era when everything seems to be moving online or to mobile devices, the way
that most people give money to each other -- for, say, splitting a restaurant
check or reimbursing a roommate for rent -- has remained stubbornly in the 20th
century. But the time is coming when you'll be able to easily pay individuals
using your smartphone.
promise to make using your phone for small and casual transactions more convenient
and secure (see chart). The dream: transferring money to your friends will be as
easy and quick as sending an email or text message.
moment, though, that's still
just a vision. While the technology is improving, most of the existing networks
are too small to be convenient -- and they don't talk to each other. It's like
using Facebook to share a photo of your cute kitten. Friends who aren't on
Facebook won't see it.
"Right now, we don't have anything that is universal enough
that links all of us together," says James Wester, research director of global
payments for IDC Financial Insights. "What we currently have is adequate, but
not adequate for what a lot of people want a person-to-person solution to do."
New competition for PayPal
New companies with names such as Dwolla, Popmoney, clearXchange
and Venmo are starting to offer person-to-person online payments to take
advantage of expected big growth in this area. Mobile person-to-person payments
are expected to increase tenfold in the next five years, to $70 billion in
2017, according to a 2012 study by IDC.
course, you've been able to pay friends through PayPal for years. The new
entrants hope either to undercut PayPal on costs -- some charge as little as 25
cents per transaction -- or to use their size to gain customers. This spring,
Google entered the business, enabling users to send money via Gmail accounts
linked to its Google Wallet service. Google's social networking service, Google
Plus, has more than 350 million active users.
filings, PayPal's parent company, eBay, lists many different kinds of
competitors seeking to move in on PayPal's business, such as digital wallet
providers, card processors, traditional banks and bill-pay operators -- some of
which might have advantages over PayPal.
The online payments boom is expected to coincide with the
decline of some traditional payment methods, such as checks. Americans used 24.5 billion
checks in 2009 -- a drop of nearly 20 percent from three years earlier,
according to the most recent figures from the Federal Reserve. Use of debit cards, Automated
Clearing House (ACH) payments and prepaid cards saw
big gains, while credit card use held steady during that period.
How they work
The person-to-person services typically work like this: You
create an online account, which is linked to your bank account or debit card.
In some cases, you can link to a credit card, although that often carries
When it comes to moving money between your family and
friends, people still do it the old-fashioned way, using primarily cash and
checks. Everything else has moved to a digital format.
To pay somebody, all you need is that person's email address
or mobile number. The company then notifies the person that the money is
available, and he or she can have the money deposited in an existing bank
account after creating an account with the service provider online. The
transactions are typically processed on the ACH network, the same one used for
direct deposits and automatic withdrawals from bank accounts.
Most companies in the industry also allow users to pay
businesses online, which is another fast-growing segment.
Clinging to the 'old-fashioned
Tom Roberts, senior vice president of marketing for
e-payments with financial technology company Fiserv, says person-to-person
payments are taking off, but widespread adoption will require changing
ingrained habits. "When it comes to moving money between your family and
friends, people still do it the old-fashioned way, using primarily cash and
checks," he says. "Everything else has moved to a digital format."
He likens the trend to online bill pay, which started in the
late 1990s. It took several years before most people felt comfortable paying
bills on their computers. Today, 46.5 percent of bills are paid online and 2
percent are paid via mobile phone, according to the Western Union Payments Money Mindset Index, a survey
conducted in 2012.
Fiserv has a service called Popmoney, which allows customers
of about 2,000 banks and credit unions to send money to people or businesses
online. Users unaffiliated with one of those financial institutions can sign up
for an account on Popmoney's website.
Getting poll results. Please wait...
Roberts says the company sees two main groups of users:
Young people, aged 24 to 34, who use it to pay roommates for rent and other
household bills; and a group he calls "digitally active harried parents," aged
44 to 54, who use it to pay for kids' needs,
such as tutoring or an end-of-season gift for the lacrosse coach.
Popmoney's average transaction amount is about $400, he
says. The company does not release usage data, but says the number of users has
been more than doubling every year.
Jordan Lampe, a spokesman for Dwolla, says growth in the
industry is fueled by a changing understanding of what technology can do. Quick
digital interactions on social media are paving the way for changes in the electronic
payments space, he says.
"Now we're getting to a stage where consumer technology and
social networks have created this new expectation, where these consumers place
a premium on convenience," he says. "People have started thinking of payments
not as checks, but as Facebook friends, or SMS [texts], or the ability to pay
based on how close they are because their phones are next to each other. This
is what consumers are coming to expect from money."
Lampe says that people often begin using Dwolla on a limited
basis, but then expand use once they get comfortable with it. The company had
roughly 100,000 users at the end of 2012.
Steve Dunn, a 40-year-old lawyer from Charlotte, N.C., provides
an example of how consumers are increasing their use of digital payments. He first
started paying for things online more than 10 years ago, when he opened a
PayPal account to buy baseball cards on eBay of an obscure Minnesota Twins
first baseman from the mid-1990s who shared his name.
From there, he went on to buy items such as artwork or
concert posters of the rock band Phish, because he found online payments
convenient and most of the sellers did not accept his preferred method of
payment, credit cards.
Today, he uses PayPal to pay the $75 dues to the
commissioner of his fantasy football league, or to enter a friend's NCAA
"It's instant, and it's a very convenient way of exchanging
money," he says. "It's very useful for transactions between people who are not
physically close to each other."
Person-to-person payment systems
Payment companies have different ways of charging for online money transfers. Some of the most common services and their fees are listed below:
Available only to customers of Bank of America, Chase and Wells Fargo. Can link only to bank accounts.
$0.25 per transaction. Free if receiving $10 or less.
Cannot link to credit or debit cards.
Free if linked to bank account. 2.9% charge if linked to credit or debit card.
Free when linked to bank account. 2.9% charge if linked to credit or debit card.
Free unless sender specifies otherwise (see Note).
Sender can choose to have recipient pay 2.9% credit/debit fee. Additional fees for sending money outside United States.
$0.95 per transaction if linked to bank account or debit card.
Cannot link to credit cards. Fee listed is for Popmoney.com only; fees vary if Popmoney accessed from financial institution.
Free if linked to bank account or debit card. 3% charge if linked to credit card.
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