Go back twenty years. It won’t take long to count the number of methods you could use to pass money from one to another. If you wanted the money to reach someone far away, you’d probably head for Western Union or Moneygram. Back then, they didn’t have any kinds of Peer-to-peer payments. If you’re sending large sums to another bank account, you might pay for a wire transfer. Let’s say you were content to take the risk of loss. You might trust a check or cash to the postal service, and hope it wasn’t lost or stolen. For grandparents who wanted to give their grandchildren money for their birthday, the traditional was always a banknote or check wrapped in a birthday card.
Each of those methods had flaws, and those flaws were serious. Western Union remains an expensive way to send money abroad or across the country. Although the amount of the fees varies depending on the service, it’s not unusual for the sender to have to pay as much as 7 percent of the transfer sum in fees.
Like Western Union, wire transfers have the benefit of being relatively secure. The financial institutions are middlemen, ensuring security of the transfer and that the sender has the money they’re transferring. Though the system is getting somewhat better, the process has been difficult. Both sender and receiver need to own a bank account. The sender also needs to know the recipient’s account details. Fees as high as $30 per transfer mean that wires were better used for high payments. The fees have been considered rather high to settle small debts between friends. While the transfer of checks and cash can avoid those high fees, the loss of protections makes these choices fundamentally insecure, with few if any safeguards against theft, loss or fraud.
New payment systems attempt to provide security, reduce fees and deliver greater convenience by moving money instantly through devices as common and familiar as our mobile phones. By using a decentralized distributed ledger, cryptographic protocols and peer-to-peer networks, mobile phones are able to record transactions across a network of computers instead of centrally, cutting out the (expensive) middleman. Because a mobile payment system doesn’t require the sender to know sensitive information such as account numbers and sort codes, payments can’t be replicated, and they can’t be reversed, so the recipients can be certain that they’ve received the funds they’re owed.
The new world of peer-to-peer payments should make all payments between individuals. This is whether they’re sitting together or on opposite sides of the world – quicker, safer and cheaper.
But the range of the services is now also much broader. Once, people hoping to send money had a limited choice of weak options. Now we’re spoiled with so many choices among multiple options, each with its own weaknesses and strengths. In this chapter, we’re going to look at the most important of those options, explore how they work and explain the differences between them.
Western Union, together with its rival Moneygram, is the grandparent of peer-to-peer payment systems. Midway through its second century, the one-time telegraph company might have long abandoned the use of the telegraph wires and regular dots and dashes but its methods of sending money to all corners of the world now look no less antiquated.
To send money through Western Union, the sender normally visits a Western Union office, provides their own name and address, presents the funds, and gives the recipient’s name and payment destination. The company gives the sender a Money Transfer Control Number that the sender forwards to the recipient. The recipient can then visit a Western Union office in their own location, present the MTCN and ID, and receive the funds in cash. Sometimes, if the recipient doesn’t have an ID, they can use a password supplied by the sender.
If that sounds like the traditional Hawala method, it’s because the two are fundamentally the same. The difference is that instead of using a network of independent brokers who trust each other, Western Union is a single company with thousands of outlets scattered around the world.
It is now possible to send money without physically visiting a Western Union store by using the company’s website or mobile. But the process isn’t straightforward and requires the use of a debit or credit card. Fees can also vary; typically senders can expect to pay as much 7 percent for an international transfer.
The biggest benefit of Western Union is its international offices; many of the new peer-to-peer payment platforms have yet to break out of the United States. Companies like Western Union and Moneygram enable recipients around the world to receive funds in cash. They don’t need a bank account or even a mobile phone. As long as they have the MTCN, they’ll find money waiting for them at their local branch of Western Union.
