Instant payments could help financial institutions capture a piece of the P2P pie

Mobile and online person-to-person (P2P) payments are increasing in popularity across the United States. In 2019, half of consumers (Off-site, PDF) adopted at least one online payment method such as PayPal, Venmo or Zelle, and the pandemic may have further boosted (Off-site) contactless payments. Younger consumers appear to be leading the movement. For instance, 62 percent of millennials reportedly use (Off-site) a mobile P2P payment method, and their adoption often spurs their parents and grandparents to get onboard with these technologies.

When consumers make mobile P2P payments, their financial institutions1 aren’t always the ones that enable them to execute these transactions. That could change with instant payments, which could better position financial institutions to offer mobile/online P2P payment options to their customers. Read on for a refresher on mobile/online P2P payments, how they’re currently executed and how instant payments might change financial institutions’ role in these payments, along with some tips on how to get onboard.

What is a P2P transaction, and how can individuals make one?

A person-to-person (P2P) transaction involves two people transferring funds between each other, such as someone repaying a friend for a concert ticket. Historically, consumers have used cash to complete the majority of these transactions, but in 2019, cash was used (Off-site, PDF) in only four out of ten P2P transactions. Notably, another four in ten transactions occurred via online/electronic means. This article focuses on this noteworthy, and likely increasing, shift in how consumers make person-to-person payments, and will use ‘P2P’ hereafter to refer to mobile/online forms only.

Most card and online P2P payments occur on one of several online platforms where consumers typically use an email or phone number to identify the intended recipient and initiate a payment transaction. For example, consumers can use mobile payment apps like Paypal’s Venmo and Square’s Cash App. Some digital wallets also support P2P payments, like Apple Pay’s Apple Cash. In addition, Early Warning Services, owned by a consortium of banks, operates the interbank Zelle Network®, which allows customers of the participating banks to complete online and mobile P2P transactions.

How does the current P2P landscape impact financial institutions?

Many P2P platforms may leave financial institutions out of the equation if the transaction occurs on a nonbank closed-loop network, which means the payer and payee conduct the transaction on accounts with the single central provider, like PayPal or Venmo. The central provider might use an ACH debit or credit card transaction “behind the scenes” to pull funds from a financial institution account to make the payment. However, the payer could also send funds to the payee directly from funds stored in their online account with the central provider. In this scenario, the transaction occurs entirely on the closed-loop network, which disintermediates financial institutions altogether.

How could instant payments shift the P2P space for financial institutions?

Instant payments introduce the opportunity for financial institutions to reimagine their involvement with P2P transactions. By using instant payment rails, financial institutions can enable their customers to send instant P2P payments via their mobile banking app or website. In this scenario, financial institutions are at the center of the transaction flow: They assist the payer to initiate the payment; facilitate clearing and settlement between the payer and the payee’s financial institutions; and credit the payee’s account with funds to use immediately. Further, this all occurs in a matter of a few seconds.

Additional properties of instant payments that could help transform the P2P space include:

  • Instant payments enable financial institutions to provide confirmation of receipt and posting to their customers in near real time.
  • As an irrevocable credit push payment, an instant payment eliminates the potential for returned payments and saves both payer and payee the cost and hassle of unwinding the underlying transaction.
  • Instant payments eliminate settlement-related credit risk because settlement between the paying and receiving institutions occurs before posting to the payee’s account.

In addition to The Clearing House’s RTP® Network, the Federal Reserve Banks’ forthcoming FedNowSM Service2 will support a variety of instant payment transactions (including P2P) in which a sending financial institution includes the routing transit number (RTN) and account number of the recipient in the payment message. For a future release, the Federal Reserve is considering an enhanced P2P service including an alias-based directory that would allow financial institutions and their customers to send P2P payments using information like a payee’s email or phone number instead.

What are the steps financial institutions can take to begin achieving this vision?

Financial institutions that are interested in offering a P2P service to customers can begin work now to prepare for supporting instant payments. A key first step is to identify how instant payments could benefit their organization. They’ll also want to review their systems and processes to prepare for the logistical and operational implications of 24/7/365 payments. Finally, financial institutions can ask their vendors and service providers about plans for enabling instant payments, along with requirements and any guidance that their vendors can provide.

Financial institutions can also talk with their customers. Specifically, they’ll want to understand customer needs and foster customer interest in P2P payments. Many customers may already use nonbank alternatives to meet their needs, so it will be important for financial institution customers to learn about the benefits associated with instant P2P options that settle via their financial institution account, including:

  1. Immediate and certain funds transfer: Customers can transfer funds from their financial institution account immediately, with the assurance that the payee will receive the funds within a matter of seconds and can immediately use those funds (useful when sending emergency funds to a loved one).
  2. Less friction: By transacting on an interbank network through a financial institution, a customer can avoid the hassle of having to open multiple stored-value accounts and transfer funds between those accounts.
  3. Broader reach and accessibility: An interbank instant payment network has the potential for broad reach as increasing numbers of financial institutions adopt it.

Key Takeaways:

  • Mobile/Online P2P payments are growing in popularity with consumers — particularly among millennials and younger generations — which could spur adoption among their parents’ and grandparents’ generations.
  • Currently, consumers are executing most mobile P2P transactions through fintech technology platforms. These platforms can reduce financial institutions’ role in P2P payments or leave them out of the P2P payments equation altogether.
  • However, instant payment networks, like the forthcoming FedNow Service, could enable financial institutions to reimagine P2P payments and allow them to offer the service through their online and mobile portals.
  • Financial institutions interested in this opportunity can begin preparing now for integrating instant payments into their core systems and processes along with generating buzz for their customers.

Learn more about instant payments and the FedNow Service, an instant payments infrastructure being developed by the Federal Reserve.


1Technically, the term financial institution could apply to a wide array of institutions in the financial services industry, but for the purposes of this article, financial institution is specifically referring to depository financial institutions, including commercial banks, savings banks and credit unions.

2FedNow is a service mark of the Federal Reserve Banks. Other service marks noted in this article belong to the organizations indicated.

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