Peer-to-Peer Payments - The Network Effect


The network effect is best described as greater use of a product resulting in an increase in its value. If you think about the telephone or social media, you can immediately understand why the more people are in a network, the more useful it is. Collaboration is one great way to increase the effective size of a network and thus the value and utility of the product. In financial transactions, this mostly refers to P2P (person-to-person) transactions. The more of your friends are in the network, the more useful it is.

The banking world's on-again-off-again relationship with collaboration has lasted since the industry's early years. At the dawn of the internet, most banks tried to build their own P2P solutions, individually. They lost out to the payment giant PayPal, especially as many delayed in embracing the true potential of digital networks.

The truth is that payment systems benefit heavily from a larger number of transactions. This is why PayPal beats out individual bank solutions to the point where many small businesses no longer bother with a merchant services account. PayPal's rival Square, more focused on face-to-face transactions, has also lured away sole proprietors and micro businesses.

The banks have finally clued in with the launch of Zelle, an API-enabled network with more than 30 partners, designed to work with thousands of banks and millions of consumers. The basic premise of empowering the network with more participants and transactions can thus be used to benefit smaller banks. MasterCard and Visa have also expanded the use of open APIs to encourage larger networks. Blockchain may also affect the development of P2P systems, although the technology is new enough that it might be unclear, as yet, how. It may come into play more strongly in cross-border ecommerce.

The rise of mobile payments is also driving peer to peer payment. As many people pay for shared pizza using their phones and the amount of cash in use declines, banks need a slice of the pie moving forward. P2P systems are taking over from cash and moving us closer to a cashless, or at least cash-less society.