During the last decade, both demand-side and supply-side factors have contributed to a surge in new methods of making person-to-person (P2P) payments. On the demand side, the driving factors have been the emergence of new forums for commerce such as online auctions and the increasing desire by consumers to monitor and control payments. On the supply side, the main factors have been technological advancements such as faster Internet speeds, increased computing power and smartphones. Despite the surge in new P2P payment methods, studies show that consumers in the United States still prefer to make payments to other people with checks and cash. In fact, P2P payments by check are the only type of check payment that is still increasing. If consumers could be induced to use a digital alternative to P2P payments by cash and check, the efficiency and safety of the U.S. payments system might be enhanced.
Three distinct models for P2P payments have emerged. In the nonbank-centric model, an individual instructs a nonbank intermediary such as PayPal to transfer funds to another consumer. In the bank-centric model, the individual interacts directly with a bank to request a transfer from the bank account of the individual to the bank account of the recipient. The third P2P model is card-centric, in the sense that the payment is processed entirely over a credit card or debit card network. While these new P2P payment methods have received much attention in the retail payments community, they have not been systematically analyzed and evaluated. This article provides such an analysis, showing how each new P2P model works, the extent to which the model improves on checks in meeting consumers' needs and what needs remain unfilled.
The article concludes that the new P2P methods improve on paper checks in a number of ways but leave important gaps, suggesting a need for further innovation. All the new methods have the advantage that they can be used with mobile devices. Furthermore, compared with checks, some of the new P2P methods provide payers with greater control over account balances, payees with faster access to funds and both with stronger security. Still, none of the new methods enjoys the nearly universal acceptance that checks do for making and receiving P2P payments.
Section I provides a brief history of P2P payments in the United States, focusing on the long-standing dominance of checks and the emergence of new P2P methods in the last decade. Section II introduces the key payments characteristics used in the article to evaluate and compare P2P payment methods-speed, payer control, security and universality. Section III explains and evaluates the three basic models of new P2P payment methods, rating each in terms of key payment characteristics. Section IV summarizes the gaps that remain in P2P payment services and discusses the role the Federal Reserve could play in facilitating innovation in this area.
I. A BRIEF HISTORY OF P2P PAYMENTS IN THE UNITED STATES
P2P payments include payments by individuals to friends and family members and to other individuals for goods and services. The latter group is often referred to as "micro-merchants." They include gardeners, babysitters, independent repairmen and individuals selling goods through classified ads or online auction markets such as eBay. This section briefly reviews the history of P2P payments in the United States, describing the early dominance of cash and checks, the emergence of new nonbank-centric methods in the late 1990s and the introduction of bank-centric and card-centric methods more recently.
Early dominance of cash and checks
Before this century, P2P payments were almost entirely by cash and check. Cash was convenient for small, in-person payments between individuals. Except for the risk of counterfeiting, the payee could be confident that funds were good. Furthermore, the only costs of carrying out the transfer were the time and inconvenience cost to the payer of obtaining the cash, the cost to the payee of depositing the cash, and the cost to both parties of safely transporting the cash. …