What 4 Wildly Optimistic Visions of P2P Tell Us About the Future of Moving Money

This article was adapted with permission from the original.

Most financial services executives that you speak are quite rational.

Sometimes coldly so. I remember talking to a chief lending officer at a small regional bank operating out of the Southeastern U.S. about his need to mitigate the geographic concentration risk of his bank’s loan book and later realizing what he was talking about was hedging against the risk of a bunch of his customers having their homes destroyed by a hurricane.

Now, to be clear, this is generally a good mindset for these folks to have. This is what financial services leaders are supposed to do—dispassionately evaluate risk and return and allocate capital accordingly. And, for the most part, it is what they do.

Except when it comes to person-to-person payments.

When you talk to financial services folks about P2P payments, rationality quickly gets tossed overboard. They start saying things like, “We can’t let ourselves be disrupted by fintech,” and “My granddaughter and all her friends use Venmo. We need to offer P2P payments, or our customers will leave!” 

There are no presentations of business cases or data-driven discussions about retention and customer acquisition costs and price sensitivity. It’s just, “We have to do this immediately, or we’ll go out of business.”

It’s irrational. Jarringly irrational.

I think it’s worth trying to unpack some of the visions that different financial services companies have of P2P payments and what those visions tell us about the future of money movement. So, let’s jump through four wildly optimistic visions for P2P payments and try to pick out what is real and what is delusional.

P2P Vision 1: Customer Retention!

The Vision: Stem the tide of customer attrition, especially Gen Z and Millennial customers, by offering modern P2P payments functionality (for free!) that can compete with the likes of Venmo and Cash App

The Kernel of Truth: This vision has been the force driving the growth of Zelle—a P2P payments network for banks launched by Early Warning Services in 2017 that has grown to 2,400 financial institution members (from 766 in early 2020).

Most of the growth has been fueled by community banks and credit unions (more than 90% of signed financial institutions on the Zelle network have less than $10 billion in assets), which have proven very receptive to EWS’s pitch, which does have some supporting evidence: “If you want to compete with big banks and fintech companies, you need a modern P2P payments solution.”

Modern P2P payments tools have proven to be extraordinarily popular. By 2019 (just 10 years after the launch of Venmo, one of the first modern P2P payments tools), 40% of the P2P payments made by U.S. consumers were made electronically using a payment app.

Impressive, but not terribly surprising when considering the costs of previous money movement options. For example, when Walmart introduced a domestic money transfer service through its stores in 2014, it was seen as a huge improvement over the status quo (Western Union and MoneyGram). Today, Walmart’s “low prices” of $4.50 or $9.50 for transfers of various amounts look scandalous.

Since 2019, usage of P2P payments apps has surged, thanks to consumers’ increasing usage of digital services during the COVID-19 pandemic. A recent survey from Cornerstone Advisors found that a little more than half (56%) of P2P payments users said that, since March 2020, they send money using digital payments tools more frequently than they did before the pandemic and a third of P2P users report sending larger amounts of money using P2P payments tools since the start of the pandemic, in contrast to the 23% who said they’re sending smaller amounts of money.

Roughly three quarters of survey respondents said that if their primary checking account provider stopped offering P2P payments capabilities, they would act. What would they do? The most popular actions were using an account from a different bank more frequently [30%], closing their account [24%] and opening an account with a different institution [23%].

The Delusion: There’s no arguing that Zelle is thriving. EWS has been enormously successful in selling the vision of Customer Retention! to community banks and credit unions, and the expansion of Zelle’s network has driven a corresponding increase in payment transaction volume (1.8 billion payments made in 2021, a 49% increase from 2020) and, even more notably, in total payment volume ($490 billion in 2021, up 59% from 2020).

I’ll now admit I don’t really buy the argument that EWS has been using to sign financial institutions up for the Zelle Network.

Consumers like and use P2P payments tools, yes. But would a community bank or credit union really be at a greater risk of losing customers if they didn’t offer Zelle (or something like it)? Consumers are already accustomed to using a variety of different apps and services to manage their finances. Indeed, the Cornerstone Advisors survey referenced above found that this is exactly what many consumers do when it comes to P2P payments.

If a consumer absolutely loved their community bank or credit union, would the lack of Zelle really cause them to leave? Wouldn’t they just keep using that FI’s products and just also start using Venmo or Cash App? Flipping that around, if they hated their FI, would the addition of Zelle magically prevent that consumer’s eyes from wandering?

