Unlike in the United States, where despite considerable consolidation over the past 25 years there still remain over 8,000 banks, the UK has had a fairly consolidated banking system since the early part of the 20th century. Consequently, the United Kingdom’s banks are in a strong position to lead change within their domestic payments system compared to many other developed economies. Working as the Payments Council, the industry-dominated body in the UK with responsibility for “ensuring that payment services work for all those that use them in the UK”, for example, banks collectively announced in 2009 that they were phasing out paper checks in the UK by 2018 (though they were forced to do a U-turn on the decision in 2011). The Payments Council and its predecessor, the Payments Industry Association, nonetheless in 2008 reduced settlement times for online banking transfers from the 3 days of the BACS system to within 2 hours using the Faster Payments system, though in effect most FPS payments are almost instantaneous.
Faster Payments paved the way for mobile banking apps in the UK to become an effective P2P mobile payments platform, building as it did on a well-established online banking infrastructure, and a tendency (among younger UK consumers in particular) to share bank account details in order to facilitate P2P transfers among friends and family. By way of contrast, the practice of sending a check remains relatively entrenched in the USA . (It is worth noting, though, that unlike in the UK, checks in the US can be deposited via a digital image and funds can be cleared immediately).
The result of this trend was the Payment Council’s launch in late April of this year of of its new Paym service (pronounced pay-em), branded as “mobile-to-mobile” payments. The idea is essentially an expansion of the Barclay’s Pingit app, which launched in February 2012 and allowed Barclay’s customers to transfer funds using a phone number as a proxy for the sort code and account number. Now customers from nine banks can register their mobile numbers with their bank to enable them to receive payments. Six other banks have committed themselves to joining the scheme by the end of 2014, meaning more than 9 out of 10 British bank customers could be potential Paym payment recipients by 2015.
A key distinction, however, remains between senders and recipients. Anyone with a mobile phone can register their number as a proxy for their account number and sort code, but the ability to send payments will be restricted to those who have a smart phone and who have their bank’s mobile banking app downloaded onto it. While this may appear a limitation on the service’s reach, it is also a key element of its potential: it requires minimal effort to register for those who already have the app installed, and takes only minor behavioral change to operate (selecting a contact from the phone’s directory, instead of a payee whose account and sort code the sender already has listed in their previous payees list). Unlike, for example, PayPal’s mobile app, which would require the recipient to download the PayPal app and be an active (or at least registered) PayPal user, all Paym needs is for the recipient to have at some point registered their mobile number while using their mobile banking app (or have done it via a different medium if they don’t have a smartphone).
Nonetheless, almost half of those questioned in a poll by Consumer Intelligence said they would definitely not use the service, citing concerns about security and worries about the consequences of their phone being stolen. It is unlikely, however, that such customers are going to be users of mobile banking apps in any event. Furthermore, in the event of the customer’s phone having been stolen, a criminal who had somehow gained access to the mobile banking app would be able to transfer funds via a “traditional” online transfer well in excess of the £250 daily limit that is currently in place for Paym. Or, as one writer put it, “Paym will be as secure as the mobile app it is integrated with.” Younger customers are less likelty to be deterred, with 39% of those in the 18-34 year age group surveyed saying they would use the service, compared to 25% overall, figures largely in line with findings that 18-34 year old Britons are roughly 50% more likely to use online banking than the population at large.
A similar service, clearXchange, has been available in the United States for several years now, and in fact offers the facility of either phone number or email address as a proxy for bank account information. Originally a cooperative initiative by Bank of America, Wells Fargo and Chase, in February of this year Capital One signed up meaning that by some calculations, more than half of America’s mobile banking app users are potential clearXchange users. Uptake of the service, however, has been slow. According to BankInnovation.net, JPMorgan Chase has repeatedly declined to provide QuickPay data (Chase’s version of the white label clearXchange), which observers have taken as an indication that usage is a long way short of where banks would like it to be.
The reasons for this lack of enthusiasm for clearXchange are not difficult to discern, as the product’s value proposition is far from clear. Transfers may still take several days to clear and users may be charged a fee for the privilege. The fastest transfer available, for example, from a Wells Fargo account to a Bank of America account is still the next business day. The recipient may also be required to manually accept the transfer. By contrast, other than the fee charged for issuing a new book of checks, sending a check rarely costs more than the price of a stamp, if that, and can be digitally deposited by the recipient via a smartphone fee-free with most of America’s big banks. Such checks are cleared by electronic image exchange and funds are immediately accessible.
Essentially, clearXchange and its participant banks are betting that instant fund availability is a premium P2P transfer service that customers will be willing to pay for. That may be the case, but for as long as digital check deposit is free (and it appears unlikely that that is going to change) the convenience fee charged by banks for such a facility is going to have to be less than the inconvenience of handing over a check in person. ClearXchange’s CEO may be right in pointing out that P2P is a $900 billion potential industry, but every day that the US’s fragmented banking system fails to keep up with customer demand means the banks’ share of that potential market slips further.
It is into this breach that Venmo has ventured, and is on many fronts eating the banks’ lunch. Users can connect their bank debit or credit cards to their Venmo wallet, and send funds to anyone in their (Facebook or similar) social network who has also installed the Venmo app. Funds are pulled in from the registered card as necessary to make a payment, and users can choose to retain funds in their Venmo wallet or cash-out back to their registered bank account (which can be done overnight). Its combination of social and mobile clearly offers a unique value proposition, one which was identified by Braintree who snapped up Venmo for USD$26 million in 2012, and who were themselves bought by PayPal in 2013. The prospect of capturing Venmo is believed to have played a significant role in PayPal’s decision to pay $800 million for Braintree.
Through the Payments Council and Paym, the UK’s banks have shown that they are not scared of trying to keep themselves ahead of the game in the P2P transfer market. While some doubt Paym’s potential, the number of registered users is clearly going to grow from the 750,000 who signed up in the first two months of its availability, as network effect takes hold. For those used to making online P2P transfers in Britain, Paym represents an obvious next step, and even opens the door to other types of proxy IDs for bank account information coming into use. Paym has even caused Bitcoin enthusiasts to question what exactly is the cryptocurrency’s value proposition in the UK market.
Paym is also likely to widen the gulf between American and British mobile banking users, and the language used to describe such payments. While in the United States it seems possible, and perhaps likely, that “to venmo” may become as widely accepted a verb as “to google”, in Britain it is more likely to be mistaken for a reference a Dutch soccer player. Americans in London may similarly be left wondering who is Em and why does she need paid so often.
Despite the potential for confusion for tourists, Paym nevertheless goes to show that where banks take coordinated action to keep third-party transfer providers at bay they may be successful. US banks should look and learn.
©Mondato 2014. Mondato is a boutique management consultancy specializing in strategic, commercial and operational support for the Mobile Financial Services (MFS) industry. With an unparalleled team of dedicated MFS professionals and a global network of industry contacts, Mondato has the depth of experience to provide high-impact, hands-on support for clients across the MFS ecosystem, including service providers, banks, telcos, technology firms, merchants and investors. Our weekly newsletters are the go-to source of news and analysis in the MFS industry.
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