Peer-to-peer (P2P) payments are the act of one person electronically sending money to another person through a platform. While most people still use cash or write checks, there is no denying that the use of digital platforms for P2P payments has exploded in recent years. While tech companies such as PayPal Holdings Inc. (PYPL -2.98%) have thrived with P2P payments, traditional banks and smaller fintech companies have struggled to keep up.

This might be finally beginning to change as several big banks, including Bank of America Corp. (BAC -0.38%), JPMorgan Chase & Co. (JPM 1.11%), and Wells Fargo & Co. (WFC -0.05%), called out Zelle's big launch this past quarter for serving as a catalyst for P2P growth. Zelle is probably best thought of as a shared P2P platform on which nearly all domestic big banks, and several smaller ones, are currently participating.

For banks, one of the major problems in gaining traction with P2P payments has been a fragmented market. Until recently, if I want to electronically send my friend $15 to cover my share of pizza, I couldn't have done that using my bank's app unless my friend and I both used the same bank. With PayPal or its subsidiary Venmo, there is no need to share a bank, smartphone manufacturer, or operating system. For banks, Zelle looks like it might have largely solved that problem.

Person navigating Venmo app on a smartphone.

PayPal has deepened customer engagement with P2P payments. Image source: PayPal Holdings Inc.

P2P takes off for PayPal

For good reason, PayPal has become the envy of the financial world with its P2P payments success: In its most recent quarter, P2P payments grew to $24 billion across PayPal's platforms, good for a 47% increase year over year, and P2P payments now represent 21% of PayPal's $114 billion total payment volume. Venmo, PayPal's P2P app popular with millennials for featuring a social-media element, also continues to show explosive growth. In PayPal's third quarter, Venmo processed about $9 billion in payments, an incredible 93% year-over-year increase.

Some might wonder why this is a big deal. After all, very little, if any, money is made on P2P payment transactions. Neither PayPal nor Venmo charges fees for these transactions if the funds originate from the account's balance or a bank account. When a credit card is used as the source of the funds being transferred, a nominal fee is charged, but that mostly goes to the credit card company.

But P2P payments have never been about turning a profit. Rather, it's about getting customers to deepen their engagement level with a platform. This is something PayPal knows a thing or two about: In its recently reported quarter, PayPal reported 1.9 billion transactions across its platforms, a 26% increase year over year. Its transactions per active account increased to 32.8, a 9% annual increase. By getting its customers to use the platform more with free and convenient P2P transfers, it has also increased other types of transaction numbers as customer acquaint themselves more with the platform and form spending habits.

Hitting the ground running 

As banks saw consumer habits changing, they knew they would have to adapt or risk losing the next generation of consumers. Zelle was their collective solution, and early results look promising.

In the company's third-quarter conference call, Wells Fargo CEO Tim Sloan said the bank had seen "significant growth" in both the number of P2P transactions and payment volume since launching Zelle in June. Sloan also said the company saw 46% growth year over year in P2P payments. While JPMorgan Chase CEO Jamie Dimon didn't give specific numbers in his company's conference call, he did say that since Zelle launched, P2P was "doing quite well." But it was Bank of America CEO Brian Moynihan who might have shed the most light on how well Zelle was performing with his bank's customers. He stated:

In this quarter, Zelle came forward, the latest offering we have in mobile area. ... [O]ur volumes through Zelle this quarter were $4 billion in the third quarter. We processed nearly 14 million transactions, and the growth continues. We recently processed $0.5 billion in a single week. Our customers are using Zelle, and we look forward to further growth in that area.

While these numbers are coming off a small base and still represent a fraction of these banks' overall payment volumes, the growth should encourage them that they are finally gaining traction in this particular payment subsector. Of course, shareholders in these banks should continue to watch their progress closely. It's important for these banks to demonstrate that they can consistently match the latest trends in fintech and consumer behavior.

At the same time, PayPal's heady growth numbers show that there is plenty of room for two or more players in this space. Investors in this company should, of course, continue to monitor its growth numbers and customer engagement levels, but there doesn't appear to be any reason for concern for the time being.