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September 12, 2011
Retail Payments Risk Forum publishes discussion paper on peer-to-peer payments
Peer-to-peer (P2P) payment products are some of the most innovative developments from the payments industry in the past decade. Consumers have never had so many payment choices. Alongside a host of recent entrants like PayPal and CashEdge, longstanding industry players like Fiserv, Visa, and MasterCard all offer P2P products. Additionally, three major banks have announced a collaborative P2P initiative called ClearXchange.
Despite this range of innovative offerings, however, the industry lacks a standard understanding of how the various P2P payments in the market work. Further, consumers and businesses are also confused by the many options, and a lack of familiarity may be a source of the inertia that keeps consumers relying on cash and checks for most P2P payments.
The Retail Payments Risk Forum recently published a working paper on P2P payments as a resource for regulators, consumers, and the payments industry in general. The paper offers a framework to organize a discussion of P2P payments and evaluate the associated risks. This framework should help bankers and regulators better manage the risk exposure of different P2P products currently in the market. The framework categorizes transactions by counterparties, access channel, funds load and receipt instruments, and settlement network. Any P2P payment can be mapped across this lifecycle into categories that are mutually exclusive and comprehensively exhaustive.
Consumers send P2P payments by first initiating the transaction through an access channel. Traditionally limited to face-to-face, mail, or bank branches, today you can send payments at a kiosk, online, or even with your mobile phone. The payment funds are loaded and received through an instrument like cash, a bank account, credit card, or prepaid balance. In the background, the funds clear and settle over traditional networks, including ACH, wire, and card networks.
The paper goes on to detail specific P2P payments with case studies indicating how a provider fits across the payment lifecycle. Two of the covered providers have been mentioned in this blog before: Western Union and CashEdge's PopMoney.
In a Western Union P2P transaction, both counterparties are consumers. The sender can initiate a payment at an agent location, a kiosk, or online, or by using their mobile phone in some limited markets. The sender can fund the transaction using cash or a credit, debit, or prepaid card. Senders can also use their account and routing numbers to fund transactions made online or by mobile. Western Union has been proactive in expanding the access channels and funding instruments available to remittances senders. The transaction clears by ACH in countries where the network is available, and by wire in other geographies. Finally, the recipient can receive the funds as cash, or can direct them to their bank account using account and routing numbers.
Consumers can use CashEdge's Popmoney to send a payment to another consumer or to a small business, and can access the service through online or mobile banking. The payment is funded from the sender's bank account using the account and routing number, and the recipient receives funds into their bank account the same way. CashEdge recently partnered with MoneyGram, an international money transmitter, and some recipients may be able to pick up their payment in cash at MoneyGram agents around the globe. Transactions are usually settled via ACH, although recent partnerships with EFT networks enable card network settlement as a speedier option in some cases.
The working paper concludes by discussing some of the risks of P2P payments. P2P payments may seem new and unprecedented from the industry and media buzz surrounding them, but, as described above, most P2P payments actually rely on traditional networks and banking channels. Therefore, the risks posed by P2P payments are not original, but rather map to the risks of the underlying payment type. The risk profile of each P2P product must be evaluated across the specific use case, access channel, and settlement network, a specific risk profile. A one-size-fits-all risk management plan cannot work for such a diverse market. Finally, in evaluating the risk of P2P payments, consumers, banks, and third parties should make comparisons to the status quo of cash and check transactions. Many times new products will offer benefits in terms of efficiency and innovation that may outweigh their greater risk, and in some cases the risk of new products may be lower than that of the status quo.
By Jennifer C. Windh, a payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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