P2P Payments and the Way Forward for Financial Institutions

By Chet Kamat, CEO and Managing Director, Oracle Financial Services

Mobile and peer-to-peer (P2P) payments have exploded in popularity. More Americans are opting for this seamless medium, and for good reason. Circumventing the bank branch altogether saves valuable time in already thin schedules. Based on a recent study, 22 percent of Americans now use their smartphones to send or receive money (Pew Charitable Trusts)—a number that no doubt is destined to increase as the barriers for entry continue to be constantly lowered.

The changing behavior of consumers while making payments creates a unique opportunity for the financial-services industry to rethink its strategies. It’s time to embrace P2P and all of the variables that come with it to ensure the safest and easiest experience for end users.

Ubiquity of P2P today

While it’s true that one in five Americans use P2P, tried-and-true methods still reign supreme, with cash and checks being by far the most common way to complete person-to-person transactions. That’s not to say that P2P doesn’t have a strong foothold in the industry, with Americans completing more than $1.2 trillion worth of P2P payments in 2014, according to data released last November from consulting firm Aite Group.

But how did we get to this point? A big reason is the rise of digital devices and better connectivity. Now consumers can use their personal devices for many tasks that previously involved trips to physical locations. More consumers than ever bank through their phones, and for some mobile is the only way they connect with their financial institutions. By removing the bank branch from the equation, individuals are creating a financial life with them at the center. Commerce is also affected by shoppers having more options than ever. Once the fear, uncertainty and doubt around sending digital currency directly to your peers declined, commerce began to evolve with personal preferences. The individual-to-merchant relationship has moved toward more individual-to-individual exchanges. Although banks and financial institutions have been slow in adopting these new technologies, developing more P2P capabilities is aligning banks more with what modern consumers want.

While P2P is still not profitable on its own, there has been an increasingly large investment by already-established financial institutions to grow this business. A prime example of this is Zelle, a well-thought-out endeavor by some of the biggest names in banking to capture the interest of Millennials, young professionals and truthfully anyone looking to conduct transactions in a more direct fashion. Zelle is proof that P2P cannot be written off; it’s here to stay, and it would behoove banks to find a way to work with rather than against its core value proposition.

P2P is keeping up with non-banking players, which have grown their m-commerce and e-commerce businesses through development of digital and frictionless payment experiences.

What will P2P mean tomorrow?

So people are using P2P more now, but what does that mean for financial institutions? There’s a dire need to gear up and capitalize on opportunities in the payments space by leveraging new payment technologies supporting next-gen payment enablement. It’s no longer feasible to rely on antiquated legacy systems through which end-to-end payment protocols are siloed, slow and ineffective. A concerted effort to address the growing challenges in this payments ecosystem surely points toward digital as banks continue to build next-generation payment solutions as core pillars of their businesses.

The growth of instant payments made available through institutionalized protocols will continue to fuel the growth of P2P payments. Banks will have to simulate the ubiquity and personalized digital experience for Millennials in their payment-solution offerings. Regulators across the world are pursuing strategies for instant-payments adoption through inter-bank payments standards. And having the right infrastructure in place to deliver a faster and better customer experience lies at the very core. A digitized backend architected for agility and simplicity can deliver a constant stream of innovation to its consumers.

The world of payments has consistently grown year-over-year, and embracing P2P can only serve to help the growth of banks that may be operating on legacy systems that prevent nearly instantaneous transactions. This concept enables banks to develop centralized hubs that provide visibility and transparency of payments operations, effectively eliminating a system reliant on multiple interfaces and silos. This is the future of payments: streamlined, efficient and user-friendly.

Regulation, fraud prevention and preparing for the long-term

In a market with such burgeoning potential, it’s imperative that we keep in mind the regulation and complex laws that accompany all processes within the financial-services industry. On top of key standards such as ISO 20022, SEPA (Single Euro Payments Area), SWIFT 2017 and Fedwire, governing bodies such as the European Union (EU) are setting deadlines for adding the PSD2 (Revised Payment Service Directive) into national legislations to comprise the regulatory framework for payments.

It goes without saying that P2P payments—like all transactions—will be impacted by security risks. The competition to create the fastest real-time payment system can leave the heavier regulated banks at a disadvantage compared to nimbler fintechs. A keen eye will be required from banks’ regulatory and security services of choice to mitigate risk, but the industry can rest assured that next-gen methods can help P2P-payment networks better adapt to the fight against fraud. Real-time payments will also create constantly fluctuating cash flows for banks, which have millions of customers using the service daily. These obvious and subtle byproducts create hurdles for financial institutions that may already struggle to quickly adopt new technologies due to their sheer size. The alternative of doing nothing puts those financial institutions at a disadvantage next to their peers.

While there’s always a bit of risk associated with any technological advancement, the financial industry understandably has a massive responsibility to protect clients. Consumers have been trending towards digital, and we’re finally at the tipping point at which banks need to build the infrastructure to fall in line with these client behaviors for the long-term.