A look at the P2P payments market

There has been a lot of activity in the market for peer-to-peer (P2P) payments lately. While the concept of P2P payments is not new (one could argue it started once upon a time with the barter system), multiple products are trying to capture a share of this market today in the world of mobile. PayPal’s latest quarterly earnings report notes that $2.1 billion of payments were processed through Venmo in Q3–2015, growing at the rate of 200% a year! Venmo is just one of the products, although arguably the most popular, and competes with many other products such as Square Cash, Google Wallet, Facebook Messenger and PayPal itself. Apple is also planning to launch a P2P payment service, according to the New York Times.

The objective of this post is to analyze

  1. Whether P2P payments is a winner-takes-all market and
  2. Brief strategies that both larger incumbents and newer entrants can pursue to succeed in this market.

This post does not cover the market size, different features and nuances of the various products (unless they’re relevant to the above objectives), various stakeholders involved in building such products and their incentives (e.g. banks, credit card network operators etc.) and other considerations such as security and privacy.

Is P2P payments a winner-takes-all market? ?

To evaluate the extent to which this is a winner-takes-all market, we can evaluate the following:

  1. Strength of network effects

    In a P2P payment transaction, by definition, there is a ‘payer’ and a ‘receiver’. The products above clearly exhibit network effects in these terms because more payers in a network attract more receivers and vice versa. A user can play the role of both ‘payer’ and ‘receiver’ across different transactions and, hence, each additional user increases the value of the network to the other users too.

    But how strong are these network effects? In P2P payments, a user could potentially want to use this service with multiple other people (including friends, family, colleagues at work, an acquitance at a party etc.). It is also not easy to predict in advance when or with whom a user will transact. However, there is not much value in the ability to transact with a ‘random’ person (unlike the ability to check the profile of or connect with a ‘random’ new person on Facebook). Hence, on a scale from 0 (none) to 5 (high), I would rate the strength of network effects in this market as 4.

  2. Multi-homing costs

    Multi-homing means the ability to check multiple products offering the same functionality in parallel (which product the user ultimately decides to use depends on various other factors such as cost, user experience and so on). The process of homing has 1 to 2 steps in this case: installing the product and signing up for it (if not already done) and making a transaction.

    How high are the multi-homing costs? I would argue that the first step of installing a product and signing up is costly. While some products allow signing up through a debit or credit card, they may charge fees in making P2P payments (especially when using a credit card). The one mode of payment that is mostly free across several products is transacting through a bank account. However, signing up through a bank account takes time: the user needs to recall the bank account number, routing number and wait for a day or two to verify the account (usually done through a debit and credit of random amounts less than $1).

    However, once a user has signed up for another product, multi-homing is not as costly. It depends primarily on the user experience (e.g. details the user would need to enter to make a transaction and the ease of use).

    Overall, on a scale of 0 (none) to 5 (high), I would rate multi-homing costs in this market as 3.5.

  3. Demand for differentiated products

    While the core functionality may not be different across products, users would appreciate differentiation of the products in terms of the user experience (e.g. ability to start a transaction even without signing up, a feature of Square Cash and Google Wallet), platforms it is available on (e.g. mobile-only or both mobile and desktop) and other related features such as tracking, security and so on.

Overall, while there are strong network effects and strong (although less so) multi-homing costs, there is also a demand for differentiated products. Hence, the P2P payments market is not likely to be winner-takes-all and will likely have multiple products competing in the long-term. At the same time, due to the network effects and multi-homing costs, I would not expect more than 3–4 players competing in the long run.

Strategies to succeed

Given the above drivers of the extent to which this market is winner-takes-all, both large incumbents and new entrants can follow different strategies to succeed. A few of the strategies (certainly not exhaustive) are very briefly discussed below:

  1. Reduce ‘friction’ in signing up and using the functionality for the first time

    This is especially important for new entrants so that they reduce multi-homing costs, but this is not easy. Companies like Apple may have an advantage on this front: If P2P payment is added to Apple Pay, existing Apple Pay users are signed up by default. Companies like Facebook and Google are also making it relatively simpler by adding ‘$’ buttons to Facebook Messenger and Gmail respectively which already have large user bases.

  2. Provide a superior user experience when making transactions

    This is one of the definite ways to differentiate the product. For example, Apple Pay can have a mechanism where the user double-taps the home button, scans the fingerprint and pays/requests another iPhone nearby, all this without even unlocking the phone! Of course, not all better user experiences are necessarily appreciated by the users. Careful attention should be paid to user experiences that actually solve a pain point. For example, is the ability to pay/request a nearby iPhone without unlocking the phone actually valuable to users?

  3. Develop a differentiated and valuable offering, perhaps for a specific niche in the market

    One of the differentiating factors of these products is cost. For example, some of the big incumbents may not necessarily aim to make money through this ‘feature’ and hence have a lower charge. Their aim may be to increase usage and engagement of their products and monetize through exisiting or other means. New entrants may also start by serving specific niches and developing a differentiated offering for them. For example, one specific niche could be an offering optimized for payments and settlement between users in a large group.

Finding good strategies and executing them is easier said than done, but it would be fun to see how this market plays out.

What do you think?

By: Shankar Vellal


3 Comments

  1. Kaushik Anand

    Shankar,

    I think there is one other factor of the P2P market which makes the network effects stronger. You have covered same side network effects. However, Paypal primarily makes money off merchants and has network effects between merchant and consumer as well. Once you have millions of users (like Paypal), you can do in-network transactions i.e. move from Paypal wallet to merchants. This vastly reduces the transaction fee and risk of fraud. So, Paypal can go to a merchant and offer the transaction costs to be a few percentage points lower than other payment gateways. This makes it a compelling argument for merchants to add a Paypal checkout.

    While I agree that it is not winner take all market, the strong network effects make it harder for a disruptor to win.

    Kaushik

    • Shankar Vellal

      Thanks Kaushik. Yes, I agree. I was looking at this primarily from a C2C (consumer-to-consumer) payments perspective. But yes, building a good user base in C2C can help players also move into C2B (consumer-to-business) payments, that arguably may be better from a revenue and predictability of cash flows stand point, since the C2B market possibly has both higher transaction volumes and higher average transaction size.

  2. Anju Somani

    Thanks for the post Shankar! I agree that P2P payments is not a winner-take-all market, and am curious to see how this plays out over the next few years. PayPay has yet to monetize Venmo significantly despite its install base, usage, and payments processed. Furthermore, as other players leverage their own distribution advantages (Apple with iMessage; Facebook with Messenger), it will be interesting to see if P2P payments becomes a feature, not a product, reducing the influence Venmo and Square Cash have.

    Furthermore, it seems like P2P payments do not have a core business model in payments themselves. Each of the services you mentioned is owned or operated by a company that monetizes separately from its P2P payment service. Furthermore, the P2P payments service is often a cost center. Kaushik – you mention that PayPal could offer merchants lower fees by leveraging its Venmo install base, but have we seen significant traction in this area? It also requires users to pay with their PayPal wallets, a high friction activity compared to using pre-filled payment credentials, a credit card, or Apple Pay.