It’s important to ask these questions because Zelle isn’t free. I had a conversation with a community bank executive who was paying 90 cents per transaction, didn’t charge a fee for the real-time transactions and was getting hammered by fraud.

Me: So … why are you doing this?

Community Bank Executive: Well, we just have to.

Me: No! No, you don’t!

P2P Vision 2: Faster Payments!

The Vision: Differentiate our P2P payments tool by enabling instant money movement by default

The Kernel of Truth: The growth of Zelle, the only mainstream P2P payments app that moves money instantly by default, supports this vision.

One of the big reasons that Zelle is outpacing Venmo and Cash App in annual payment volume is that the average transaction size for Zelle is significantly higher (nearly $300 compared to roughly $60 for Venmo).

A big reason is that many of the larger P2P payments that consumers make like paying rent or for a service like landscaping are ones where the payer wants to make the payment in a timely manner. Using a P2P payments tool that, by default, moves money instantly holds obvious appeal for these use cases. Indeed, data from EWS confirms that these consumer-to-small business use cases were the fastest-growing use cases between 2020 and 2021.

The Delusion: Consumers, independent contractors and small-business owners all benefit from faster payments. This is true.

Fraudsters also benefit.

An elemental law of financial services is that any technology that delivers more convenience to consumers will, inescapably, also attract more fraudsters. This was the case when Venmo (and then Cash App) digitized P2P payments. And it has certainly been the case with the real-time payments courtesy of Zelle.  

EWS says fraud and scams impact only a tiny slice of transactions (less than 0.1%), but my conversations with FI executives that have implemented Zelle suggest that it is much higher (at least for mid-size and community banks). In the Cornerstone Advisors survey, one in four P2P payments users said they have been victims of fraud or scams involving digital payments.

The problem has gotten so bad and attracted so much attention from consumer advocates, regulators, and legislators that EWS is having discussions with JPMorgan Chase, Wells Fargo and Bank of America about creating a playbook for refunding customers and each other for illegitimate transfers, according to people familiar with the matter. The idea is to boost security and consumer trust in Zelle.

The refund plan would be a huge concession for the seven large banks that own EWS, which have argued that Reg E consumer protections on unauthorized transactions do not apply to the vast majority of P2P payment scams.

And here’s the thing—none of this was really necessary!

Most P2P payment use cases don’t require the money to actually move instantly. All that’s required is instantaneous acknowledgment that a payment has been initiated. You don’t need the $20 that Bill owes you for lunch in your account at this moment; you just need Bill to satisfy his social obligation to you. This was Venmo’s most important innovation: overlaying standard one- to three-day ACH transfers with a real-time social network for money movement. For the few cases where the money actually does need to move right now, there are other rails (like the card networks) for Venmo to leverage while passing along a reasonable fee to the consumer.

P2P Vision 3: Super App!

The Vision: Leverage P2P payments as one of the initial building blocks in the development of a super app

The Kernel of Truth: Super apps—enclosed digital ecosystems that enable users to accomplish a wide range of financial and non-financial tasks—do usually revolve around some type of P2P messaging and payments functionality. WeChat and Alipay in China are the best-known examples.

P2P payments functionality is central to the operation of a super app and can be a cost-effective way to acquire an initial base of users. Cash App provides a good case study.

The Delusion: Super apps are essentially just app aggregators; they combine multiple apps into one, creating a more streamlined and convenient experience.

Every tech company in the U.S. wants to offer a super app. The problem is that none of those companies wants to participate in another company’s super app.

Many of the companies that have assembled the core messaging and money movement pieces necessary to execute a super app strategy (like PayPal; Cash App; Block, formerly Square; and Twitter (which doesn’t have the money movement pieces yet, but is working on it).

And yet none of them have gotten anywhere close to reaching the heights reached by Alipay and WeChat.

It’s really hard!

Perhaps the best case in this arena is Apple, which has everything you’d want when building out a super app—a huge base of captive users, complete control over its ecosystem, deeply integrated identity, messaging, and financial services capabilities, and a community of third-party app developers that it has managed to keep under its thumb. Apple has offered P2P payments as a part of Apple Cash for more than five years. According to Cornerstone Advisors, only 13% of consumers use Apple to send money to other people or businesses.

If Apple can’t unlock a super app with P2P payments, it seems highly unlikely that any tech company in the U.S. will be able to.   

P2P Vision 4: Universal Money Movement! 

