In many countries, the last ten years have seen a decisive shift from cash to digital payments. During the coronavirus crisis, many governments and retailers have actively discouraged using cash; if some form of digital payment, ideally contactless, could be used instead, the move away from cash has accelerated.
In many markets, increased use of digital payments has also been assisted by a growth in the number of digital payment methods available. These include peer-to-peer (P2P) payment tools, for transferring cash between individuals; some of which can be used through social media platforms as P2P social payments.
Volumes and transaction values of such P2P social payments are growing, in part because the use of social media also continues to increase. By July 2020, 3.96 billion people – approximately half the world’s population – were active users of social media, according to figures from Datareportal. The statistics are mind-boggling: in July 2020, Facebook had 2.6 billion users; WhatsApp 2 billion; Facebook Messenger 1.3 billion; and Instagram just over 1 billion. Hundreds of millions of people use several other platforms, including Twitter, Tiktok and Sina Weibo. The vast majority of social media users (about 4.33 billion) use smartphones to access these platforms.
In that context, it is unsurprising that fintech firms, banks and social media platforms have all developed P2P social payment tools. These services must offer both convenience and security if they are to succeed, but in societies where smartphone use and digital payments have become the norm, there is enormous potential for further growth in the use of these services.
Easy, convenient and free
The first digital P2P cash transfer service was offered by PayPal almost 20 years ago as a way for consumers to pay for eBay purchases. At the time, many people were still nervous about using credit cards online, while many eBay sellers lacked either the need or the means to set up a merchant account with a credit card company.
The P2P social payment services developed more recently can be used for multiple, everyday purposes but are perhaps particularly useful when individuals want to transfer small amounts of money to each other: when splitting a bill in a restaurant, for example. They can also be offered free of charge to consumers (although not all services are free for all transactions) because social media platforms derive significant revenue through advertising.The P2P social payment services developed more recently can be used for multiple, everyday purposes, but are perhaps particularly useful when individuals want to transfer small amounts of money to each other: when splitting a bill in a restaurant, for example. They can also be offered free of charge to consumers (although not all services are free for all transactions), because social media platforms derive so much revenue through advertising.
Well-established P2P services include Venmo, in the US, which PayPal owns. Users can sign up for the service via Facebook, through which they can also transfer money to other Facebook users. They can find non-Facebook users by searching for their Venmo user name or phone number.
Venmo users access a newsfeed-like interface through the app, which shows their recent transactions. Some of these details are also shared with friends in their Venmo network unless users ask for this information to be kept private; the Federal Trade Commission (FTC) has reprimanded Venmo in the past for revealing too much end-user personal information. Venmo had 52 million active accounts by the end of 2019 and processed more than $102 billion during the year.
Another US-based P2P service, Zelle, is owned by a group of major US banks and can be used by customers of many US banks and credit unions, via their existing banking apps, for money transfers. If a potential recipient’s bank does not work with Zelle, they can still use the service by downloading the Zelle app and providing a mobile phone number and email address. Some US banks also now allow small businesses to accept payment via Zelle. There were 519 million transactions made using the service during the first half of 2020. Elsewhere, Facebook has struggled against regulatory and technical problems but (at the time of writing) looks likely to launch WhatsApp Pay in both Brazil and India shortly.
But perhaps the most exciting example of a P2P social payment service that could be used in multiple jurisdictions in future is Facebook Pay, already available in the US. Users input account or card details once they can use the service to make payments to businesses, donate to charities, and make P2P transfers. They can access the service from Facebook, Messenger, Instagram or WhatsApp accounts.
This is Facebook’s second attempt to launch an effective social P2P payments service: a previous system based on Messenger was closed in the UK and France in 2019 after failing to attract many users. It will be fascinating to see how quickly Facebook rolls this service out to other countries. Facebook’s broader business model’s success means it does not currently need a money transfer/ P2P payments service to bring in any revenue: during 2019, revenue from advertising was $69.6 billion, an increase of 27% compared to 2018.
Risk management and mitigation
P2P payments via social media are inevitably subject to security risks, including the exposure of consumers’ bank account, credit or debit card information. If security measures prove inadequate and consumers’ accounts are hacked, there may be no adequate insurance coverage for losses incurred. Service subject to high levels of fraud also poses significant financial, regulatory and reputational risks to financial services companies, fintech, social media platforms and other stakeholders.
These companies are fully aware of the danger posed by these continuously evolving risks. Security measures are taken to address them include more widespread use of two-factor authentication in various forms, including biometrics, OTP codes and secondary security devices to authenticate end-user identity, plus transaction monitoring or device use analysis processes that can identify suspicious activity.
But individual consumers must also take some responsibility for ensuring the security of transactions. Steps they should be encouraged to paying close attention to advice from service providers about using services safely, using strong passwords, logging off websites after transactions, and above all, simply checking carefully to ensure money is being moved into the correct bank account. It is also essential for services to comply with all relevant regulatory and legislative requirements, including the EU Payment Services Directive (PSD2) within the EU, guidelines for accessing UK bank accounts through the Open Banking initiative, and relevant data protection applicable within a given jurisdiction. Such regulations are subject to change, and it seems likely that they will tighten in future as the use of digital payments, in general, continue to grow.
The promise of P2P social payments
With the implementation of adequate security measures, P2P social payments can be made safely. A growing number of consumers will find these services easy and convenient, and they may also help some people poorly served by the current banking system, such as the unbanked, who might not have a bank account but may well have social media accounts and a smartphone.
The evolution of this form of payment forms part of broader changes in the way consumers make payments. These changes will cause significant financial and economic disruption while raising important questions about how consumers and businesses interact with social media and the data generated by those interactions.
But if suitable measures are taken to ensure that the use of these tools is safe, then businesses enabling their use, along with their customers, investors and the economies of countries where these services are made available, will all benefit. If they are not already doing so, businesses and other organisations would be wise to keep an eye on the subsequent development phases in P2P social payments.
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