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Move over cash: Mobile payments go small

New services, mobile wallets hope to ease small-denomination payments

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In an 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.

New services 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.

At the 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.

A slew of new services hopes to make person-to-person payments ubiquitous

"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.

Of 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.

In securities 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 additional fees. 

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.

-- Tom Roberts
Fiserv

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 way'
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.

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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. 

Increased convenience
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 basketball pool.

"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:
Provider Sender fee Recipient fee Notes
clearXchange Free Free
Available only to customers of Bank of America, Chase and Wells Fargo. Can link only to bank accounts.
Dwolla Free
$0.25 per transaction. Free if receiving $10 or less. Cannot link to credit or debit cards.
Google Wallet Free if linked to bank account. 2.9% charge if linked to credit or debit card.
Free
 
PayPal 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.
Popmoney $0.95 per transaction if linked to bank account or debit card.
Free
Cannot link to credit cards. Fee listed is for Popmoney.com only; fees vary if Popmoney accessed from financial institution.
Venmo Free if linked to bank account or debit card. 3% charge if linked to credit card.
Free
 

 

See related: Fed: Consumerw wary of mobile payment security, Infographic: Consumers prefer mobile banking to mobile payments

Published: September 16, 2013


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