On March 17, 2015, Facebook Messenger announced a new feature for friends to send and receive money easily and securely. All users have to do is start a new chat with a friend, tap the “$” icon, enter the amount they want to send, and tap “Pay” to add their debit card. Then, assuming the friend has also added her debit card information to her account, she receives the original payment in her bank account.
Steve Davis, the product manager overseeing Messenger’s new feature, said in a March 17 New York Times interview that the purpose behind the app’s new feature is to retain its users and cultivate uninterrupted conversations. Others, like Josh Constine of TechCrunch, speculate that Facebook’s goal could be to expand Messenger into becoming a centralized chat app used for numerous important day-to-day functionalities—something like Korea’s KakaoTalk, which includes features that allow users to purchase items, follow celebrities, and even call taxis. Regardless of its exact reasoning, Facebook’s entrance into the peer-to-peer (P2P) payments market is a reflection of the growing trend of banking going mobile and the resulting shrinkage of the market for physical, branch office-based retail banking.
A Changing of Tides
Walking to the bank, talking to a teller, opening a new checking or savings account—these are all familiar services of retail banking. However, the rising smartphone market and growth of Internet usage are changing the industry’s face and functions. According to a 2015 Federal Reserve report, by 2014, 87 percent of adults in the United States had a mobile phone—71 percent of which were smartphones. As a result of the widespread use of smartphones, the number of mobile phone owners with a bank account who have used mobile banking services increased by 33 percent between 2013 and 2014.
Furthermore, the report states that since 2011, the steady increase in both the number of people with smartphones and the usage of mobile payments indicates that the two could share a strong correlation. Smartphones increase access to the Internet and make online transactions convenient as a result. With mobile services available, people would be less likely to go to the bank or ATM to withdraw cash, or even to use their physical bankcards to purchase items.
Financial technology experts argue that the traditional retail banks are failing to compete effectively in the booming online banking market. Rather than adapting to fit the changing needs of consumers, some banks are instead spending millions of dollars in re-modeling their branch offices to look futuristic. About five years ago, Citibank opened its “branch of the future” in New York City’s Union Square to redefine retail banking by integrating new technologies, such as walls with interactive touch screen features. However, Jay Sidhu, the chairman and CEO of Customers Bank, the company that owns the BankMobile app, said that smartphones make Citibank’s concept obsolete. Smart screens in banks cannot compete against smartphones’ convenience and accessibility.
Peer-to-Peer
The advent of smartphones and online banking services could mean that the future of banking now lies in financial technology, or “fintech.” As of July, 46 fintech startups have surpassed a valuation of $1 billion. These businesses are based on online and mobile apps with features ranging from paying bills to consulting in business and technology—services that big retail banks have traditionally given. Peter Diamandis, the co-founder and executive chairman of Singularity University, told the Exponential Finance conference in June that bank branches could disappear by 2025. Fintech companies, led by mobile banking apps, could be their replacement.
Peer-to-peer, or P2P, payments comprise yet another system that services the growing demand in mobile banking services. P2P allows people to make financial transactions with each other through mobile devices, directly to their bank accounts, without any of the intermediate steps associated with interpersonal transactions. The concept grew after 2001, when PayPal launched its service that provided user-friendly accounts to allow sellers and buyers to make online transactions easily and instantly.
Then, in 2009, Andrew Kortina and Iqram Magdon-Ismail co-founded Venmo in order to develop a convenient way to settle accounts that avoids the hassles of writing checks or withdrawing from the ATM. From its beginning, Venmo allowed all users—not just products’ sellers and buyers—to transfer money via P2P payment systems. This feature made Venmo so popular that the large payments company Braintree acquired it for $26.2 million only five months after its public launch. About four years later, PayPal (then owned by eBay) eliminated its mobile-based competitor when it bought Braintree for $800 million.
Venmo’s social media format, as well as its free-of-charge label on most services, enhanced its popularity among users. The moment the app opens, users can see their friends’ public payments, or they can easily request money from or pay back their friends. The social aspects of the app (like the ability to share which restaurants users visited over the weekend) help create a sense of community that could draw people back to Venmo. And the app’s no-charge bank and debit card transfers helped make it an attractive alternative to other services like Google Wallet, which charges a 2.9 percent fee to deposit from a debit card.
However, new companies are challenging PayPal’s dominance of the P2P payments and e-commerce markets. On November 17, 2014, Snapchat partnered with Square to launch a P2P payment app, Snapcash, which is still a functionality offered by the Snapchat app despite plans for expansion. Facebook’s incorporation of P2P features into its Facebook Messenger app is yet another move to diversify a market that still largely belongs to Venmo and PayPal.
The Future of Retail Banking
The rise of P2P payment systems indicates that consumers want services that go beyond client-to-bank interactions. Indeed, traditional retail banks now have online services and apps, and they are making plans to downsize their branch offices. Bank of America, for instance, has closed hundreds of its branch offices, and JPMorgan Chase announced that it would lay off nearly 5,000 tellers by the end of next year.
However, fintech companies could soon replace even electronic banking systems put forward by traditional banks. The P2P payment system has what traditional retail banking services do not have: a social component. The system itself is reliant on personal and convenient interactions between peers. Online transfer features in electronic banking systems, on the other hand, are less personalized and can be more inconvenient when compared to P2P payment apps.
Facebook Messenger also encourages businesses to personally interact with their customers, making the app appealing not only to individual users, but also to corporations. Since its launch on March 25, Businesses on Messenger has allowed companies to interact more personally with customers through the app. Employees can now relay information, make transactions, and offer live support to their customers.
This type of instant but individualized interaction between businesses and clients appeals to younger bank-goers, a demographic which makes up 21 percent of consumer discretionary purchases. The increasing number of fintech companies that provide convenient, mobile, or more varied alternatives to the services of retail banks could be the reason why 33 percent of millennials doubt that they will need to visit a bank within the next five years. Banking could eventually go completely online. Retail banks might no longer exist in branch offices, but rather in every 180×180 pixel icon on the screens of Apple iPhones, Samsung Notes, and HTC Ones.
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