What is P2P Without Real Time Payments? Incomplete.
Does anyone remember when the primary payment method was cash? People would do crazy things like pump just enough gas so the amount owed would round up to an even dollar amount. How about adding change to a payment to round up to the next currency denomination (instead of getting 21 cents back in change, you would actually GIVE the cashier an additional 4 cents so you can put a quarter in your pocket). Not only did you have to do the math in these situations, but you also had to have CASH!
And what about the effort factor? To make a purchase, you had to get in the car, drive to the store, find the product, wait in the checkout line, pay, and then drive back home. And what about purchasing a product that could not be bought at the store? You’d have to fill out an order form and send it by mail with a check. It was all very time-consuming, frustrating, and by today's standards, a total waste of time.
OK, enough of the history lesson. Fast forward, and credit cards are the prevalent payment instrument in today's society. There are, however, some consumers who don’t use credit cards to avoid potentially carrying card balances from month to month and accruing interest charges. Credit cards are also difficult to obtain by people who do not qualify based on credit score (that doesn't necessarily mean bad credit, it may be unestablished credit).
Immediate payment is now the expectation of consumers but is often not achievable through today's payment channels. For example, an electronic payment between parties can take 24-48 hours, which is a lifetime for today's consumers. It’s unconscionable to think that you could binge-watch a few seasons of your new favorite show in the time it takes to complete a payment!
So how did we solve the cash payment predicament between parties in an efficient, non-cumbersome way? P2P. But first, we need the backstory for a bit of context. The advent of online digital banking brought convenience to its users. Features such as electronic bill payment, real-time transaction history, electronic statements, and the ability to transfer funds between internal accounts created a convenient and efficient way to manage one’s account.
While this solved many of the frustration points mentioned, the ability to send funds and have them instantaneously received was still not achievable. Other cash payment products were still available, such as sending money through ACH or a wire, but that still created a 24-72 hour lag from when the money was sent to the time the money was received.
Today's digital banking platform includes both online and mobile channels. The same functionality available in the earlier online banking technology is still available today, but now there is an additional feature called P2P, person-to-person payment. P2P enables a person to transfer funds from their account to the account of the person who is owed the money. An early player in the P2P space was PayPal, and to be fair, they were pretty revolutionary when they came on the scene. BUT, even when using PayPal, there was a 24-72 hour lag from when the funds were sent until they were received.
Also, credit unions were not happy with their members using PayPal since the members were barraged with competitor advertising. So digital banking companies (like yours truly) worked to incorporate a P2P process inside their digital banking platforms to keep those transactions away from the clutches of competitor advertising. And an equally valuable benefit was that the internal P2P functionality kept the member inside the digital banking platform. In the case of mobile, the value proposition to use the app also increased.
OK. Great story. P2P sounds great, but there has to be a catch, or this article would be concluding now, right? There is still an integral part of the P2P process that has been missing until now. While P2P created convenience for the digital user (payer and receiver), it did not solve the time lag from when money was sent to when it was received. The advent of real-time payment providers has now removed that time lag. A payment that used to take 24-72 hours from initiation to receipt of funds can now be immediate. The use of real time payments to facilitate P2P transactions now enables that payment method to meet the instantaneous expectation of today's digital banking users. Real time payments is a solution that will fulfill the needs of both consumer and business accounts.
In the not too distant future, bill payments and business payables and receivables will be processed and received instantaneously. One of the first use cases for real time payments is payroll processing. Consider how antiquated the traditional payroll model is for gig economy workers. Today, an Uber driver is paid weekly. Using real time payments, Uber drivers can receive their funds at the end of their shift. What a difference real time payments can make!
Are real time payments a necessity? Well, we know that P2P works without a real time payment. The question is whether your digital banking offering without real time payments can compete against financial institutions and fintech competitors who are offering real time payments. The strategy of creating an internal P2P product was to remove the threat that your member may go to a competitor to complete the transaction (see earlier PayPal discussion). If you do not offer real-time transaction capabilities as part of your P2P offering, then chances are your members will find another way to accomplish that. There are moments when innovation changes a product's value proposition for the consumer and the company offering the product. The introduction of real time payments into the P2P model will probably be seen as one of those moments in the coming years.
The ability to move funds conveniently and instantaneously between two parties has always been a desire of consumer account holders and business accounts alike. In the past, cash payments made between two parties required both parties to be present. That was neither convenient nor efficient. The introduction of digital banking provided users with convenient payment options inside the application, and for them, convenience was the unmet need. Those users were happy to have payment options at their fingertips regardless of the time it took to send money. While P2P has created a whole new level of payment convenience, today's digital users expect instantaneous transactions where funds are sent and received in real-time. The combination of P2P and real time payments is quickly becoming a defensive posture to retain existing members and an offensive posture to capture new members. Can you wait? That is a real-time decision only you can answer.