PayPal (NASDAQ:PYPL) is synonymous with peer-to-peer (P2P) payments, as that was the very first product it ever introduced in the late '90s. Yet two decades later, the P2P payments space is seeing a sort of renaissance as companies are putting newfound effort into developing P2P payment services, driven by rising consumer demand for such services.
The largest financial institutions in the U.S. are now ready to roll out their competing offering, Zelle, which they partnered to develop years ago. Zelle's big differentiating feature was going to be instant bank transfers that are processed in minutes instead of days. Today, PayPal announced that it's getting that feature, too.
A small price to pay
The payments company says that U.S.-based users will "soon" be able to transfer funds instantly to their bank accounts, provided that they use an eligible Visa (NYSE:V) or Mastercard (NYSE:MA) debit card. These transfers should process within a few minutes (in some cases upwards of 30 minutes, depending on the bank). The program will launch in beta but will roll out more broadly in the near future. For now, the new offering is limited to PayPal and not its subsidiary P2P services like Venmo or Xoom, but the company intends on adding the functionality to Venmo at a later date.
Visa and Mastercard are doing the heavy lifting behind the scenes with facilitating and processing the instant transfers. PayPal announced expanded partnerships with both payment processing companies last year (Visa in July, Mastercard in September). Both prior announcements specifically mentioned the ability to instantly cash out funds via debit cards, so today's news shouldn't come as a surprise.
The only kicker is that the instant transfers won't be free: There will be a $0.25 fee per transfer. Presumably, this is what Visa and Mastercard are charging PayPal for the service, and PayPal is just passing that cost along to users. It may not sound like a lot, but it may not be worth it to many users, since the free option that takes one business day is probably sufficient for many people.
P2P payments have taken off recently in part because users are increasingly splitting tabs at coffee shops, restaurants, and bars, which are small transactions; paying a $0.25 fee to instantly access the $3 that your friend just sent you hardly seems worth it, for example. It could make sense for larger transactions, though, like roommates splitting rent.
Messaging and payments could be a paradigm shift
PayPal is still an industry leader here, but it's going to need to play some serious defense going forward as competition only intensifies. Beyond heavyweights stepping in, there is a broader shift of messaging platforms integrating P2P payments, a trend that has become increasingly popular in Asia (most notably with WeChat in China). Whether or not this trend spreads to the U.S. or other Western markets remains to be seen, but it won't be for lack of trying.
Former PayPal exec David Marcus is in charge of Facebook Messenger and its P2P payments strategy, for instance, and confirmed in a recent interview with Recode that the social network is "continuing to invest in payments" in order to "remove friction from that funnel."
If messaging and P2P payments do take off, though, that could represent a potential risk to PayPal as it doesn't -- nor should it ever -- operate any messaging services. The good news is that many of these messaging services are becoming platforms in and of themselves, increasingly supporting and encouraging third-party integrations. It wouldn't be too hard for PayPal to integrate with some of them.
Evan Niu, CFA owns shares of FB and Mastercard. Evan Niu, CFA has the following options: long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB, Mastercard, PayPal Holdings, and Visa. The Motley Fool has a disclosure policy.