'Anti-social' P-to-P hurts banks

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The mobile phone revolutionized person-to-person payments, taking the online technology for transferring funds from individuals’ checking and credit card accounts mainstream: out into the world where transactions actually happen.

For many years the P-to-P function was mostly ignored by traditional financial institutions hampered by the need to upgrade their legacy wired desktop Internet banking platforms to support native mobile banking apps.

It was a value proposition that originally spawned PayPal’s founding, enabling P-to-P transfers between Palm Pilots.

The market has evolved into a number of P-to-P categories with such examples as international remittances (Western Union, MoneyGram, Xoom, etc.), privately initiated between parties through financial institutions or third parties (e.g., Zelle, PopMoney, Square Cash, etc.) and socially through Venmo, Facebook Messenger or iMessage with Apple Pay Cash.
Up to this point, financial institutions through Zelle, PopMoney, etc. have not offered a social payment option and restrict the request and transfer of funds to only private scripts and instructions.

Venmo, a PayPal company, invented a whole new P-to-P payment type with the option to request and post payments to the Venmo social ledger. Users can choose how to post their payment message to the Venmo public social ledger, selecting visibility to only the payee, to friends only, or the entire Venmo universe. Today, Venmo is the only true totally public social payments provider, though semisocial options exist through Facebook Messenger and iMessage with Apple Pay Cash.

Both private P-to-P and social payments are killer apps for virally building an enrolled user base for mobile wallets and whole new payment types. However, social payments have far more upside in creating new value propositions and revenue streams for all the stakeholders in the payments space.

Venmo as a brand has evolved to be both a noun and a verb. The phrase “just Venmo me the money” epitomizes acceptance of the innovation by new and existing users alike.

What existing players in the payments space and especially financial institutions tend to miss is that Venmo is also a social network. And one of the byproducts of having a social network is having a marketing platform for monetizing the social interactions that come from facilitating communications among the active users.

This is the business model employed by Facebook, Google, Twitter and every other network seeking to stimulate the enrollment of an active online user base. Social networks are more than social, they are marketing platforms.

Payment is always a part of bigger picture, a series of events, before, during and after and that is where the innovation and new value creation lies for those seeking to maintain or create their new place in the space.

Financial institution-supported P-to-P services such as Zelle, provided by Early Warning Services, and originally formed through a consortium of banks known as clearXchange, doesn’t provide a social payment option and thus misses all the upside that comes from providing a social following and marketing platform.

This missed opportunity is illustrated by the release last year of “Pay with Venmo,” a feature allowing users to use Venmo to buy things online from merchants as a new tender type.

Social followings of all types resonate with brands, retailers and anyone seeking to gain a network effect and following for their offerings. Managing social media is a cornerstone to all marketing and promotional campaigns. Word of mouth, peer-based endorsements are more credible, highly trusted, and when they spread virally through social media, far more valuable than traditional advertising.

Every consumer packaged-goods brand, product manufacturer, retailer and even the local yoga instructor or street vendor want to create a social following from their customer interactions. Pay with Venmo social payments tap into the power of personal referrals and do this as a byproduct of the payment process.

What could be a more convincing than your friend’s endorsement of a retailer, brand or food truck by actually buying something and making it a social payment on Venmo?

Venmo and Pay with Venmo set a precedent for a new kind of business and a new kind of banking. Call it social banking, social retailing, social branding, where every service interaction or customer touchpoint represents a share point and “post point” to a social network with its subsequent following, peer group endorsements and the like.

This is what financial institutions need to tap into and why they need an embedded social payment strategy.

For example, say a bank customer applies for a loan, the bank customer shares; they get the loan, they share; they buy the car, they share; they get the extended warranty, they share; they make the car payment, they share; if they get in an accident they take a picture in the insurance app to make a claim and they share.

These are all big life events; they are getting posted to social media now but the brands, retailers, banks, product and service providers that stimulated the feed are not in the thread.

Link to social, and at minimum link to social payments or social banking or retailing, and you have a new lifelong, continuous connection to the customer and their dynamic and ever-growing network of trusted friends!

Venmo and this idea of complete transparency, where the customer can choose to share parts of their payment and financial experiences socially is the whistle most financial institution executives cannot hear.