MoneyGram is a direct competitor of Western Union, and works in a similar way. You can send money from one of its outlets, which can be located in pharmacies, post offices and convenience stores as well as dedicated offices, and you also send funds online using a debit or credit card. Fees are usually a flat $12 for transfers within the U.S. Depending on the destination country the money can be available as quickly as ten minutes after placing the money order. More typically, though, the funds will be available either later the same the day or, when sending money abroad, on the following day. The fee for international transfers can vary considerably too. Some commonly used destinations, such as Mexico, typically have a flat fee of around $10 but sending $500 from the U.S. to Ireland will cost $35.
MoneyGram’s biggest strength is in its network of locations for recipients. With hundreds of thousands of locations around the world, it’s possible to get money to someone in almost every corner of the globe.
On the other hand, if you’re picking up the cash in person from either a Western Union or a Moneygram site, you’ll only able to collect the funds during office hours. That’s something to bear in mind when someone far away needs money fast in the middle of the night.
The launch of PayPal in 1999 changed everything… at least for ecommerce. Internet sites that sold online now had an easy way to accept payments. With just a click and a form, visitors could place and pay for an order, allowing sellers to convert clicks directly into cash. The value the service offered for sellers became clear three years later when it had its IPO and was quickly snapped up by eBay. The separation of PayPal from eBay in 2015 freed the service to team up with the auction firm’s rivals, spreading its influence further. Being able to work with companies such as Amazon and Alibaba, (the most popular retail site in Asia), should begin to increase competition, reducing fees and improving services for customers and sellers alike.
The service works like a simple bank account. Opening an account is free, and funds can be added using a credit or debit card, by writing an echeck or by receiving funds from other users. With 173 million users in 2015 and revenues of $9.24 billion, PayPal is large enough to make it likely that both senders and recipients will already have accounts. If a recipient doesn’t have an account, however, it’s still possible to send the money to their email address; the funds will be waiting for them when they open an account using that address. Users can even bank the funds in their account and earn interest on their deposits.
Growth of Paypal
Since its launch, PayPal has set the standard for top digital wallet payments.
The company has had its critics though PayPal has worked to incentivize options to its customers. Recipients typically pay 2.9 percent of the amount sent plus 30 cents. While that’s comparable to the amounts charged by credit card companies, PayPal doesn’t provide credit or a float, has no risk and fewer hardware overheads. If a customers sums are continually higher than $1,000, wire transfers may be more attractive.
PayPal is stronger in personal payments. Send money from one PayPal account to the account of a friend or family, and as long as the sender doesn’t use a credit or debit card, there are no fees at all. However, that requires funds already present in the account and as the service is really aimed at small business owners or online merchants, these business may opt for larger amounts held in their accounts for sending payments.
PayPal seems to be a good way for e-tailers to take money from website visitors and is becoming a friendlier way to make peer-to-peer payments.
Many entrepreneurs are content to lead one successful business. Those businessmen and women who have managed to create more than one successful business generally launch one, develop it, and sometimes sell the business move on to develop the next progression. Jack Dorsey is currently the chief executive of two giant firms. Part of the team that founded Twitter, he is now the social media firm’s chief executive, a role he had held until 2008 when he was fired. Away from Twitter, he launch Square, a mobile payments firm that created a small credit card reader.
The reader plugs into the earphone socket of mobile phone and can be used to swipe a credit card and take digital payments. For owners of stand-up stores, sellers at art fairs and for vendors at farmers’ markets, the device has been a wonderfully simple solution to the difficulty of accepting non-cash payments in places that lacked permanent infrastructure.
Dorsey returned to Twitter as executive chairman in 2011 and became chief executive in 2015 but he also retains control over Square which has now branched out beyond the offer of a simple solution to occasional sellers who want to turn their mobile phones into credit card readers. Square also has an option for personal use. “Whether splitting a dinner bill with friends or paying your landlord for the month’s rent, Square Cash is the easiest way to send money,” the company boasts.
