P2P payments: from humble beginnings to $3.04 billion banking ecosystem

October 25th, 2023

Peer-to-Peer (P2P) payments have revolutionised consumer finance, offering a lifeline to those who have struggled with traditional banking. By facilitating fund transfers between parties, P2P payments have opened up a world of possibilities for consumers and businesses alike. Since the inception of the technology, the adoption has ballooned. The global P2P payment market is expanding at an impressive rate, with its value projected to grow from$2.62 billion in 2022 to $3.04 billion in 2023, boasting a compound annual growth rate (CAGR) of 16.4%.

But P2P payments are more than meets the eye. In this article, we delve into the origins of P2P payments and their primary objective of serving the underbanked. We also explore the intricate web of network effects that have transformed the financial landscape, giving rise to a dynamic and transformative ecosystem.

The origin of Peer-to-Peer technology

The first iteration of widely accepted P2P networks appeared in 1999 with Napster as the pioneering example.

Napster revolutionised the P2P world by introducing centralised music sharing. The file-sharing company peaked with over 26.4 million users in 2001, but would soon drop by 18.3 million amidst legal issues. However, it is worth noting that this implementation of P2P was not monetised, and purely used as a method of sharing files between users.

Soon after Napster, in June 2000, Gnutella emerged, showcasing the concept of decentralised file-sharing networks.

The birth of the file-sharing websites would eventually lay the groundwork for other uses of P2P technology, including the decentralised Bitcoin project in 2009, which aimed to eliminate the need for financial intermediaries like banks.

How P2P payments work

The peer-to-peer (P2P) economy operates on a direct model where individuals engage in buying and selling goods or services. Sellers, typically private individuals, produce or provide offerings themselves.

In this context, the need for extensive production and labour resources managed by a single firm is bypassed. Instead, the exchange benefits from intermediary companies that connect buyers and sellers.

P2P payments facilitate outgoing and incoming transfers in a closed-loop environment that can accommodate access from multiple devices.

The original idea behind P2P transactions focused on direct connections between individuals. However, intermediaries emerged to bolster trust, security, user-friendliness, scalability, and revenue potential. These intermediaries have become central to the flourishing P2P economy, as they tackle real-world challenges and deliver valuable services to both buyers and sellers.

For example, as of December 2020, Cash Appboasted 36 million active customers engaging in monthly transactions. The Mercator Advisory Group reported that around 70% of people had utilised at least one P2P service by the close of 2020. However, most individuals tend to use a single app, and many do not consistently use multiple P2P apps for their needs.

While each platform possesses unique features, their fundamentals often work on the same processes. To leverage these services for P2P payments, users are required to:

Create an account: starting typically involves using an email address, phone number, or linked social media account.
Connect a funding source: link a bank account, debit card, or credit card, however, using a credit card may incur an additional fee.
Send a payment: payments can be initiated using a person's or business's username, phone number, email address, or QR code. Online stores may also offer the option to pay with your P2P account.
Receive payments: P2P accounts can also be used to receive payments. Funds can be retained in your P2P account or transferred to linked bank accounts and debit cards. Transfers may take time, but some apps offer instant transfers to eligible linked accounts for a fee.

Examples of companies that offer P2P

Venmo: known for its user-friendly interface and social-media-like features, Venmo allows users to share payments and interact with friends.
PayPal: a versatile platform that offers P2P transfers, e-commerce solutions, and online payment options through services like Venmo and PayPal.me.
Cash App: this mobile app focuses on simplicity and ease of use, enabling straightforward P2P payments and Bitcoin transactions.
Zelle: integrated within many banking apps, Zelle is a bank-backed P2P payment service that allows users to send funds directly from their accounts.
Google Pay: seamlessly integrating with various Google services, Google Pay offers a digital wallet and P2P payment system for online and in-store transactions.
Apple Pay: With an emphasis on security and privacy, Apple Pay enables P2P transactions, in-store payments, and online purchases within the Apple ecosystem.

The speed of a P2P payment depends on the specific service used and the timing of the transaction.

Some P2P services, such as Zelle, send funds directly to another user's bank account in real-time. This means that the recipient can typically access the funds within minutes of the payment being sent.

Other P2P services, such as PayPal, may take a few business days to process a payment. It depends on how the company has incorporated P2P, their internal ledgers, and banking restrictions.

How much do P2P payments cost?

P2P payment services typically do not charge a fee to use or download their products. However, there are a few fees that may be charged in certain circumstances, such as:

Instant transfers: some P2P apps offer the option to make instant transfers, which are processed more quickly than standard transfers. Instant transfers typically come with a fee, while standard transfers are often free.
Debit or credit card fees: some P2P apps allow users to link their debit or credit cards to the service. However, there may be a fee for using a debit or credit card to send money.
International fees: some P2P services allow users to make payments to people in other countries. These transactions may come with an international fee.

