In this digital age when almost anything can be had in an instant, the movement of money can seem glaringly slow.
Most people paying a housekeeper or collecting money for an office pool still use cash or a check, which can take days to go through — a relative eternity that banking regulators worry is impeding commerce and economic growth.
The slowness has led many Americans to new mobile services, like PayPal’s Venmo or Square Cash, which make it possible to pay a friend instantly with just a phone.
Venmo processed nearly $4 billion in P2P payments last quarter, which represented 141% growth from the prior-year quarter. By comparison, mobile payments processed at PayPal’s core app rose 56% annually to $24 billion.
PayPal’s total processed payments — which include its website, third-party sites, retail stores, and Xoom — rose 29% on a constant-currency basis to $86 billion during the quarter. Venmo might seem small when compared to PayPal’s entire business, but it’s also its fastest-growing platform. However, Venmo is already facing lots of competition in the P2P payments space.
Now, the banks are catching up. On Monday, Wells Fargo joined JPMorgan Chase, Bank of America and US Bank in allowing customers to send money in seconds to one another’s bank accounts using just a phone number or email address. Customers of the biggest banks can now use their mobile phones, say, to send money instantly to a child in college who needs cash.
“We pay attention to what customers are asking for, and we are doing all the things we need to stay competitive,’’ said Brett Pitts, who leads digital initiatives at Wells Fargo.
The stakes are high: Banks are under broad pressure both from the Federal Reserve, which has a “faster payments committee” aimed at requiring immediate improvements, and from tech companies like PayPal and Apple, whose Apple Pay service was a bright spot in its recent earnings report.
All these companies, and Visa and MasterCard, are competing to build and control the payment network of the future.
Banks are promoting their new services as cool and convenient: One Chase advertisement shows the basketball star Stephen Curry dribbling a basketball while making an instant payment on his phone.
American bank executives fear that they could lose ground to plucky payment companies like Venmo, a popular choice among millennials who want to pay each other — and send emoji-filled messages to their friends.
The banks worry that if they do not respond with their own instant payment offerings, they will be relegated to performing less-profitable back-office functions for hip new payment companies, which make their money primarily by charging small fees to customers who pay by credit card rather than directly from a bank account.
The person-to-person payment market is valuable because it allows financial companies to gain the first point of contact with a consumer and then try to sell them other products like loans.
Analysts predict that eventually the new payments network could be extended to connect consumers with merchants, providing a potentially lucrative source of fees for banks.
“It’s like owning a toll road: You are going to get paid by everybody that uses it,” said Gareth Lodge, a payments analyst at Celent, a financial consulting firm.
Mastercard and Visa, which have a tight grip on payments made with credit and debit cards, are also trying to gain a foothold in these new networks.
Late last month, Mastercard acquired a majority stake in VocaLink, the company that operates a mobile and internet payment network in the United Kingdom and is helping to develop an even broader system in the United States. Also, Visa recently announced a broad partnership with PayPal that will make both of their offerings more instantaneous.
Instant person-to-person payment is something that people in many other countries have been able to do for years, and the absence of the service in the United States has been a marker of the relative backwardness of American banks.
The banks began developing the system being introduced this year in 2011, when Bank of America, JPMorgan and Wells Fargo created a network called clearXchange. That system has already allowed bank customers to send each other money using just an email address or cellphone number, but transactions were not instant until this year.
In addition to payments technology that the nation’s largest banks are rolling out this summer, banks that belong to an industry group called the Clearing House are developing a broader network that will allow businesses and even governments to make large instant payments.
A fast and efficient payment network also has implications for the economy. Federal officials and analysts say the current lag time between when a payment is sent and when the money is cleared to spend can hinder businesses from balancing their books and managing their supplies. The lag also puts the United States at a disadvantage compared with, say, Europe, where banks are far ahead in making payments instantaneous.
The banks now face a challenge to make their real-time technology easy enough to lure customers away from start-ups like Venmo.
With Venmo, a user can send money to anyone simply by tapping into the app and entering a phone number or email address. By contrast, customers of JPMorgan Chase, for example, must log into their Chase app using their password, then navigate through a series of somewhat clunky tabs to initiate a transaction with QuickPay. The banks also lack the social networking capabilities that have helped make Venmo a hit.
Talie Baker, a payments analyst at the Aite Group, a banking consultancy, said that even her friends who have Chase’s service often do not think it is worth using. “I can’t get anybody to accept a Chase QuickPay payment from me,” she said. “Banks are probably going to start losing market share if they don’t make their applications as easy to use as Venmo is.”
Chase and the other banks say the additional steps they ask of customers provide more security. The banks also say they are already handling significantly more personal payments than Venmo and other competitors like Square Cash.
Chase said that last year it processed about $20 billion in so-called peer-to-peer payments, while Venmo handled about $10 billion. PayPal as a whole made about $40 billion in such payments, the company said.
The banks should have a significant advantage over technology companies, given the sheer number of customers they already have, payment industry analysts say.
PayPal and the banks say the most immediate opportunity is not taking business from one another, but cannibalizing the enormous number of payments that are still made by cash and check, which represent more than three-quarters of all peer-to-peer transactions.
Bill Ready, who oversees Venmo at PayPal, said he was happy that American banks were finally catching up with the progress that has been made in most other developed countries.
“The rest of the world has already been here a long time,” he said. “To see an industry move is a great thing.”