What’s engaging is not payment itself, it is what you are buying, the experience and how what you bought affects and enables life. That is the premise of social payments.

For financial institutions to play on Venmo's turf, they need an embedded, mobile and social payment strategy.

Apple’s P-to-P funds transfer service known as Apple Pay Cash is a plus one feature for Apple Pay and only works for registered pre-authenticated users of Apple Pay.

But it is more than just another use case for Apple Pay; Apple Pay Cash is really a new tender type. Apple Pay Cash, for all intents and purposes is a private-label prepaid debit (PLPD) account; except the issuer here, instead of being a merchant, is Apple. And as such, Apple is the merchant of record for funding this account (and Green Dot is the issuer processor behind the scenes, just as FIS or Fiserv are the core processors behind the scenes for financial institutions).

Apple Pay Cash is a hybrid PLPD account because it is also open loop, because your Apple Pay Cash is not just for P-to-P payments, but accepted anywhere Apple Pay is, making it open loop PLPD. This would be like Walmart Pay, Target Wallet or Kohl's Pay gift cards being accepted at competing merchants.

Again, Apple Pay Cash is a whole new tender type. And this new tender type has its own debit network as announced by Discover in a Dec. 5 press release headlined “Discover Network Enables Payments for Apple’s Newly Launched Apple Pay Cash.”

Discover will provide the network, processing rules, pricing, etc. for the new tender type (Apple Pay Cash).

Discover will charge the merchant for accepting Apple Pay Cash, and generate revenue from a whole new tender type for Apple, Discover and Green Dot; not Apple Pay issuing banks that funded the Private Label Prepaid Debit (PLPD) account in the first place.

In fact, the Apple Pay issuing banks are actually contractually obligated to help fund the Apple Pay Cash account, because their contracts call for paying a portion of their interchange to Apple for every Apple Pay transaction. Since Apple acts as a merchant for the PLPD funding, the financial institutions are essentially donating a portion of their own proceeds to fund a competing payment account, namely Apple Pay Cash.

This is one of the unintended consequences of financial institutions’ commitment to Apple Pay, since they do not participate in any of the downstream revenue from merchants when Apple Pay Cash is used to pay merchants directly.

Apple Pay Cash acceptance also drafts the acceptance momentum of NFC at the physical point of sale, giving it even more of a push at the physical point of sale than the bank-sponsored P-to-P services such as Zelle, PopMoney, etc.

We don’t know what they are charging merchants to accept Apple Pay Cash, but we can assume the proceeds from this new
tender are used to compensate Discover, Green Dot and most assuredly, Apple.

Just as Venmo and Pay with Venmo fuel the growth of new accounts and active use for PayPal, so will it be for Apple Pay Cash: a driver of viral, customer-funded incentives for fueling new enrollment and active use for Apple Pay.

The Venmo and Apple Pay Cash user base are the ones creating the incentives for enrollment and active use. For example, when you send your friend Michelle $30 using Venmo or Apple Pay Cash, she now has a $30 incentive to activate and use Venmo or Apple Pay Cash. The consumers, the users of Venmo and Apple Pay Cash are paying the bounties for incenting the use of Venmo and Apple Pay Cash. This is a sweet deal for Venmo and Apple for building enrollment and active use.

Regardless of what you hear about Apple Pay, Venmo or Pay with Venmo adoption, there is still much more disruption and upside from innovations in P-to-P and mobile payments in general. Your leading indicator is the massive user base of Alipay and WeChat in China, numbering more than 500 million in less than five years and driving a mobile payments revolution in all purchase venues, virtual, physical and P-to-P.

Venmo no doubt is a fully social payment option. But Facebook Messenger and Apple Pay Cash too are initiated inside a social thread. Currently, there is a two-party restriction for Messenger and iMessage, so the social aspect is not as wide and deep as Venmo. Apple Pay Cash is what we would call semi-social.

In contrast, Zelle is anti-social allowing only private interactions. By being anti-social they restrict their market potential to those that want only private transactions.

Financial institutions need to have more than a mobile P-to-P offering, they need a social payment AND social banking strategy with a clear vision for embedding payment into every purchase, transfer and value creation event when serving customers.

Financial intuitions must actively choose for themselves; they cannot depend on their mobile banking or core vendor alone for defining their own course of action because waiting is not a strategy.

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