Mobile and online person-to-person (P2P) payments are increasing in popularity across the United States. In 2019, half of consumers adopted at least one online payment method such as PayPal, Venmo or Zelle, and the pandemic may have further boosted (Off-site) contactless payments. Younger consumers appear to be leading the movement. For instance, 62 percent of millennials reportedly use (Off-site) a mobile P2P payment method, and their adoption often spurs their parents and grandparents to get onboard with these technologies.
When consumers make mobile P2P payments, their financial institutions1 aren’t always the ones that enable them to execute these transactions. That could change with instant payments, which could better position financial institutions to offer mobile/online P2P payment options to their customers. Read on for a refresher on mobile/online P2P payments, how they’re currently executed and how instant payments might change financial institutions’ role in these payments, along with some tips on how to get onboard.
A person-to-person (P2P) transaction involves two people transferring funds between each other, such as someone repaying a friend for a concert ticket. Historically, consumers have used cash to complete the majority of these transactions, but in 2019, cash was used (Off-site) in only four out of ten P2P transactions. Notably, another four in ten transactions occurred via online/electronic means. This article focuses on this noteworthy, and likely increasing, shift in how consumers make person-to-person payments, and will use ‘P2P’ hereafter to refer to mobile/online forms only.
Most card and online P2P payments occur on one of several online platforms where consumers typically use an email or phone number to identify the intended recipient and initiate a payment transaction. For example, consumers can use mobile payment apps like Paypal’s Venmo and Square’s Cash App. Some digital wallets also support P2P payments, like Apple Pay’s Apple Cash. In addition, Early Warning Services, owned by a consortium of banks, operates the interbank Zelle Network®, which allows customers of the participating banks to complete online and mobile P2P transactions.
Many P2P platforms may leave financial institutions out of the equation if the transaction occurs on a nonbank closed-loop network, which means the payer and payee conduct the transaction on accounts with the single central provider, like PayPal or Venmo. The central provider might use an ACH debit or credit card transaction “behind the scenes” to pull funds from a financial institution account to make the payment. However, the payer could also send funds to the payee directly from funds stored in their online account with the central provider. In this scenario, the transaction occurs entirely on the closed-loop network, which disintermediates financial institutions altogether.
Instant payments introduce the opportunity for financial institutions to reimagine their involvement with P2P transactions. By using instant payment rails, financial institutions can enable their customers to send instant P2P payments via their mobile banking app or website. In this scenario, financial institutions are at the center of the transaction flow: They assist the payer to initiate the payment; facilitate clearing and settlement between the payer and the payee’s financial institutions; and credit the payee’s account with funds to use immediately. Further, this all occurs in a matter of a few seconds.
Additional properties of instant payments that could help transform the P2P space include:
In addition to The Clearing House’s RTP® Network, the Federal Reserve Banks’ forthcoming FedNowSM Service2 will support a variety of instant payment transactions (including P2P) in which a sending financial institution includes the routing transit number (RTN) and account number of the recipient in the payment message. For a future release, the Federal Reserve is considering an enhanced P2P service including an alias-based directory that would allow financial institutions and their customers to send P2P payments using information like a payee’s email or phone number instead.
Financial institutions that are interested in offering a P2P service to customers can begin work now to prepare for supporting instant payments. A key first step is to identify how instant payments could benefit their organization. They’ll also want to review their systems and processes to prepare for the logistical and operational implications of 24/7/365 payments. Finally, financial institutions can ask their vendors and service providers about plans for enabling instant payments, along with requirements and any guidance that their vendors can provide.
Financial institutions can also talk with their customers. Specifically, they’ll want to understand customer needs and foster customer interest in P2P payments. Many customers may already use nonbank alternatives to meet their needs, so it will be important for financial institution customers to learn about the benefits associated with instant P2P options that settle via their financial institution account, including:
1Technically, the term financial institution could apply to a wide array of institutions in the financial services industry, but for the purposes of this article, financial institution is specifically referring to depository financial institutions, including commercial banks, savings banks and credit unions.
2FedNow is a service mark of the Federal Reserve Banks. Other service marks noted in this article belong to the organizations indicated.