PayPal (NASDAQ:PYPL) has long been the leader in peer-to-peer (P2P) payments, from its own roots back in the 1990s to its acquisition of the Venmo social payments app, which has gone on to become one of the fastest-growing components of the payments service.

However, it is quickly losing out to big banking interests, including Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and JPMorgan Chase (NYSE:JPM), which formed a consortium that developed Zelle, a competing P2P service. Last year it surpassed Venmo in the amount of transactions processed last year. This year it is poised to beat Venmo in the number of people using the app.

Venmo app on smartphone

Image source: PayPal.

Take my money!

Data from eMarketer suggests Zelle will grow by more than 73% in 2018 to reach 27.4 million U.S. users, significantly ahead of Venmo's expected 22.9 million users. By 2022, the research site estimates the gap will widen even further, with Zelle being used by over 56 million people compared to 38.7 million users of Venmo.

Square will remain a distant third place in the race, growing from 9.5 million users this year to 16.2 million in four years' time, while Apple, which launched its Apple Pay Cash service last year, doesn't even register.

One of the key differences between Venmo and Zelle that was supposed to make the PayPal service the better choice was its social feed.

When you transfer money on Venmo, you need to make a comment, which then appears in a feed that people can see, though they can be made private by changing your privacy settings. It supposedly is one of the features that attracts millennials to the site, and though I've long since aged out of that demographic, I didn't even realize the feature was there when I've used the app.

It would seem to have more utility for businesses that accept Venmo payments. There is, of course, the benefit of free advertising in a customer's friends and family seeing where they shop or eat (assuming their feeds are public).

Further, although businesses do pay a transaction fee for each payment made to it by a user, if the app increases sales they might mind the cost. Venmo can also gain insight into a user's spending habits, something which just got a big push forward with Venmo officially launching a branded debit card with Mastercard.

After using the debit card, the purchase will show up in your account (though not in your feed, unless you specifically allow it) and feature an option to split the purchase with friends. You'll also be able to withdraw cash from an ATM with it from your Venmo account balance. And since attracting merchants is how Venmo is going to make money, that could be a plus, but it still seems of minimal value.

It's all about the Benjamins

But P2P payment services are about transferring cash, not socializing. A relatively recent study by LinkedIn and Ipsos Reid found that 32% of millennials "envision a cashless society where currency is no longer used for transaction." Millennials may have liked Venmo more because of its immediacy in getting and sending money -- and the fact it was the biggest around -- than from in any social benefit.

They may be switching over to Zelle because it allows payments to be processed within minutes if the recipient is enrolled in the service compared to the one to two business days required for Venmo. Although Venmo has now allowed for instant availability as well, it charges a $0.25 fee for the transaction; Zelle remains free. So once you switch there's no real reason to go back, a social news feed notwithstanding.

Still, the P2P payments market is a big one, is still growing, and will be able to support a number of players.

Play for pay

At the end of April, Zelle had over $25 billion move through its network in the first quarter, up 15% from the year-ago period, on 85 million transactions. More than a third of those transactions, or 29 million, were processed through Bank of America, which saw $9 billion in volume. Mobile payment volume on PayPal was also up big year over year, rising 52% in the period.

Venmo has an added advantage of being the more well-known of the P2P payment services, giving it an advantage over Zelle. But as more people begin using the big bank payment service -- it claims that 100,000 people a day sign up for the service -- that competitive edge will disappear.

PayPal will still be able to hold its own as the global P2P payments industry is expected to grow at a 32% compounded annual growth rate through 2023, hitting $3.3 trillion dollars. Yet it will no longer be the biggest, most widely used service, as the banking industry shrugged off its typical sloth and created in Zelle an effective competing service that does one thing and does it quite well: making transferring money accessible.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, PayPal Holdings, and Square. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.