Financial institutions should take note of consumers’ increased use of person-to-person payments methods, such as PayPal, and look for ways to mitigate the potential loss of business, suggests Hitachi Consulting.

In fact, banks and credit unions might want to partner with companies such as PayPal, George Simotas, director of Hitachi Consulting’s National Financial Services practice, tells PaymentsSource.

The use of P2P payments for online purchases is showing substantial growth, according to a recent study. Harris Interactive conducted the online survey of 3,271 U.S. adults 18 and older this summer for Hitachi Consulting and the Bank Administration Institute. First Data Corp.; Fidelity National Information Service Inc., known as FIS; MasterCard Worldwide; the Pulse electronic funds transfer network; and U.S. Bancorp sponsored the research.

The use of P2P payment options among consumers who have made at least one online purchase grew to 62% of online purchases from 49% in 2008, the research suggests. Respondents cited P2P second only to credit cards as the predominant online payment option.

With PayPal, introduced as an intermediary between merchants and banks, financial institutions could lose out on the opportunity to analyze transaction data to develop marketing programs tailored to consumers’ payments behavior and for managing risk, Simotas says. This intermediary negates the ability to understand the data transmitted between the parties through PayPal, he says.

“PayPal has created a business model that looks sustainable and could eventually migrate from the virtual world to the physical world and pose a threat to Visa and MasterCard,” Simotas says. “We think financial institutions may want to consider partnering with PayPal to have access to the data. It’s a ‘resistance-is-futile’ situation because it’s unlikely that PayPal is going to go away.”

If banks do nothing, “then PayPal will become much more of a formidable competitor,” he says.

In an interview with PaymentsSource earlier this year, PayPal President Scott Thompson addressed the potential for bank alliances (see story).

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