Over the past two years we’ve talked a lot here about the burgeoning industry known as “Fintech,” a portmanteau of “financial technology,” or how financial transactions are moving to digital platforms.
While Fintech began as a way to describe how technology is being used to improve behind-the-scenes workings of financial institutions, this disruptive force is now changing everything from how we shop and how we bank to how we apply for credit – anything to do with money is ripe for Fintech disruption.
It’s even changing how we pay for dinner…
We’ve all been there – that awkward dance that occurs when the check comes. There are either too many credit cards, or not enough people with enough cash, or the restaurant refuses to split the bill, or no one can agree how to split it evenly…
In recent years, we’ve seen an explosion of smartphone apps that involve what’s known as peer-to-peer (or P2P) payments. These allow anyone to connect a card or a bank account to the app, and send payments instantaneously to anyone else on the app.
All of a sudden that awkward dinner bill – and thousands of situations just like it – get a whole lot easier.
Even social media giants have incorporated P2P payments into their interfaces. Any smartphone user with a credit card has at least five options to get a small sum to a peer almost instantly.
As of right now, none of these innovators have figured out how to monetize P2P payments. That’s going to become increasingly important as the marketplace grows – and as investors line up to profit from one of the market’s hottest trends.
A New Trend Today, a Booming Industry Tomorrow
The rise of P2P payments, from the birth of eCommerce to the hundreds of apps available today, is already impressive. The sliver of the industry that is conducted via mobile devices was valued at about $5 billion in 2013 – but it’s about to explode to $86 billion by 2018. That’s a massive compounded annual growth rate of 76.65% per year.
The potential here is staggering – companies are jockeying to efficiently and effectively monetize mobile P2P payments while appealing to the growing user base. Both will be crucial as new Fintech innovations continue to disrupt the market.
We are already seeing the effects of speedy, informal transactions in eCommerce. Online marketplaces like Etsy and eBay, where anyone with a computer can sell to anyone else with a computer, prefer these types of payments over the dinosaur concept of mailing checks, as well as the expensive option of conducting credit card transactions.
P2P really started to take off with the advent of smartphone apps like Venmo, a leader in the industry. Venmo is growing at a rapid pace – after processing $7.5 billion in payments in 2015, the company eclipsed that total in 2016, processing $12.1 billion in payments in just the first three quarters of 2016 (according to the latest data).
Venmo doesn’t make money through advertisements or one-on-one transactions. The use of a debit card or a connection to a bank account makes the use of the service absolutely free. It’s when a user pays with a credit card that part of the 3% card processing fee goes into Venmo’s pockets.
Now Venmo’s facing competition from just about everywhere…
Other apps use similar models, like Square Cash, who shares the 3% rate for credit card use. Their in-app wallet can cash out to your bank account after a business day’s wait, or immediately for a 1% rate fee. However, the fee-free version of this same system is used in Snapcash, the lovechild of Snap and Square, enabled through a Snapchat app.
Of course, Snap isn’t the only social media company to integrate P2P payments into their interface. Facebook has the function through their Messenger, and Google Wallet uses your Gmail information to connect you to peers.
Interestingly, Facebook’s P2P services aren’t reaching the bulk of their more than 1.2 billion monthly users – that’s mostly because users aren’t aware that functionality exists for them.
Google Wallet is also struggling after foisting a confusing integration system on its user base with little transparency on fees. When users figure it out, it’s obvious a flat fee of 2.9% for the sender per transaction, whether debit or credit, is far from the cheapest option.
Besides, smartphone giants Apple and Samsung have their own P2P payment capabilities. Apple launched Apple Pay in September 2014. Samsung followed them about a year later.
There are lots of options out there. In fact, too many.
If the average investor wants to move in on this exploding trend (and they should), where would they begin?
The Leader of the Pack
The amount of P2P payment apps is a clear sign of how ripe the market is, but there’s one name that stands out as the obvious choice for an investor to get their foot in the door.
PayPal Holdings Inc. (NASDAQ:PYPL) is definitely the most recognizable name in eCommerce. They changed the game when they were acquired by eBay in 2002, and then we watched as they grew faster and stronger than their parent company and split in 2014. PayPal has over 197 million (as Q4 2016) active accounts worldwide.
They launched their own P2P payment platform, PayPal.Me, in 2015. It is one of the few services where you can complete transactions with users around the world. Also in 2015, PayPal acquired Braintree, which previously acquired Venmo.
Venmo is much more popular with millennials than PayPal.Me, and adds substantial value to PayPal’s P2P future. The popular app also has the unique social media twist of posting you and your friend’s payments (minus the dollar amount) to a feed where people can like and comment on each transaction. It’s a superfluous feature, but has helped to establish Venmo as the trendiest P2P app available.
Currently, PYPL shares are a bargain and are trading around $42. The stock dipped a tiny bit since Google announced their new feature of receiving and requesting money through a Gmail attachment on Android phones. But we already know that users are not fans of setting up the complicated Google Wallet system, and this new feature isn’t much of a splash. A couple bucks off PYPL’s highs just makes it more affordable for us.
When Fintech meets convenience, there will always be fireworks. It’s not too late to hop on this opportunity before P2P payments become a piece of tech we use every day, and PYPL doubles.