Square recommends that users who have business accounts open separate personal accounts and their Square accounts. It is good advice for any business to keep business and personal money separate. Square Cash, which uses Cash.me, a different URL from Square’s SquareUp.com, are different type accounts. Recipients can choose to keep payments in their “Cash Drawer” (on the app, in other words) or the money can be sent directly to the bank account associated with their debit card. This is a difference from PayPal which requires users to withdraw their funds manually (on their phone or computer) from their PayPal accounts, a process that can take a few minutes to a few days depending on the amount. Money sent to someone using Square Cash can arrive on the app or in the user’s bank account within minutes.
Personal payments cost nothing when the money is drawn from the Cash Drawer or made through a debit card but are charged at 3 percent when the payments are made with a credit card.
Free, personal payments made directly to a friend’s bank account using an app on a mobile phone makes Square Cash an attractive tool for people who want to make peer-to-peer payments. One limitation though is geographic location. Square Cash is limited to residents of the United States, located in the country and over the age of 18. It’s not a competitor to the international peer-to-peer services offered by companies such as Western Union and MoneyGram.
Founded in 2009 by a pair of Penn University roommates, and sold three years later for $26.2 million to a company later bought by PayPal, Venmo is now the closest to a standard in smartphone-based peer-to-peer payments. The service is so popular with millennials, who use it to pay friends back for concert tickets, drinks and even rent shares, that you can often hear students promising “to Venmo” each other some money.
It helps that Venmo is entirely free, provided that payments aren’t made through a credit card. (Those payments cost 3 percent.) When setting up a Venmo account, users have to choose their funding source. This can be their U.S. bank account, their Venmo balance, or a credit/debit card. Payments are made by choosing the recipient, adding the amount of the payment and indicating the reason for the transfer. Recipients then receive a notification that looks like the kind of Facebook message stream familiar to the service’s mostly young users. Under the contact’s icon, a message explains why they’ve just sent some money. It’s also possible to request payments (and issue reminders).
Unlike Square Cash, the money remains in the Venmo account until it’s transferred to a bank account. Venmo also limits payments to $299.99 a week until the user’s identity has been confirmed. It then rises to $2,999.99 per week.
Venmo’s simplicity, familiar design and non-existent pricing have made it a hit. In 2014, the company processed transactions worth $2.4 billion. That rose to $7.5 billion in 2015. In January 2016 alone, more than $1 billion passed through the system.
Although Paypal is expanding Venmo to merchants, the company does not appear to have any plans to move the service outside the United States. The service is best seen as working like a kind of digital check. Hitting the “Pay” button doesn’t actually transfer the funds; it only sends a notification that money is on the way. That gap leaves time for senders to cancel the payment. And if you’ve joined Venmo through Facebook then payments are shared by default with the members of your Facebook network. The ‘sharing’ option needs to be changed in settings, so as not to be a risk to privacy and security.
For the most part though, Venmo has done a good job filling a niche -supplying a need to send digital funds through smartphones between individuals.
In 2008, Google started negotiating with PayPal with the aim of integrating a payment system on Android-based mobile devices. The talks dragged until, according to a lawsuit filed by PayPal against Google and two of its own former employees, Google suddenly backed off and hired PayPal’s negotiator, Osama Bedier. Bedier, said PayPal, brought with him confidential information, including PayPal’s plans for mobile payments and an analysis of Google’s weaknesses in phone-based payments. The launch of Google Wallet in 2011 replaced Google Checkout, which had been the company’s PayPal rival since 2006. Development on Checkout ended completely in 2013.
The first iteration of Google Wallet, however, was widely seen as a mess. The app wasn’t just a peer-to-peer payment system, like Venmo, or even a tool for merchants, like PayPal. It was both of them… and also an NFC-payment system that allowed users to pay for goods in stores by waving their phones over an NFC station.
In September 2015, Google finally brought order to the chaos. The NFC and online payments were placed in a separate app called Android Pay, only available to Android users and competing directly with Apple Pay. Google Wallet would be usable on Android, iOS and through Gmail, and would focus entirely on peer-to-peer payments. Instead of competing with PayPal, Google is now competing directly with PayPal’s property, Venmo.
