P2P
and Alternative Payments
P2P is no longer a growth vehicle; but innovative uses of payment technologies will drive revenue opportunities.
Key Questions
- What is the current P2P landscape? How is it changing?
Key Findings
- P2P usage will remain primarily consumer-to-consumer since there is no real cost savings for merchants to use P2P systems to accept credit card payments.
- P2P universe will shrink due to increasingly prevalent and convenient alternatives such as online bill payment, virtual checks, and site-hosted credit card payments.
- P2P’s “trusted third party” status will be replaced or displaced by consumers’ own bank or credit card issuer.
- P2P transactions will remain a small fraction of total consumer transactions, and will be further eroded by consumers’ increasingly preference to use credit cards because of greater fraud protection, trust, acceptance, and convenience.
- Retailers can be comfortable with existing payment systems. Financial institutions should look to creative uses of their own credit and debit products for revenue growth rather than P2P services.
Introduction
The peer-to-peer (P2P) payments landscape consists of only a handful of services, the top three being PayPal, Citibank’s c2it, and Yahoo PayDirect. It is likely that the landscape will remain the same in the near future due to the high barriers that face newcomers attempting to break into this space.
A Closer Look: PayPal
One of the “oldest” surviving P2P payment services, PayPal, provided a more convenient and secure alternative to paper checks and money orders at its inception in 1998 primarily for person-to-person payments arising from online auctions. It rode the coat-tails of the meteoric rise of eBay as the first-mover payment solution which also led to it being the first to achieve a critical mass of users.
However, in the current landscape, PayPal’s value proposition and uniqueness has been steadily eroded by the big-bank “tortoises” whose online payment systems were slow to launch but are now widely available to most consumers. While in 1998 online banking was just starting, today virtually all bank customers enjoy it as a free service. Within most of these online banking services, users can initiate payments from their accounts to companies or individuals either electronically or by physical check – popularly known as “online bill payment” or “virtual checks.” A pre-set number of these transactions are usually included for free each month. So for light or moderate users this included feature is a free and convenient alternative to signing up for PayPal, going through their verification procedures, and funding the outside account. It is also easier for the recipient because they do not need to sign up for PayPal either.
Site-hosted Payment Alternatives
In the arena of online auctions and some online retail, where PayPal used to be the only option to process payments between individuals, many sites today serve as intermediaries for payments themselves. One of the best examples of this is Amazon Payments – a site-hosted payment solution for individual-to-individual payments. Even an individual selling a single item can “accept credit cards” because Amazon processes the credit card payment from the buyer for them and then deposits the funds (less a commission which includes the transaction fees) into the seller’s Amazon account or directly into the seller’s checking account via direct deposit, if so requested. In this scenario neither the buyer nor seller needs to sign up for a third-party P2P account nor even know how to accept credit cards. It is all done for them and even guaranteed by “Amazon.com Safe Shopping Guarantee” which protects both buyer and seller in the event of fraud by the other party.
P2P Fees At-A-Glance
|
|
Individual |
Business |
|
PayPal |
no fee (cannot accept credit cards) |
(2.2% to 2.5%) + 30¢ |
|
Yahoo PayDirect |
no fee (cannot accept credit cards) |
(2.2% to 2.5%) + 30¢ |
|
Citibank c2it |
sender pays 2% (min. fee 30¢) |
n/a |
|
Amazon Payments |
2.5% + 25¢ per item |
n/a |
|
credit card proc |
n/a |
1.5% - 3.5% + 20 - 40¢ |
Similar Fees to Credit Card Processing
If the seller is a merchant or an individual who wants to sell a multitude of items regularly, they must sign up for a PayPal business account since PayPal Personal accounts cannot accept credit cards. A closer examination of the fees assessed by P2P services reveals that there are no significant cost savings compared to direct credit card payment processing. So while P2P may be useful for the ocassional individual-to-individual transaction, it is less attractive for most other cases where sellers sell larger numbers of items or simply want to provide the convenience of credit card payments to their customers.
Key attributes of P2P service:
- critical mass – is my counterpart already on the system?
- trust in service provider – am I willing to trust this third party with my acct info?
- protection against fraud and risk – what protection does the third party offer?
- anonymity – do I have to reveal my details to my counterpart?
- convenience – what do I have to do through to receive or make payments?
Consumers Prefer Credit Cards
Comparing P2P accounts versus credit cards, it is likely that consumers will increasingly prefer to pay with their credit cards as opposed to third-party P2P accounts, even in individual-to-individual transactions, for many reasons, including fraud protection, convenience, universal acceptance, and trust. The well-publicized “zero liability” policy of most credit card issuers offers more complete protection to the party making payment. As more and more sites which include person-to-person transactions decide to intermediate transactions themselves through their existing credit card processing system (like Amazon Payments), buyers can simply pay with their credit cards in one-step rather than use their credit card to fund a P2P account and then make payment. Even the anonymity issue is solved by virtual or single-use credit card numbers. In other words, individuals not wanting to reveal their primary credit card number can instantly generate and use a virtual credit card number instead, which can be “locked down” by expiration date, merchant ID, or amount to be spent. Finally, having all transactions aggregated in a single account log-on (online banking log-on shows checking account and credit card transactions all in one place) and protected by a “big-name” bank provides further convenience and “trust factor” for the consumer.
Conclusions
While PayPal has indeed captured the low-hanging fruit of avid online auction participants and has rapidly achieved a critical mass of users, it is likely that the convergence of economic forces and more convenient and less costly alternatives would not only cap its further growth but also steadily chip away at its current user and revenue base. The other P2P services such as Citibank’s c2it and Yahoo PayDirect not only have not reached critical mass but will likely just “die on the vine” for the same reasons.
Online retailers can comfortably stick with their current payment systems, since payment by credit cards usually account for the majority of their transactions anyway. P2P service providers such as PayPal should 1) focus on specific niches which survive and thrive on person-to-person payments, 2) be prepared to absorb greater transaction fees for payments in and out of their system by way of credit cards (see Supplement), or change their policy to have the users bear a part of these costs, and 3) continue to break new ground and identify new market opportunities such as person-to-person payments within the context of person-to-person file sharing, where individuals pay for quality and speed of downloads. Finally banks and financial institutions should look for revenue growth opportunities outside of P2P, such as innovative uses of credit or debit cards in marketing promotions.
Supplement
Source: 10-Q, PAYPAL INC,
Payments into PayPal System
“We bear all costs of funding payments into the PayPal system. We incur no incremental cost on payments funded from existing PayPal balances. For payments funded by bank account transfer, we incur a processing cost of $0.01 per transaction. On credit card-funded payments, we currently incur a cost of 1.9% of the payment amount plus $0.15 per payment. Credit card funding costs comprise the bulk of our funding costs and include interchange expenses, authorization and settlement expenses and fraud screen expenses. The percentage of our total payment volume funded with credit cards has decreased as customers increasingly have chosen to fund their payments via bank account transfers.”
Withdrawals from PayPal System
“We bear all costs associated
with withdrawals from the PayPal system. On transfers to a recipient's U.S.
bank account, we incur a processing cost of $0.01 per transaction. On transfers
to a recipient's bank account in the sixteen countries where we offer
withdrawals to local bank accounts, our processing cost varies based upon
different banking network fees in the different countries. Our average
processing cost for international bank account withdrawals for the three and
six months ended