Things have changed at PayPal in the last year, with the e-commerce payments player realizing that it has to play nicely with others if it wants to grow its markets beyond e-commerce revenue. But only a handful of banks have evolved their view of the situation, realizing the next generation of consumer payments is theirs to lose.

PayPal's new normal includes a decision last fall to open its platform to outside developers, iPhone style. Around the same time, PayPal bulked up on banking expertise, hiring senior executives from Wachovia, Citigroup and Barclays, each reporting to PayPal President Scott Thompson. But even with these overtures, it was still a surprise in November when S1 and FIS both announced that their P2P offerings would run on PayPal's rails and be "Powered by PayPal."

Since its inception, banks have viewed PayPal as a competitor, and watched all but helplessly as PayPal became the e-commerce payment network of choice, growing to more than 78 million active accounts in 190 countries in 12 years. But S1 and FIS saw a solid P2P partner from a technology and security perspective, and were attracted to the opportunities that the massive global payment and customer network could provide to their banks.

The P2P partnership announcements came with just one named bank on board-S1's Mercantile Bank of Michigan-and there have been no announced deployments since. This at a time when other niche vendors like CashEdge and iPay Technologies have announced stunning numbers of banks adopting P2P-iPay alone touts 500 new customers in the fourth quarter of 2009.

It's clear that bank (if not customer) demand for P2P is there, so why are PayPal-powered rollouts non-existent? Some of the delay is surely on the tech side-integration issues perhaps, or deployments that will come when banks upgrade their Internet banking applications. Though it has just one deployment to talk about, S1 says banks are eager for the chance to offer P2P, and be associated with the powerful PayPal brand in a way that allows the bank to retain the primary relationship. FIS ePayments Solutions President Jeff Lewis is a bit more circumspect about bank eagerness, noting a good number are locked into the idea of PayPal as a competitor.

This is short-sighted. Like multi-modal mobile banking, P2P transactions-online and mobile-will soon be table stakes for banks that wish to maintain relevance. The integration of P2P into online banking and bill pay applications will be mandatory, though standalone apps like PayPal's innovative "Bump" promixity payments will also be in demand. If you have any doubt that consumers want convenient ways to make small dollar payments, look at the research, or consider the three million people who contributed more than $32 million in donations via SMS to the Red Cross's earthquake relief efforts in Haiti.

By partnering with PayPal via their core processors, banks get a re-do on the PayPal dilemma, another chance to get a piece of the action. The other choice? Keep your distance and cede P2P payments to PayPal as well.

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