Fuelling the P2P economy

The strength of the P2P payment sector is directly proportional to the number of users who adopt it. The more users, the greater the network effect, which in turn leads to increased convenience, liquidity, and widespread acceptance of P2P payments as a preferred method.

With the estimated increase in smartphone users — the primary platform of P2P payment apps — by 73.3% through 2027, Insider Intelligence only lists a 3.3% increase in P2P app users. This minimal growth showcases that P2P providers need to continuously innovate and incorporate new offerings to keep users engaged.

This can be further explained by the following:

The power of networking

P2P payments thrive on the concept of the direct network effect—where the success of P2P transfers relies on the growth of its user base. As more people join the platform, the quality of service improves.

Consider popular platforms like Venmo and Cash App. With a larger user base, the P2P payment experience becomes smoother and more reliable.

Bridging the gap

The P2P business model acts as a middleman, connecting individuals who offer products or services with those who need them. Think of it as playing matchmaker for buyers and sellers. These platforms provide a space for interactions, set up rules, handle payments, and manage transactions.

They create a secure and confident environment for successful exchanges. Additionally, this model reduces production and investment costs, leading to potential cost savings for consumers.

Adding value to keep the network thriving

Once the network is established, the focus shifts to creating value for users. Take Cash App, for example. They have introduced exciting features like a debit card, the option to invest in Bitcoin and fractional stocks, direct deposit capabilities, merchant rewards, and discounts.

By evolving into a comprehensive banking product, Cash App has not only strengthened its network but also enhanced its value proposition. This is especially beneficial for individuals who have limited access to traditional banking services.

Leveraging P2P to empower the financially marginalised

The influence of P2P networks extends beyond simple transactions. These systems present a unique opportunity to uplift those traditionally excluded from financial services, thereby addressing a pressing issue in the realm of financial inclusion.

"Financial exclusion" is a term that describes the inaccessibility of essential fiscal services like bank accounts, varying payment methods, credit accessibility, and insurance. According to the World Bank, this lack of access affects a startling 1.7 billion individuals globally.

The absence of these services not only hinders socio-economic development but also acts as a barrier to economic progression, perpetuating cycles of poverty.

P2P lending actively addresses financial exclusion by enabling access to credit for individuals and businesses systematically underserved by traditional institutions. Consider a migrant worker denied the opportunity to open a bank account in their host country; P2P platforms empower them to borrow money from relations or lenders in their homeland, effectively offsetting living costs and facilitating remittances.

However, P2P is not without cons. Should your P2P platform fail, the Financial Services Compensation Scheme (FSCS) does not offer protection for P2P lending, and a risk of borrower default exists.

The impactful role of payments

At the heart of this narrative stands the transformative role of payments in bolstering financial inclusion. By empowering the financially underserved with new ways to manage their funds, digital payment methods – including mobile wallets, prepaid cards, and digital platforms – have brought about a revolution in access.

These digital payment methods offer convenient alternatives to conventional banking, putting emphasis on ease of use. With mobile money solutions, individuals can securely transact, receive, and store funds using simple mobile phones. This is a particularly vital development in remote regions with limited banking infrastructure.

The problem of financial exclusion

In many developing economies, a significant proportion of the population remains underserved by standard banking institutions. Obstacles such as the distance to physical branches, lack of necessary documentation, and absence of credit history can all contribute to keeping individuals marginalised.

This scenario engenders an ongoing cycle of economic disempowerment, restricting access to essential opportunities and hampering societal mobility.

P2P payments as catalysts for change

P2P payment platforms are emerging as transformative agents in this landscape. Through the leverage of technology and mobile connectivity, these platforms provide a vital financial lifeline to those previously left in the economic shadows. The simple mobile phone, which has seen widespread adoption even in remote regions, has become a tool of empowerment, functioning as a virtual bank branch that fits in the palm of one's hand.

Extending financial outreach

One of the most remarkable contributions of P2P payments in developing economies is the extension of financial reach. Those who have previously been without access to banking and credit can now conduct transactions, receive payments, and even access microloans through P2P platforms. These platforms bypass the need for traditional brick-and-mortar branches, allowing individuals to handle their finances and take part in commerce right from their homes or workplaces.