The service works in much the same way. Download the app to your phone, link it to your bank using your account details or your credit or debit card, and you’ll be able to send funds directly to other people using their Gmail address or phone number. Transfers are “usually instant” and limits are higher than those applied to Venmo and Paypal: transactions are restricted to $9,999 each and $50,000 over five days. (Floridians can send and receive $3,000 every 24 hours.) The funds remain in the Google Wallet account until withdrawn. There are no fees for sending or receiving funds but usage is limited to U.S. residents, although users in the UK can email each other funds. There are currently no international transfers.
The app launched without the ability to send funds through SMS, a service provided by both Venmo and Square Cash but Gmail has since filled that gap. When you send money through a text message, the recipient receives a text with a secure link. Having tapped the link, they can log into Google and enter their bank details to transfer the funds to their bank account.
While the privacy ramifications of text payments apply to Venmo and Square Cash as much as they do to Google Wallet (a text message suggesting that someone “clicks here for free cash” then asks them to enter their bank details looks a lot like a phishing scam) Google has other issues to face. The company might not make money from its transfers, any more than it does when an email is sent, but it does pick up information about purchases and relationships. So far there’s no sign that Google is using that data to target its advertising but users might want to think hard about the amount of purchase information they’re giving to a company that’s also capable of reading their emails and tracking their Internet browsing habits.
Both Google Wallet and Venmo allows users to send each other money by email.
The demo video for Facebook’s payment system lasted just twenty seconds. That’s because there’s so little to explain. The platform is integrated into the company’s Messenger app, so there isn’t even a special app to download and use. Anyone in the U.S. already using Messenger when the service launched in March 2015 would have been able to send money to friends and contacts directly using an app on their mobile phone.
In addition to the icons at the bottom of the app that allow users to add images and emojis, a new $ icon lets them add funds. The first time a sender taps the icon, Facebook asks them to add their Visa or Mastercard debit card information. (In order to avoid charging fees, the company isn’t using credit cards.) The sender can then enter the dollar amount, and hit “Pay.” The funds will immediately be drawn from the debit account and be made available to the recipient. If that recipient has already added their debit card, the money will pass straight into their debit account; if they haven’t, Facebook will prompt them to enter their debit card details.
It’s for users and advertisers
The system has been built entirely by Facebook, which adapted the payments platform it uses for advertisers. The transactions are free and like Google Wallet, Venmo, and Square Cash, remain limited to the U.S. The motivation for the service, however, may be different. Venmo and Square Cash are both dedicated payment services. Facebook is less interested in earning income from peer-to-peer payments than it is in keeping people on its own property. In an interview with TechCrunch Facebook’s payment product manager, Steve Davis, noted that as people talk about nights out and Uber fees, “conversations about money are already happening on Messenger… What we want to do is make it easy to finish the conversation in the same place you started. You don’t have to switch to another app.”
For Facebook’s users who want to send money to their friend’s contacts on the platform, the company’s payment’s feature can look like a useful service from a trusted brand, and one already baked into their regular mobile phone use.
What Facebook does in twenty seconds, its one-time purchase target takes two minutes to do in what must be the strangest launch video ever made for a piece of technology. Costumed performers toe-tap their way through a song-and-dance routine to explain how to use a social media app to transfer money. It’s not just strange, it’s also unnecessary; the process is remarkably simple. And coming from Snapchat, there’s no surprise that it can also be dramatic.
The service, which launched in November 2014, provides two ways to make payments. The first is to start typing a dollar amount in a message to a contact. As soon as the sender presses the dollar key, the send button becomes a dollar sign. Enter the amount and press that dollar key, and money will be transferred from the sender’s debit card to the card registered by the contact on Snapchat.
The second method is a bit more fun. Type three dollar signs in a row, and the screen displays a dollar bill. Swipe and the bills appear to fly off the screen. Once the sender is finished, they’ll be prompted to confirm the amount and money will be sent.
