If you own an Apple device, you’ll soon be able to send and receive money from friends and family within Apple Pay.
The technology giant recently announced the news at WWDC, its annual developer conference, which is taking place in California and due to finish tomorrow. The feature will be integrated directly into iMessage and will use Touch ID to ensure transactions are made securely. Once the funds have been sent, they will go into an Apple Pay cash card, enabling users to send the card to friends or family, or transfer them directly into their bank account.
Unsurprisingly, Apple’s announcement made headlines across the globe, but many other companies have been innovating in the peer-to-peer (P2P) payments arena for some time. The one thing Apple does have, however, is a solid – some would say cult-like – following, having sold its billionth iOs device in late 2014.
But Apple has competition too, as it tries to set itself apart from similar propositions developed by fellow tech giants Facebook (which launched a P2P payment function within Messenger in the US in 2015) and Google (which enables people to send and receive payments via Gmail); but also mainstream banks and online payment processors such as PayPal and Square.
There may be room for incumbents, both big and small, but what exactly are startups’ chances of survival?
The regulatory environment
Regulation is not just an expensive, albeit necessary, form of industry validation, it also takes up a vast amount of time and resource, which can be problematic for startups operating on relatively tight budgets.
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“Getting a direct FCA license can be expensive and time consuming,” said Vinoth Jayakumar, a FinTech investor at Draper Esprit, noting that in order to bypass these associated costs, some startups may consider becoming authorised through existing – and licensed – payment processors such as Wirecard.
Leaving UK regulation to one side, it’s important to remember that firms are also currently bound by EU instructions.
The PSD2 directive, which must be adopted by all EU Member States by 13th January 2018, is widely considered a significant evolution of existing payments regulation. Overall, the directive seeks to increase competition in what is already a very hotly contested industry, by bringing into scope new payment services and enhancing customer protection and security. It’s also, many would argue, an important step towards forging a Digital Single Market in Europe – which is certainly good news for startups.
“PSD2 presents a huge opportunity for new payment providers and intermediaries by opening up the market to competition and many firms will be investing in their business models to take advantage,” said Christopher Ratcliffe, a senior associate in the financial services regulatory group at international law firm Taylor Wessing.
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“Whilst the UK remains part of the EU, it is required to implement PSD2 … and it is preparing to do so. Beyond Brexit, these firms can take comfort in that the UK is already a front-runner and supporter for many of the policy objectives behind PSD2, such as the Competition and Market Authority’s Open Banking Initiative that will allow third party access to banking data. As such, a reversal of PSD2 looks unlikely,” Ratcliffe added.
Jayakumar said he believed the directive was the “single biggest opportunity” in the market at the moment, as it looks to open up API access to bank accounts and enable any P2P payment providers to offer more real-time and contextual services. But, the regulatory environment, he added, is continually changing and doing so very quickly.
One of the hardest things for startups to do is to gain user trust and keep it. Although many FinTech firms emerged following 2008’s financial crisis and the subsequent loss of faith in mainstream finance, it’s still difficult to convince customers to hand over funds to relatively unknown services.
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Colin Hanna, an investor at Balderton Capital, agrees. “While peer-to-peer payments remain an interesting opportunity, smaller companies in the space face an uphill battle.
“Firstly, P2P networks rely heavily on network effects which favour incumbents that may already have large active user bases. Secondly, it can be difficult to convince customers to store assets in companies or products they are not familiar with.”
Much of PayPal, Google or Facebook’s success lies in the fact these companies already have huge customer bases. This, Jayakumar said, gives rise to network effects, enables them to carry out quick and necessary A/B testing to refine their products.
“This will make their product stickier and increase the odds of becoming the default P2P platform,” he added.
The P2P opportunities
This may be the case, but there’s no denying consumer banking is on the verge of disruption.
Customers are redefining their expectations and seeking to gain greater convenience, customisation and accessibility, hence why there’s probably never been a better time for startups to enter the battleground.
In fact, according to PwC’s Global FinTech Survey 2016, the majority of financial sector executives believe consumer banking is the sector most likely to be disrupted by FinTech startups.
“P2P payments is all about achieving mass adoption and scale because payment margins are extremely thin. Huge volume is required to be able to build a sustainable and/or profitable business.
“Every major payments player was once a small company – I absolutely believe there will be room for a true disruptor to reinvent P2P payments,” said Jayakumar.
The past few years alone have seen a number of startups innovate in this space, take US service Circle, for example. Founded in 2013, the startup now has backing from Goldman Sachs, IDG China, Breyer Capital, Accel and General Catalyst to the tune of $136m. Snapchat introduced its own stand-alone friend-to-friend payment app Square Cash in the US back in 2014, but here in the UK, firms are entering the space too. Acasa (formerly Splittable) is primarily an app that enables users to manage and pay for utilities, but it also features a peer-to-peer money transfer service. Fellow British firm Revolut, which has so far raised more than $15m in funding, offers pre-paid debit cards, currency exchange, current accounts and P2P payment services.
Although there’s certainly room for more, new entrants will need to ensure they are platform agnostic. This, Jayakumar explained, will allow them to integrate seamlessly with existing P2P payment methods and in so doing will widen the net of potential adopters.
New players, he added, will also need to think carefully about pricing mechanisms if they are to remain competitive with incumbents, who are typically able to offer much lower rates due to the economies of scale at which they operate.
“The biggest opportunity is to provide a better service (faster clearing times, lower costs) packaged within a convenient UX (mobile native, frictionless),” Hanna predicted.
But, how does the theory differ from reality?
Edward Cooper, chief mobile officer at Revolut, echoed much of what Jayakumar and Hanna shared with Tech City News.
“The main challenge facing P2P startups is achieving critical mass and network effect. In order to compete with incumbents, startups need to leverage their size and nimble nature to quickly take advantages of opportunities as they arise.
“Incumbents have locked in routines and processes and in the face of rapid external change, these routines and processes prevent swift and decisive alterations to existing business models, making them ripe for disruption,” Cooper said, highlighting that he believed startups would set the bar and generally increase innovation within the space.
The ongoing rhetoric may be that startups are seeking to disrupt financial services and are ultimately competing with mainstream financial banks in their quest to do so. Although idealistic, this seems somewhat far-fetched.
Many believe the future will see banks and FinTech firms working together and collaborating to improve customer experiences (which banks have historically struggled with) and gain consumer adoption (where the banks say their strength lies). With investment into UK FinTech continuously increasing, the opportunity for startups to rise and flourish is there, it just needs to be embraced.