The Vision: Enable every adult to send and receive money anytime, anywhere in the world, instantly and for free

The Kernel of Truth: This is the P2P-payments-as-a-public-utility vision, the one that causes Visa and Mastercard executives to wake up in terror in the middle of the night. It has some grounding in reality, especially in large, rapidly digitizing markets outside the U.S.

Let’s quickly run through two examples.

The first is the Unified Payments Interface in India. Launched in 2016, UPI allows consumers to set up a virtual payment address (kind of like an email address, but for money movement) and use it (via smartphone apps or offline via India’s digital ID system) to instantly make and receive payments, for free, 24/7/365.

UPI serves several purposes, including enabling more efficient disbursement of government benefits, accelerating the migration away from cash, and helping unbanked and underbanked consumers. It has been an unqualified success. In April 2022, nearly 5.6 billion transactions were carried out through UPI, up from roughly 300 million transactions in August 2018.

The second example is Brazil’s Pix, the fastest-growing national real-time payments system in the world, which is currently processing 2x more real-time transactions per capita than India.

Launched in November 2020 and developed by Brazil’s central bank (Banco Central Do Brasil), the PIX network provides free and instant settlement of digital money transfers within two accounts registered with participant institutions. Less than two years since implementation, adoption has exceeded expectations: PIX processes the vast majority of B2B payments, and over 75% of the adult population has either sent or received a payment via PIX.

While initial adoption was mostly driven by the replacement of bank wires and cash payments in a B2B/P2P context, new features added in 2021 (e.g., payment in installments, scheduled payments, cash back, merchant initiation) and growing merchant adoption have led to an accelerating use for P2B transactions. PIX is now processing about $250 billion in annualized P2B payments, equivalent to more than 40% of card volume and 20% of total consumer spend.

That last point is also worth pausing on for a moment. Pix hasn’t just replaced cash as the primary mechanism for P2P payments; it has also surpassed credit cards and debit cards as the primary P2B (person-to-business) payment method in Brazil, proving especially popular with small businesses.

The Delusion: So, could something like UPI or Pix ever exist in the U.S.? In theory, yes, but if we’re being realistic, probably not.

“But wait!” I hear you saying. “Isn’t the Federal Reserve doing this exact thing with FedNow?”

Sort of, but not really.

FedNow is a real-time payments system being built by the Federal Reserve. After many, many, many years in design and development, FedNow is slated to launch in late spring or early summer 2023. The service will be available for any bank in the Fed system (the settlement model will leverage participating banks’ existing master account at the Fed), and it will initially support payments up to $500,000 (although the default will likely be closer to $100,000).

FedNow is essentially a new payment rail, one that is faster and lower cost than pretty much any rail available to financial institutions today. That’s cool! It will be valuable to FIs, and some of that value will trickle down to consumers and businesses.

However, the Fed doesn’t appear interested in building a full-stack, public utility payments service like India and Brazil (and many other countries) have done. Use of FedNow will be restricted to financial institutions, but they won’t be required to utilize it. Consumer fees will be left up to the discretion of banks, and added functionality will be built by the banks and their technology partners, not the Fed.

In contrast to FedNow, UPI and Pix are vertically integrated payments solutions. They provide the rail (real-time, always-on money movement facilitated by the central bank) and the customer-facing network (most provide their own app as well as integrations with third-party apps as well as a central database of user profiles). They usually require an account with a licensed bank, but in theory wouldn’t have to, given that the central banks are the ones operating these services.

The closest we might realistically be able to get to this “Public Utility P2P Payments Service” in the U.S. is another layer of abstraction on top of the customer-facing networks. A solution built at this layer would be completely open. It wouldn’t require a customer to join a specific network to receive money from it. The customer wouldn’t need to download Venmo and Cash App and Zelle onto their smartphone. The customer would simply specify where the money was going, when it needed to be there, and how much they were willing to spend to send the money, and the service would determine and execute the optimal money movement route.

As I understand it, this is the vision for Alloy Labs’ CHUCK. It’s how Jack Henry has been talking about P2P payments since its acquisition of Payrailz. And it’s somewhat similar to the developer-oriented vision that Simon Taylor outlined for Twitter’s hypothetical payments service in an excellent essay a few months ago:

What are the odds of success of building out an open payments solution at this “network of networks” level? I don’t know. I would imagine that some level of cooperation would be required from all the individual networks, which might be difficult given the “No, we want to be the super app!” mentality that I described above. But who knows! Maybe this is where we will eventually end up once Zelle and the P2P digital wallet providers get tired of fighting with each other for market share for a product that doesn’t make money.

Alex Johnson is the creator of the Fintech Takes newsletter.