Whichever method is used, the recipient is notified by an animation showing dollar bills raining from the top of the screen. It’s all fun stuff that’s meant to turn the transfer of payments between friends into an event as much as a chore.
Who is this available to?
The service is only available to U.S. members over age 18. It can’t be used internationally, even on U.S. military bases abroad, and the only cards the service will accept are debit cards issued by Visa and Mastercard. Snap Cash has an initial limit of $250 per week which can be raised to $2,500 once the user’s identity has been verified. The service is free.
While Facebook adapted its advertising payment system to create its own peer-to-peer platform, Snapchat has instead turned to Square. The company created a mock-up, presented it to Jack Dorsey’s firm and formed a partnership. Users with complaints about the payments system are directed to contact Square’s customer support.
That suggests Snapchat has less interest in creating a for-profit payment platform that can rival Venmo so much as (like Facebook) keeping its members on a service that now generates almost as many daily video views a day as its social media rival. The pair shown in the launch video are youths splitting the cost of a gift purchase, and that demographic matches Snapchat’s user base, which is still mostly aged between 13 and 25.
While Venmo has successfully managed to penetrate the student market, Snapchat may be able to conquer teens. The question for both platforms is what happens as the users of each app age? Snapchat has successfully shifted its content from short-lived images of the sort users wouldn’t want their parents to see – to videos created by professionals who build stories and create personal brands. If that trend continues, Venmo, Snapchat and Facebook will all be engaged in strong competition for casual peer-to-peer cash transfers.
Venmo is a upstart. Facebook and Snapchat are more worried about their members leaving their apps for a few minutes. Popmoney is now owned by Fiserve, a company that supplies payment platforms to banks and financial institutions. While the service promises to replicate much of the functionality of Venmo and Paypal, allowing anyone to send money to a recipient using nothing more than an email address, mobile phone number or bank account number, it mostly operates through banks as a simple and free way for U.S. customers to send each other money. Recipients receive a text message informing them that they have received money and explaining how they can transfer it to their own accounts.
The mobile app
Popmoney has a mobile app. However, the iOS version has received little more than 150 reviews and an overall two-star rating. Users have complained of the need to enroll from a desktop instead of a phone, of money returned because the amount was too high or because the recipient failed to enter the right bank account details.
By aligning with banks, Popmoney appears to be trying to meet a need to transfer higher payments than the restaurant bills and shared tickets usually sent through Venmo. A number of the complaints about the app were made by people using Popmoney to pay rent. One user was told that her $1,100 rent money was too large for the system to transfer. Meanwhile, a landlord had his payment refused because he had registered his savings account instead of his current account.
Despite its limitations and its low functionality, Popmoney may have exposed a gap in the market. Much of the new peer-to-peer service has focused on replacing checks and cash for instant, low payments. But there is still a need to replace the checks and transfers needed for large payments such as rent.
In October 2015, the chief executives of Bank of America, BB&T, Capital One, JPMorgan Chase, US Bank and Wells Fargo issued a joint statement announcing the acquisition of the bank-owned digital payments network ClearXchange by Early Warning, a risk management service also owned by banks. “Our customers want the ability to make payments to anyone, in real-time, making funds instantly available in the recipient’s bank account,” the banks said in a press release. “With this acquisition, Early Warning is bringing together immediate funds availability, integrated authentication and fraud management capabilities into a single platform. The resulting security, reliability and consistency among financial institution payment services will provide a required catalyst to advance real-time payments.”
Senders can log in to either ClearXchange.com, or use their bank’s website or app. They choose the amount they wish to send, and transfer the funds to the recipient’s email or phone number. Recipients receive a text informing them that they’ve received a payment. They can then sign up at their bank or at ClearXchange.com to receive the money directly into their bank account. The service only works at U.S. banks, and it’s free.
