“Digital Wallets”, “P2P Payments”, and “Real-Time Payments” are buzzwords that create a confusing environment for consumers. Worse yet, consumers are faced with a wide range of options -- and most of them aren’t from their primary bank.
This is a major concern for any bank that doesn’t have a long-term strategy for their online and mobile payment services. It is estimated that the average customer interacts twice per day with his or her bank on payment-related needs, making this strategy crucial to profitable relationships with customers that go beyond simply holding deposits.
In this article, we’ll take a look at what each of these buzz words actually mean, and where the digital payments industry is headed.
Digital wallets
Historically, bank accounts, investment funds, and mattresses were popular places to store fiat money. Today, digital wallets including a “Venmo balance”, a “PayPal balance,” credits in retailer app, or a “Google Play Wallet” contribute to consumers having many more destinations for their money.
While technically, these “digital wallet” balances still reside in a bank account, a consumer cannot go to a bank and withdraw the money. They are forced to use their application, and in some cases, the only way to deplete the balance is by spending the funds or credits in approved stores. If one of these services went bankrupt and you had a large balance with them, it is not always clear or guaranteed that you would get your money back, unlike with FDIC institutions.
An early popular digital wallet, PayPal, is still one of the leaders in electronic and alternative payments. When you receive payments via PayPal, the funds don’t go directly to your bank, they go to your “PayPal Balance”. You can then transfer the funds from PayPal to your bank, but this usually takes place via an ACH deposit and is typically not a quick process. PayPal can be used on a large variety of websites online.
Starbucks’ app is a great example of a more modern, “disruptive” digital wallet. Over 10 million1 customers use Starbucks’ app to purchase a grande frap or their favorite pastry from Starbucks locations across the world. By leveraging this digital wallet, Starbucks has found a way to increase the purchasing experience by offering exclusive discounts, coupons, rewards and, most importantly, convenience to customers using the app. By tightly integrating a loyalty program with its digital wallet, customers are highly incentivised to use Starbucks’ app. Once money gets in this specific wallet, the only place to spend it is Starbucks.
P2P payments
Peer-to-Peer (P2P) payments are simply payments between two individuals, and not related to a business or business services. Imagine you’re out to dinner with a friend, and he or she pays the dinner bill. To pay them for your share, you would (in the stone ages) hand them physical cash. Today, you might use a service like Venmo (or Paypal/Snapcash/Google Wallet/Facebook Messenger Payments/SquareCash/PopMoney...you get the point). And the surprising thing is that most of these services are completely free for this type of non-business transaction for both the sender and recipient, as long as both parties are using their bank accounts (up to 2 or 3% transaction fees may apply when using a debit or credit card, however).
So why is it right now that you can’t go to your favorite coffee shop and check out with your ordinary P2P payments app? Behind the scenes, these “cutting edge” applications are largely built over the existing aging payment networks like FedACH, or the major credit card networks.
This means, when you’re sending your friend your share of the dinner bill, they can’t do anything with that money for several days until it travels across the ACH network and settles in their bank account (or the bank account of the service you’re using). Even worse, in the time between initiating the transaction and the funds settling in your friend’s account, there’s nothing stopping you from going to your bank and cancelling the pending ACH withdrawal. Depending on which app you’re using, your friend may not even get a notification that you’ve stopped the payment until they go to use the funds. This risk is why you typically don’t see consumer-to-business payments happening with P2P payment apps.
With so many options to choose from, how do consumers know which service to use? For the most part, it comes down to the apps that friends and family are using. If friends are on Venmo, it doesn’t make much sense to use SnapCash, because they’re going to need to create new accounts or at the very least provide their bank account information to this different service. But once everyone sending or receiving funds from is on the same P2P app, transferring money becomes a breeze.
Real-time payments: Not so much so in the US
Real-time payments references the actual transfer and settlement of money in real time or near-real time. While some payments apps seem to transfer funds in real-time, many do not.
Take Venmo, for example, which feels like a “Real-Time Payments” app for those that use it. All it takes is the press of a button to send or receive money, and the Venmo balances update almost immediately. What most consumers don’t realize is that Venmo is closer to writing a check than a true “real-time payment” platform. Nothing can actually be done with that balance until the transaction completes several days later.
This is why Venmo’s terms explicitly state “Personal accounts are for use in person-to-person transfers with friends and family, and other people whom you know” and “may not be used to receive business, commercial or merchant transactions.”2 They know that behind-the-scenes, Venmo is still exchanging funds over slow legacy networks.
Supporting true real-time payments requires a significant upgrade to the underlying ACH network and regulatory policies that determine how we move money today. More than 35 countries have Real-time Payments3. The United States is not on the list, largely due to the Fed---unlike other country’s central banks---lacking the regulatory power to force an infrastructure upgrade to support payments like other country’s central banks.
The Clearing House (TCH) is looking to finally bring real-time transfers to the US by implementing the first truly real-time network. Some benefits include the ability to settle funds faster, and include more details around those payments. Instead of simply referencing an invoice number with today’s ACH payments, the real-time payments network invoice data will be sent as part of the payment.
Similarly, the National Automated Clearing House Association, or NACHA, has mandated that beginning March 16, 2018, all Receiving Depository Financial Institutions, or RDFIs, “make funds available from same day ACH credits” by 5:00 PM local time.4 This isn’t quite a real-time payment, but it is much better than today’s settlement times, which are often 3-5 days or longer.
Zelle ushers in real-time payments
Finally, a discussion about real-time payments would not be complete without mentioning Zelle. Zelle allows the real-time transfer of funds for users that belong to banks that have integrated with the service (and slower transactions for users whose banks have not integrated). While Zelle still largely relies on existing bank infrastructure such as the ACH network to transfer funds between banks, member banks have agreements in place that credit and deduct funds in real-time for “in-network” Zelle transactions.
For example, let’s say one Zelle user belonging to Bank of America (BoA) wants to transfer funds to a Zelle user at Citi. As both of the banks are “in-network”, after checking the validity and making sure the payment is not fraudulent, BofA will immediately deduct funds from the sender and Citi will immediately credit funds to the recipient. The recipient can immediately use these funds. BofA will then send the money to Citi via the normal money settlement network.
Zelle provides banks and other financial institutions a creative way to enhance the experience of their customers by giving them a faster, more secure way to send and receive money.
Enhance your customer experience with P2P payments
As we noted earlier, payments are one of the most frequent touch points your customers have with you each day. To ensure you continue to captivate your clients through your customer experience, you need to deliver modern payment solutions that meet and exceed their expectations. Integrating your bank with a service, such as Zelle, will let you to offer your customers a way to make payments and transfer funds in the real time they are accustomed to.
Contact a Summa financial services expert to discuss how you can implement real time P2P services and create a differentiating customer experience for your clients.
2 https://venmo.com/legal/us-user-agreement/
4 https://www.nacha.org/rules/same-day-ach-moving-payments-faster-phase-3
