P2P payments have seen substantial growth, with major players dominating their markets. However, cross-border and cross-provider payments remain complicated. Is it time to break the silos?
The past few years have seen substantial growth in the peer-to-peer (P2P) payments market. Many of us already use a mobile app for banking, bill-splitting and sending money to relatives living overseas. At the same time, cross-border payments and remittances remain complicated. There is a clear requirement for speed, convenience, and affordability for digital payments – something that has been accelerated by the pandemic.
P2P payment apps are typically linked to a credit or debit card, or a bank account. Most operate within a closed loop payment scheme and are not interoperable. This applies to banking payment apps providing P2P payments between bank customers as well as fintech/PSP based apps providing P2P payments between customers. They all essentially operate in silos and within national boundaries, resulting in a limited reach and poor service efficiency.
The success of a particular payment service depends on a provider’s ability to attract a critical mass. For example in 2021 more than 73% of the Swedish population over 16 used Swish. The key success factors of Swish include: transfers are free of charge for users, and the brand is very well recognized in the country. Other examples include Alipay, the most widely used third-party online payment service provider in China, and Tenpay. Both are strong brands. Alipay has a 54% share and Tenpay 39% of the Chinese mobile-payments market by value.
Once instant payments are introduced by an actor, we begin to see extensions to the service being rolled out. For example, Swish has added consumer-to-business (C2B) transfers. Users can also pay merchants by scanning QR codes available at partner merchant stores with the Swish app.
P2P can also be used as an additional value-added service to alternative platforms such as social media. Facebook, for instance, enabled card payments in the form of Facebook Pay. While in India, WhatsApp entered the market utilizing an existing instant payments provider’s unified payment interface.
P2P payments can be made with cards in selected markets, including Russia and Ukraine but this comes with higher commission rates. The payee typically makes a payment through a website but it can also be done through an ATM. In Russia, there are also P2P card payments, based on proxies and mobile numbers. Russia Mastercard, for instance, introduced a new service using phone numbers. The initiated transfer is sent to the Mastercard Payment HUB, where the payment system searches for the card number of the recipient. If it can’t find it, an SMS message is sent to the recipient to register their card for payment. Mastercard then makes a MoneySend Payment Transaction.
In many developing countries remittance still plays a key role. These international transfers are done through various transaction channels provided by banks, nonbank financial institutions, and money transfer operators. However, the high costs associated with many operators are opening the door to fintechs, such as Wise and Joompay who are looking to lower the cost through cross-border and P2P payments. With that said, there is a commitment among the G20 to reduce transaction costs of migrant remittances to less than 3% by 2030. Finding the right balance between regulations and transfer-transparency will be key to this, as will the development of mobile payments and digital platforms.
There is a clear need for interoperable P2P schemes that support fast, low-cost, cross-border payments, based on lower remittance fees. Many actors, such as PayPal, offer fast international payments but this is within closed loop systems. Imagine if Swish customers could make P2P transfers to VIPPS, Paypal or Alipay customers? If the silos of single schemes were broken, by regional and global interoperability, payment transfers would become cheaper and providers would compete with value-added offerings.
It’s worth noting that there are a number of ongoing interoperability initiatives. These include including the SPL rulebook – promoting mobile interoperability in Europe, and SWIFT – actively working on establishing fast and efficient cross-border payments.
If you are operating in the P2P payments market or plan to enter it, there are several key P2P considerations:
For the good of the market, it’s vital that a situation in which one closed loop scheme dominates the market is avoided. This requires an open infrastructure that promotes competition.
Commercial banks must define a P2P strategy for their account holders. This means identifying ways to retain and grow the customer base through, for instance, building mobile apps that support real-time payments. Providers such as Swish in Sweden have been able to build a customer base that has grown from zero to 73% market share relatively quickly through providing value-adding services. The demand for the service clearly exists, it’s up to you to take advantage of it.