-day Red Envelope promotion, 760 million users (nearly 80% of the monthly user base) sent a P2P payment. More importantly, these same users spent more than 17.5 billion minutes on audio and video content and exchanged 230 billion messages.*** Unlike most other “free” services provided by digital ecosystems, P2P payments require consumers to link a financial account. This requirement lowers the future acquisition costs of new payment solutions within the platform. It also provides a new source of consumer data that, responsibly utilized, could provide value to both the user and the platform.
* American Banker, How much does P2P drive engagement for banks?, 2019. ** CNBC, Venmo has 40 million users, PayPal reveals for first time, 2019. *** ZDNet, WeChat red packet senders total 768M over Chinese New Year, 2018.
As with any payment system, there is always an opportunity to take steps to mitigate fraud and misuse—intentional or otherwise. Failure to do so will lead to decreased enrollment and transaction volumes, especially given the number of providers in the market and the relatively low switching cost to consumers. Providers therefore must continue to take steps to mitigate fraud through technical and operational solutions before, during and after the transaction. Because P2P accounts may ultimately be linked to a consumer’s demand deposit or current account, losses from fraud can be highly damaging to the consumer and difficult to recover—at least in the short run. Last year, several instances of fraud were reported by users of Zelle that appeared to be the result of a successful phishing attack. When fraud is detected, it is imperative that P2P providers have mechanisms to recall funds from the perpetrator and restore consumer trust in the solution. In addition to actual fraud, the ease with which P2P payments can be made increases the chance of mistakenly sending funds to the wrong person. To combat this, companies such as Venmo are adding extra steps to the send process to confirm the identity of the intended recipient. While these speed bumps slow down the process, they ultimately provide greater trust to users of P2P solutions.
There is no question that P2P will be a large facet of the future of payments. The growth of P2P transactions over the last decade will only accelerate in the years to come, both as new entrants continue to invest in solutions and as bank-led services expand in popularity. In addition to a continued focus on transaction speed and ancillary services, investments in interoperability, new revenue models and fraud mitigation will continue to move the industry forward in a responsible and beneficial way for all parties. Like a flywheel in motion, the increasing ease with which consumers can send money using P2P will almost certainly contribute to even more usage. This will create opportunity for stakeholders across the payments ecosystem. It will also reveal new questions to be considered. Will P2P solutions expand to cover use cases outside of payments, for example, sharing medical records with a new doctor? What new sources of fraud may emerge, and how can we defend against them? What consumer and industry-wide education will be required as adoption and utilization grows? The growth of P2P is moving the market forward in new and not wholly anticipated directions. The next few years will offer opportunities for innovators and incumbents alike. Whether it is existing providers looking to grow share or new entrants looking to gain a foothold, the future history of payments will be written today.
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