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 20
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 (
). 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.
"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
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.
, 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
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.
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.
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
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
"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.
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
"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."
Fed: Consumerw wary of mobile payment security
Infographic: Consumers prefer mobile banking to