It’s not a payment platform
ClearXchange itself isn’t actually a payment platform. It describes itself as a, “real time message platform between financial institutions”. It informs banks of a request from one bank customer to send money to another bank customer. When a sender transfers money, the bank informs ClearXchange who passes the request to the recipient’s bank. The bank sends the funds and the recipient is informed.
The service’s website gives three examples of the sorts of payments that could be made using ClearXchange. Roommates can use it to pay the rent; insurance companies may decide to use it to send claim payments. Friends can use it to share the cost of “some great Thai food”. Even that last case study, shows older folk enjoying a meal rather than students who are targeted by Venmo.
ClearXchange doesn’t have an app of its own. It relies on the banks that own this offering in their own apps. Because of this, it requires users to plough through services available on banking apps to find P2P payment option. It’s less user-friendly because the transfers are performed through a branded portal familiar to users. It may also begin to win more trust among a demographic less familiar with the latest app offerings.
Popmoney might have tried to meet a demand for higher peer-to-peer payments. However, ClearXchange’s bank-based system has already created a network that has trust and security built-in.
Much of the competition over peer-to-peer payments is taking place on mobile devices, inside social media applications, and inside banks. These banks have teamed up to stop customers from going outside their own infrastructure.
Bitcoin is in a class of its own. A digital currency not backed by any national bank as of yet, bitcoin attempts to remove all intermediaries in transactions. It’s much more complex than any of the other peer-to-peer payment options. Users first have to obtain bitcoins in the same way that they might obtain a foreign currency. They can buy them on one of a number of dedicated bitcoin exchanges. They can also mine them. Mining is a process that requires buying dedicated hardware, downloading special software and joining with other bitcoin miners. Buying them or earning them by selling something in return for bitcoin is much easier.
Special digital wallet
The bitcoins have to be held in a special digital wallet. This wallet can be used to send and receive funds and transferring bitcoins is always free. There are no intermediaries and no banks. In all actuality, banks are easy to hack — but there are a number of safeguards in any blockchain. If you borrow money or make a transaction at a bank, the transaction is recorded once. In the blockchain ledger the transaction shows up on thousands of different computers — making the transaction near impossible to break.
The number of bitcoins available is controlled by the blockchain. The distributed ledger that ensures bitcoins aren’t copied or forged. Bitcoin exchanges may charge fees of around 1 percent for exchanging bitcoin into or from local currency. The value of bitcoin in relation to the dollar has also been highly volatile in the past. Coming to the end of April 2016, bitcoin has settled in and remains about a consistent $465. Bitcoin is still usable and exchanges well in other currencies, as well.
Of course, technology geeks, millennials, and early adopters have been in love with Bitcoin from the beginning. Now, other people are becoming comfortable with the system. For those who already use bitcoins, using an exchange to make peer-to-peer payments will be simple, free and painless. For anyone not currently using bitcoin, the process of creating a wallet is much like creating other “wallet” systems. Joining an exchange and learning the ropes of the system may take a minimal amount of time. However, its value can make bitcoin a practical, safe option.
Businesses and banks have spotted the demand for P2P platforms that will let anyone send money to anyone else. Users can now choose from a wide range of very different options. Deciding which options to use will depend not just on the features or ease of use of each platform. I will also depend on its popularity: the sender’s choice of platform often has to match the recipient’s. Currently, much of the choices are demographic. Teens are likely to begin with the use of Snapchat or Facebook, to send each other small amounts of cash.
For older folks, Due appears to be the current app of choice. What about for digital nomads and eCommerce workers? PayPal still appears to be the default option since these customers got used to PayPal years ago. For older folks, their banks’ may well be the P2P platform they didn’t know they were using.
But perhaps the most important factors of these payment systems shouldn’t be popularity, ease-of-use or price – but security. Just as in banking, peer-to-peer payments can leave funds vulnerable to thieves, hackers and crooks. Thankfully the gap is closing and platforms are taking security seriously. But, security will always be something that must be looked at. All financial operations will have a need to stay current on security measures and ahead of the hackers. We’ll look at security in the next chapter.