Large US banks take on technology rivals with instant payments
NEW YORK (Reuters) – Depositors at some of the largest US banks are finally getting the opportunity to do something quick and easy: send money to someone else’s account instantly using their cell phone.
The idea has been in the works for at least five years, and Silicon Valley has now advanced into the industry’s role as a payment intermediary. But now big banks, including JPMorgan Chase & Co, Bank of America Corp, Wells Fargo & Co, and US Bancorp, are starting to join a system called clearXchange that they jointly own and that allows each other’s customers to instantly add money transfer when sharing a dinner check, rental payment, or vacation bill.
“What we’re doing now is delivering real-time payments that our customers want,” said Mary Harman, managing director of payments at Bank of America, in an interview. The bank is one of two banks that have started rolling out the system to their customers.
While tech companies like PayPal Holdings and Facebook Inc already offer smart payment apps that appeal to young consumers, the banking industry has a key advantage because it controls how quickly money is actually moved between bank accounts. According to Javelin Strategy & Research, individuals sent approximately $ 200 billion to one another using cell phones and computers in the past year.
Bank managers and analysts who closely follow payment systems say banks can make up lost ground if clearXchange is fast, functional and easy to use.
Bank of America plans to announce on Wednesday that its customers can use clearXchange to instantly send money to customers of US Bancorp, which last week said it was hooked up to the fastest part of the network. Representatives from JPMorgan Chase & Co and Capital One Financial Corp told Reuters that they plan to offer the service later this year.
Wells Fargo & Co said Wednesday that it was working on rolling out instant payments by the middle of this year.
Analysts assume that PNC Financial Services Group Inc. will start this year. One representative declined to comment.
These six banks are among the seven largest banks in the United States. Regional bank BB&T Corp is also one of the seven owners of the network but is not ready to announce its plans, a spokesman said.
Citigroup, which has the fourth most US deposits, has not joined ClearXchange. A spokeswoman wouldn’t say why. Citigroup uses an older network called Popmoney, owned by Fiserv Inc., for person-to-person payments.
Today, when a customer wants to transfer cash digitally to another person – be it via an app such as Paypal’s Venmo or via the payment transfer system of a single bank such as Chase’s QuickPay – it usually takes one to three days for the money to be in an account with. Another institution will be referred. On clearXchange, the cash can move immediately with a tap of the finger.
The initiative is particularly important for banks as their customer base is transitioning from a generation who cashed checks and received mortgages by entering a branch to a generation who went online first to transact and take out loans. It is important for banks to engage with the so-called millennial generation of Americans, 18 to 34 years old, as they begin their prime years for credit and savings.
But adapting to these behavioral changes was a low priority for US banks after the financial crisis, as they faced losses, fines, new regulations, and slow revenue growth. In a short amount of time, financial technology startups filled the void – not just in payments, but in areas ranging from student loans to financial planning. If banks don’t catch up quickly, they could end up losing some young customers altogether, analysts said.
“There is a short window of time for banks,” said Michael Moeser, director of payments at Javelin.
For clearXchange to be successful, it must reach a critical mass of participants so that depositors can transfer funds to most of their friends, relatives and colleagues. Until more banks connect to provide instant service, the network has little value.
Any US bank or credit union can participate in clearXchange, and the owners hope there will be many more. The network says its members represent two-thirds of U.S. deposits.
Banks in other parts of the world are taking similar steps. For example, in the UK there is an app called Paym that allows individuals to transfer up to £ 250 ($ 355) to another user’s bank account. The Nordic countries are leading the way for a cashless society with the mobile payment apps Swish in Sweden and MobilePay in Denmark.
Analysts believe the mobile banking market will continue to grow as consumers become increasingly aware of apps and technology improves.
Launched in 2012, Venmo processed $ 7.5 billion in person-to-person payments last year. In January, the company moved $ 1 billion between individuals – a ten-fold increase in two years, said Bill Ready, PayPal’s global director of products and technology, who brought Venmo to PayPal in a 2013 deal.
Those numbers are well below the $ 22 billion in cash digitally exchanged by Bank of America customers last year or the $ 20 billion processed by Chase QuickPay. But Venmo is growing fast, and its popularity has come almost entirely through word of mouth as friends ask friends to sign up, Ready said. The Messenger app from Facebook offers a similar service.
While these apps send instant notifications that money is on the move, they still rely on banks to make sure cash is available and moving. And unlike banks, they have no control over the speed at which this happens.
“As a Bank of America customer, when I hit send, the US bank customer sees the money in their account a few seconds later,” said Harman of Bank of America.
Even so, PayPal’s senior executive Ready said he was skeptical that ClearXchange would be a success. “Banks are having a hard time working with each other,” he said, adding that it would be difficult for them to “recreate the viral nature of Venmo”.
Facebook officials declined to comment on the banks’ plan, but said the company is continuing to improve Messenger’s payment capabilities.
However, the benefit to the banking sector could be short-lived. The network that Venmo and others frequently use to transfer funds will gradually start daily billing in September. This network, known as the Automated Clearing House Network, is a not-for-profit association whose members are financial companies.
“When Venmo becomes real time,” says Moeser from Javelin, “then the banks no longer have any differentiators.”
Banks that are part of clearXchange know that they have to overcome the excitement and dynamism that existing apps have garnered. They are working to come up with a catchier name than clearXchange and are hoping to launch a marketing campaign by the middle of this year, Harman said.
“The most important thing,” she said, “is that we act now.”
Reporting by David Henry in New York; Editing by Lauren LaCapra and Martin Howell