Consumers have long said they wanted an easier way to move their money electronically, but bankers have been wary that making such a service available would simply allow their deposits to flow out to other financial institutions.
Now Bank of America Corp., the nation's largest consumer bank, is making a move that could dramatically change the landscape of the consumer money transfer market.
B of A, with its 33 million customers, said Thursday that it is offering a free person-to-person payments service. The move is reminiscent of its 2002 decision to offer free online banking, which sent a ripple through the industry and forced competitors to decide whether they saw the service as a loss leader or a revenue driver.
In much the same way, B of A's transfer service could lead its competitors to follow suit, and it may well force banks to decide whether they are willing to gamble that their customers will leave their deposits in the bank when given the opportunity to move them elsewhere.
"Considering that Bank of America has 33 million customers, it certainly gives you a large number of people to transfer funds to or receive funds from," said Sanjay Gupta, the Charlotte company's consumer and small-business e-commerce executive.
B of A has framed this move as limited in scope and focused on serving existing customers and perhaps driving additional "friends-and-family" type sign-ups. And though the service is similar to online transfer services offered by other large companies, including Citigroup Inc. and E-Trade Financial Corp., analysts say B of A's move into the person-to-person transfer business will probably have a larger effect on the industry.
Gwenn Bezard, a senior analyst for the Boston market research firm Celent Communications LLC, said that customers at other banks can expect a P-to-P service now that B of A is offering it. Citi may be the largest banking company in the world, "but people to some extent look more at what Bank of America does than Citi."
The situation could be similar to what happened in online bill payment, he said - B of A started offering it for free in 2002, and many banks followed its lead. "You just can't ignore what Bank of America does."
Mr. Gupta said the P-to-P service is available now to customers in the Southeast, Southwest, and Midwest and will be introduced in California this month. It allows any of B of A's 11.7 million online banking customers to transfer money to any other B of A customer; recipients do not need to be signed up for online banking, but they do need to provide the sender their account numbers.
There is no single limit on the size of the transfers, Mr. Gupta said; the limit will vary from customer to customer, much like the limit on a credit card. And also like credit cards, he said, customers may receive a call to confirm an uncharacteristically large transfer. There is no limit on the number of transfers a customer can make each day.
B of A expects the service to be particularly valuable to families separated by distance, such as parents with students in college. Other banks allow for online transfers to student accounts, but in some cases the accounts must be set up as linked accounts.
Mr. Gupta said B of A's service could entice relatives of customers to become customers themselves. "It gives people a real reason to be part of the Bank of America family."
This month B of A will begin letting customers move money to and from their accounts at other banks. Transfers between B of A accounts are handled by the bank's internal system, but the automated clearing house network will be used to move money to and from other financial institutions.
Beth Robertson, a senior analyst at MasterCard International's TowerGroup Inc. research unit in Needham, Mass., said the ACH network is well-established as a way to move money between customers at different banks, and the B of A service could potentially do so as well.
However, she said B of A likely has some concerns about fraud and money laundering if it opened up its transfer service more broadly.
Banks are also concerned that facilitating transfers between different financial institutions could prompt customers to move their money out of the bank, "because it's easier to do," Ms. Robertson said.
Despite these concerns, analysts say external transfers could actually bring new deposits into the bank. Mr. Bezard said that the few banks that allow free online transfers between institutions have found that as much as two-thirds of the money moved through the services flows into the bank.
At Citi, the figure is even higher.
"The fear has always been that once you enable this, the money will go out the door," said Catherine Palmieri, the director of Citibank.com, but Citi has found the exact opposite - as much as 80% to 85% of the account-to-account transfers her online banking customers initiate are inbound.
George Tubin, a senior analyst at TowerGroup, said that B of A's transfer service could also take a small percentage of business away from PayPal Inc., the payments subsidiary of the San Jose, Calif., online auction giant eBay Inc.
However, Mr. Gupta said B of A does not expect to win over users from PayPal. "Our motivation is well beyond the auction space."
And Mr. Bezard said the two services would not be direct competitors, in part because of how they are used. The average transaction value is $400 to $1,000 for account-to-account transfers but $50 for PayPal transactions, he said.
Nor is B of A's service likely to threaten the foreign remittance market, which is dominated by wire transfer services such as First Data Corp.'s Western Union. Mr. Gupta said B of A's service is limited to domestic accounts, even though the ACH network can be used to send funds to Mexico, Canada, and other countries.
And B of A already has a system called SafeSend for sending money from a credit or debit card account to Mexico.
