The sharing economy is one of the hallmarks of the 21st-century economy. From homes and cars to food and fashion, nearly every industry has been impacted in some way by the rise of shared goods and services. The rise of peer-to-peer (p2p) payments—driven largely by mobile platforms, financial technology startups, and millennial customers—illustrates how this transformation is taking shape in the financial services industry.
Peer-to-peer payments—money transferred electronically between two people—are now the norm. A third of all U.S. smartphone users make at least one peer-to-peer payment a month. People pay their friends for food and utilities through Venmo, for rent through Zelle, and for handmade goods through Square. However, the groundwork for these startups currently revolutionizing consumer payments was established nearly 20 years ago by a company known today as PayPal.
How Did We Get Here?
The earliest instance of peer-to-peer payment began in the late 1800s when Western Union expanded their telegraph service to include wire transfers by telegraph (referred to as “telegraphic transfer”). As technology evolved, so did the wire transfer process. Shortly after the telegraph, wire by telephone become popular. Along with the development of computers and the internet in the 1960s and 1970s came the rise of electronic fund transfer. However, all peer-to-peer payments at this time required going directly through the payer and recipient’s bank accounts. PayPal entered the scene as the first successful online payment transfer company to allow consumers to pay for goods online without going directly through their bank or credit card. PayPal laid the groundwork for the modern peer-to-peer economy when the company was acquired by eBay in 2002. The combination of PayPal and eBay allowed consumers to buy goods from other consumers without sharing any confidential banking information. And so peer-to-peer payment as we know it today was born.
Over the next 15 years, smartphones made their way into the pockets of millions of Americans. With smartphone use on the rise, companies like Venmo (now owned by PayPal) and Square entered the space with innovative technologies like mobile card swipes and social networking that built on what PayPal had previously established. Today, there are a wide variety of peer-to-peer payment companies; some are supported by banks, some process through social media platforms, and some are exclusively mobile-based.
While financial technology startups jump-started digital peer-to-peer payments, banks quickly joined the scene with their own offerings. In 2016, Chase’s QuickPay platform transferred $28 billion, compared with $17.6 billion by Venmo. While startups had a definite early mover advantage, Chase and other behemoths benefited from enhanced credibility and built-in customer bases established through their existing businesses.
Where Are We Today?
As more consumers, particularly millennials, grow increasingly comfortable trusting their mobile devices to securely complete transactions, the peer-to-peer payment market is expanding significantly. In 2016, $147 billion was transferred through digital peer-to-peer transactions (up from $100 billion in 2015).
The growth of the millennial market is one key reason for this growth, but the added flexibility of paying through mobile devices and online platforms cannot be ignored across all demographics. According to AARP, one in two boomers predicts they will start using peer-to-peer payment apps in the coming months, primarily due to the added flexibility.
The digital transaction market is growing rapidly, already making up 12% of the global peer-to-peer transaction market. While the overall transaction market is still weighted heavily toward cash transactions, the door is wide open for continued growth in the digital space. The immediate path forward for peer-to-peer transactions may be unclear, but one thing is for certain—they are not going anywhere.
Where Are We Going?
We are at a critical point in the development of consumer payments and the evolution of the financial services industry. As with other industries undergoing widespread digital transformation (e.g., retail, travel, and hospitality, etc.), financial services companies need to find a way to evolve. Financial giants will likely remain relevant thanks to their access to capital and resources for innovation, but mid-size players are at significant risk for being squeezed out of the peer-to-peer payment industry.
Companies need to view this challenge as urgent, especially when considering the attitudes of millennials. According to BBVA, 73% of millennials would be more excited about a new financial services offering from Google, Amazon, Apple, PayPal, or Square than from their own bank, and 70% of millennials believe that in five years the way we pay for things will be totally different than today.
Established financial institutions should focus on delivering a great transaction experience to keep pace with financial technology startups. Investments in facial and speech recognition offerings, faster transaction windows, and new methods of payment are just a few ways to remain relevant and fend off challenges from smaller startups with a digital-first approach.
On the other hand, peer-to-peer startups like the Cash App and Venmo need to build credibility with older generations and solidify their customer base, or else find themselves squeezed out by companies with deeper pockets. Unique offerings, valuable partnerships, and personalized solutions provide other opportunities for these companies to differentiate themselves from bank-supported services.
We must note, however, as the technology becomes more widespread and adopted, companies will have to differentiate themselves by core customer experience factors. Quality, personalization, and security assuredness are not going away. As companies look to adapt to technological changes, they must scale their core customer services alongside their innovation to ensure market acceptance once the technology has become the new normal.
What Should Companies Do?
Companies facing the threat of a changing financial landscape should consider the following recommendations to keep their growth and innovation on track:
Consider the user experience of all your customer touchpoints, from online, to mobile, to in-store. Is your experience consistent? Is it seamless? Does it match the brand identity you wish to position? Check out this article for tips on improving your overall customer experience
Explore money management tools like mobile budgeting or an improved customer portal to augment peer-to-peer payment functionality and appeal to the varied needs of millennials. Credera has helped many clients develop some of these new offerings to appeal to their millennial markets
Engage with your customers. Often times, younger generations are put off by financial institutions because they do not appear relatable or trustworthy. By engaging with your customers in-person, online, or via text, you will earn their trust as a company that understands and cares about them. Consider implementing chatbots or other communication channels to communicate with customers.
Beyond the peer-to-peer payment tools explored above, crowd-funding tools like GoFundMe and subscription platforms like Patreon promise to continue disrupting other areas of the financial services industry. As the distinctions between banks, social platforms, and startups blur in our new sharing economy, companies must focus less on who they are and more on what they provide. The winner will not be whoever has the flashier brand or the biggest customer base in 2018. Rather, the winner will be whoever can turn digital payments and money management into a clear, streamlined experience while maintaining trust and security.
Trying to figure out how to respond to the sharing economy in your industry? Working to provide an exceptional peer-to-peer payment experience? Looking to differentiate your company in today’s rapidly changing technology environment? Reach out to us at firstname.lastname@example.org to find out how we can help.