As banks struggle to keep up with digitization, other startups and companies are pioneering the use of mobile-specific technology to optimize payment transfers. The biggest challengers of traditional banking when it comes to digital payment transfers is peer-to-peer payment apps, digital or e-wallets, and mobile-only banking apps.
1. Peer-to-Peer (P2P) Payments
- Over 126 million users are expected to use mobile P2P payment transfers for the year 2020. Payments through P2P transfer apps are expected to reach $396.48 billion in 2020.
- P2P payment apps allow users to send payments to each other in a way that is easy, relatively quick, and secure. Users can send or receive money from friends and family without having to take money out of an ATM or write a check. Depending on the app, payments can be sent within seconds to a couple days.
- Popular apps that allow P2P payments include Venmo, Paypal, Cash App, and Zelle.
2. Digital Wallets
- The global presence of mobile devices warrants the use of digital wallets, also known as e-wallets. Payment transfers through digital wallets are widespread and forecast to increase in 2020. By 2022, only 17% of global payments are forecast to be made with cash compared to digital wallets.
- Users may prefer the convenience and low maintenance fees associated with digital wallets. Digital wallet apps provide fast, quality services and are easily accessible since services are typically available 24/7. For this reason, consumers are more likely to opt in to using their digital wallet rather than a traditional bank card to make purchases.
- Examples of digital wallets include Google wallet, Apple Pay, Facebook messenger, and many more as companies create their own wallets.
3. Mobile-Only Banking
- Mobile-only, or digital-only, banks are growing more successful than traditional institutions in many aspects. The global market for these challenger banks is forecast to reach $44500 million by the end of 2026.
- The prevalence of mobile and online banking in different countries, especially the US, UK, and Australia, is forecast to drive the growth of mobile-only banks. An increased use of smartphones and apps has fostered an environment to sustain mobile-banking use.
- Some of the top mobile banks include Chime, Revolut, Sofi-Money, N26, and Varo. Many of these online banks provide fee-free accounts with easy payment transfer processes.
Digital Payment Transfer Challengers, Processes
Payment processes for each of the three biggest challengers to banks when it comes to digital payment transfers involve keeping money stored in an app until it is manually released into a personal banking account.
Peer-to-Peer (P2P) Payments
- Peer-to-Peer (P2P) Payment processes begin by downloading an application and establishing an account, with some apps requiring additional verification details and passwords to enhance security. Then the new account is linked to a credit card, debit card, or bank account.
- After the account is set up, other users can be searched and found by their phone contacts, username, or email.
- Sending and receiving money is typically done by utilizing the other user’s email address, corresponding account handle, or phone number.
- The person being sent the money is keyed in, along with the transaction amount, with reasons for payment added if required, and the payment is then submitted.
- For a transaction to take place, money must be transferred from the user’s account within the application to the receiver’s user account.
- If there is an insufficient amount of money in an account to conduct a transaction, money is then taken directly from the user’s bank account to complete the transaction.
- Although transaction notifications are usually sent right away, the money itself may take anywhere between then and three business days. Some providers are faster, and some also offer instant transfers for a fee.
- Different services may have different steps or requirements, but most P2P payments work something like this.
- Digital wallets require the downloading of a digital wallet app on a smartphone. These apps are usually created by someone’s bank of choice or a trusted third party.
- Next, a point of sale (POS) system terminal must be located, which must be compatible with the particular digital wallet. This is usually identifiable via a contactless symbol that appears during checkout.
- Certain POS systems can also permit someone to pay by utilizing Magnetic Secure Transmission technology. Since contactless payments can be harder to locate, most modern POS systems are capable of supporting Magnetic Secure Transmission payments.
- Once a compatible POS system is located, a smartphone can be held up close to the sales terminal in order to pay. Oftentimes, a direct payment can even be made through the app.
- The mobile-only banking payment process usually begins by downloading an app onto a tablet or smartphone.
- Once the app is downloaded, an account is created by filling in personal details to set it up.
- A debit card is issued for purchases, and money can then be added to the account through the transfer of money from a different bank, direct deposit, or mobile check deposit.
- Depositing cash can be a challenge because it has to be added to another account or to a debit card first and then transferred to the mobile-only bank.
- Mobile only banks are primarily digital banks, where all transactions and monitoring take place via apps on mobile devices with no high street branches.
- Individuals still possess a bank card, and hence, they have access to cash via an ATM network. However, their banking occurs via the app.
- The app also present advanced digital functions, including real-time spending notifications, budgeting assistance, and the capacity to both freeze and unfreeze cards, as well as monthly spending reports.
How Digital Payment Transfers Typically Work for Banks
- The process usually begins by the person wishing to do a transfer approaching a bank and providing them the order to transfer a specific amount of money. IBAN and BIC codes are also provided as well so that the bank knows where the money needs to be sent.
- The bank sending the money then relays/transmits a message through a secure system, such as SWIFT or Fedwire, to the receiving bank, requesting that it impacts payment according to the instructions given.
- “The message also includes instructions on how to effect settlement. The actual transfer is usually not instantaneous as funds may take several hours or even days to move from the sender’s account to the receiver’s account.”
- The banks must either manage reciprocal accounts with one another, “or the payment has to be sent to a bank with such an account, a correspondent bank, for further benefit to the eventual recipient.”
DIFFERENCES IN TERMS OF THE PROCESSES
The Process of Digital Payment Transfers for Banks
- A wire transfer involves the movement of funds directly from one bank account to another, often requiring only an account and routing number.
- When the financial institution commences a wire transfer, the process begins by someone employed by the bank confirming that the sender’s account has sufficient funds. At the receiver’s account, an employee also confirms whether the recipient’s account is available to receive the incoming funds.
- The two corresponding banks then begin the process of directly transferring money electronically between the individual accounts.
The Process of Electronic Transfer
- Unlike the one-to-one nature of wire transfers, the process of an electronic transfer is usually triggered when the sender initiates an electronic payment via an automated clearinghouse (ACH).
- Most of the time, the entity receiving the money registers their bank account details with the ACH, either directly or through a payment service, prior to the transfer taking place.
- When the payee sends payment, the ACH receives a notification of incoming funds, then electronically sends a credit to the receiver’s confirmed account.
- The process of ACH transfers generally have lower costs when compared to wire transfers, but they show up in the payee’s account later, with delays when there is a verification of payment received.
To identify what payment processes look like for each of the three biggest challengers to banks when it comes to digital payment transfers, we searched for news articles, press releases, and media publications on related topics. We went through numerous news articles published by leading media outlets, including Forbes, GBO Fintech, New York Times, The Payments Review, Wall Street Journal, Financial Times, Business Insider, Fortune, and Bloomberg, among others.