P2P payments serve as a powerful tool for the underbanked and unbanked, offering several key benefits:

No traditional bank account necessary: P2P payments permit the sending and receiving of funds without the necessity of a formal bank account, reducing obstacles for those excluded from standard banking services due to factors such as geographical location or poor credit history.
Payment versatility: they enable the payment for goods and services, catering to individuals without credit cards or those who prefer not to use them.
Global transfers: for supporting friends and family abroad, P2P payments provide a cost-effective alternative to traditional methods like wire transfers and money orders.
Online trading: for those involved in e-commerce, P2P payments provide an easy way to receive payments for goods and services sold, cutting out the need for complicated merchant account setups.
Fostering charity: they extend to philanthropy as well, offering an easy way for individuals to make donations to charitable organisations and support their communities.

In Kenya, the mobile money service M-Pesa facilitates the transfer of funds via phones and has played a crucial role in alleviating poverty and improving financial inclusion. Between 2017 and 2023, the company had over 26 billion transactions between users. In India, millions use the popular mobile payment system Paytm – over 1.2 billion monthly transactions – to pay for goods and services, make donations, and access government subsidies.

While P2P payments are a relatively recent development, their potential impact on marginalised groups is significant. By providing a secure and user-friendly method for money transfer, they stand to enhance financial inclusion and streamline involvement in the wider economy. This kind of innovation could drive transformative change by bridging the gap between financial services and those most in need of them.

Kickstarting small businesses

P2P payments have breathed new life into the operations of small businesses as well as individuals. Entrepreneurs and micro-business owners can now directly receive payments for their goods and services through P2P platforms. This new process lessens reliance on cash, increases transparency, and opens new paths for business growth. P2P payments have also promoted the spread of e-commerce and online marketplaces in areas where physical retail infrastructure is scarce.

Financial services for the unbanked

P2P payment systems offer a unique advantage in that they enable financial services for the unbanked population. People who previously lacked the required paperwork or credit history to open traditional bank accounts can now access an array of financial services via their mobile phones. This includes money transfers, utility payments, savings accounts, and even the possibility to access credit through microloans. Such services empower users to handle their finances, build financial stability, and plan for their future.

The underbanked are further supported by digital-only neobanks – built upon P2P – that offer features that appeal to underbanked customers, such as overdraft loans, paycheck advances, and fee-free ATM withdrawals. They are designed to be more convenient and affordable than traditional banks, and they often do not charge fees or require minimum balances.

Challenges and future considerations

As promising as P2P payments are, they present their share of challenges in developing economies. Issues related to digital literacy, network connectivity, and cybersecurity must be addressed to ensure that the benefits of P2P payments are accessible to all segments of the population. Moreover, collaboration between P2P payment providers, governments, and regulatory bodies is crucial in order to create a conducive environment that safeguards users' interests and nurtures responsible growth.

This can be the key to transforming the financial landscape for the underbanked and unbanked, and future developments in the P2P field will continue to address these challenges, extending the reach of financial inclusion and empowerment even further.

Alongside P2P payments, P2P lending and remittance services are central to financial inclusion efforts, particularly in underprivileged regions. Nonetheless, there is an inherent risk of vulnerability for the financially insecure, who could face high fees or inflated interest rates on loans without proper oversight or consumer protection measures. The resolution lies in regulatory authorities defining clear guidelines that ensure fair practices within the P2P lending and remittance sectors.

Taking P2P further

The landscape of P2P payments is ripe for further innovation and expansion. A notable development in April 2023 saw Visa collaborating with PayPal and Venmo to introduce Visa+, a pioneering service bridging the two payment platforms using unique payment addresses. With the ability to establish a payment address, users can seamlessly transfer funds between the two payment apps.

Chris Newkirk, Global Head of New Payment Flows at Visa, articulated the significance of this collaboration: "Through this collaboration, Visa+ can help break down barriers for payment app users as they connect, engage and move money."

This strategic move by Visa opens the door to an even more streamlined P2P landscape. As payment visionary David Birch pointed out on LinkedIn, further advancements could usher in a future where consumers possess a singular payment address linked to multiple payment platforms. This evolution could eliminate the need for traditional identifiers like account numbers, routing numbers, or branch codes.

Envision a world where individuals share a simple pay name on their business cards, allowing anyone to send money without grappling with complex account information, app handles, or card numbers. Such a unified payment address system has the potential to redefine ease of use and accessibility in the realm of P2P payments, ushering in an era of unmatched convenience.

P2P payments have traversed a remarkable journey from their modest origins to becoming a vital component of a thriving banking ecosystem. These innovations have not only transformed the way individuals transact but have also extended financial empowerment to those previously excluded.

The trajectory of P2P payments showcases their capacity to bolster financial inclusion, drive economic participation, and continually evolve to meet the changing needs of users. As we look ahead, the interplay of technological advancements, market dynamics, and user preferences will shape the next chapter of P2P's remarkable journey.

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