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P2P Payments Are Coming, and the Credit Card Companies Won't Like It

Why can't I transfer money directly from my bank account to your account? Wait, let's try that again.... Why can't you transfer money directly from your bank account to my account?

Unlike in Europe and parts of Asia, it's difficult for one person in this country to send money electronically to another person in order to, say, buy movie tickets or make a rent payment. Most people conduct such business the old-fashioned way -- with cash, check or credit card. But that's starting to change.

In 2009, financial institutions including Bank of America (BAC), Bank of the West, ING Direct and PNC Financial (PNC) rolled out so-called P2P technology that lets customers use the Web or a mobile phone to transfer money from their account to any other account.

That's big. If the practice takes off, it could fundamentally change the payments business, says Federal Reserve Bank of Boston economist Oz Shy in a new study. It could also eventually break the credit card industry's grip on consumers and small businesses, which pay high "swipe" fees for handling credit and debit card purchases. Shy writes:

In recent years, many lawsuits have been filed against card associations with respect to their coordination of interchange fees and the implementation of the no-surcharge rule, which prohibits merchants from openly transferring their fees to card users.... It seems that widespread use of online transfers would increase competition and this would eventually reduce the fees imposed by card issuers and card acquirers.
P2P fund transfer services, most notably PayPal, have been around for a decade. For the most part, however, it was technology in search of a market. But the widespread use of online banking and e-commerce is paving the way for greater use of P2P payments.

In 2009, roughly 44 percent of U.S. consumers reported making at least one online P2P fund transfer, up from 27 percent the previous year, according to Javelin Strategy. The payments research firm expects some 60 million American households to use P2P for such transfers by 2014.

There are two general approaches to enabling P2P transfers. At financial companies such as B of A (see here for a demo), ING, Capital One (COF) and Wells Fargo (WFC), customers use an online interface to enter another person's account and bank routing info. The recipient of the funds then typically gets an email or text message requiring him to verify his account details and to accept the transaction. Other banks, including Bank of the West, First Hawaiian Bank and PNC, use the tech underlying PayPal, which avoids having to transmit banking details.

The big kahuna here would be full-blown mobile P2P transactions. That's still a ways off, with most such services in the early stages of being deployed and tested. Only five percent of Americans have used a mobile device to send funds to another person, according to Javelin. Here's what will change that: smart-phones. Industry studies show that iPhones and Blackberry users are far more likely to make a P2P transfer than folks with less advanced devices.

Speaking of, anyone interested in testing a P2P fund transfer (at a low, low price) should contact me by email. I prefer $10s and $20s.