The U.S. banks that ventured into online person-to-person payments a few years ago could not find a way to make it work. Demand was low, fraud was high, and PayPal had the online auction market pretty well sewn up.
Now the Canadian banks that began offering P-to-P a while back say they are also seeing low demand. But they are not giving up yet. Instead they plan to reposition the service as a cardless, online consumer-to-business payment service, essentially turning the final "P" in P-to-P transactions into an online retailer.
The five major Canadian banks all use the same vendor for P-to-P payments, Certapay Inc., and together they own it too. Under Certapay's system, funds will get sent in real time from a person's bank account to the recipient, whether it is the sender's co-worker or Amazon.com. The funds are "good," in banking lingo, because they are taken directly from the sender's account and held in an internal bank account, ready to be claimed and deposited by the recipient.
Among the benefits of this system: People who do not have credit cards or who do not feel comfortable using their card accounts online can use it, and from the merchant's perspective there is no risk that the funds will not be available. Settlement between the buyer's bank and the merchant's bank occurs at the end of the day.
Rather than try to persuade Canadians to give up the occasional check they write to send money to the grandkids or settle a debt, the banks using Certapay intend to market it as a good vehicle for person-to-business payments. That functionality will be introduced next summer.
"That's where the real opportunity lies," said Rod Whitwham, a former executive of TD Canada Trust who came out of retirement to become the president of Certapay, which is based in Toronto.
The Canadian banks cooled on the idea of replacing person-to-person check payments once they realized how difficult it would be to change consumer behavior, Mr. Whitwham said. They calculated that the average consumer in Canada writes only about 20 checks a year to other individuals.
"To overcome the inertia of customer behavior, you have to be doing something more constantly than 20 times a year," Mr. Whitwham said. The banks concluded that "P-to-P payments are almost a solution looking for a problem."
Some U.S. banks drew similar conclusions. Bank One Corp. folded its experimental eMoneyMail service long ago. Wells Fargo & Co. sold its share of PayPal to eBay Inc., which now owns it outright. Citigroup Inc. has stuck with its C2it service but no longer markets it as an online alternative to paper checks. The service is now is positioned as an international money-transfer service, mostly for immigrants to send cash to relatives back home.
Simply because of its size, there is much more opportunity in the person-to-business market than the P-to-P market. TowerGroup estimates there are 34.3 billion P-to-P payments a year in the United States, against 479.3 billion person-to-business payments. Tower senior analyst Beth Robertson said that "true P-to-P will blossom more once consumers are conducting other types of transactions online."
Not all the Certapay banks have been disappointed with P-to-P. TD Canada Trust, for example, says that transaction volumes are in line with its projections and that it expects to make money off the service in 2004 or, more likely, 2005. "It's too early to say whether this is a sure thing, but we're fully committed," said Jeff van Duynhoven, the vice president of Internet banking and payments at TD Canada Trust.
Mr. van Duynhoven said he had expected the average transaction amount to be $5 or $10, but it is actually around $350 (in Canadian dollars). Fraud has not been a problem "to any large extent," he said. The banks in the Certapay system limit the amount that can be sent to $1,000 per transaction.
Along with TD Canada Trust, Canadian Imperial Bank of Commerce, Bank of Montreal, and Bank of Nova Scotia are offering the service. The fifth bank, Royal Bank of Canada, will start offering it in the fall.
P-to-P volumes dropped - though not as much as expected - when the banks imposed a $1.50 charge on senders, but now the fee appears to have gained traction. At TD Canada Trust about 80% of transactions on the system come from repeat users, Mr. van Duynhoven said.
In a recent survey TD Canada Trust found that the top three reasons consumers use the P-to-P service, with results of 20% for each, were for sending money to kids in college, settling debts related to a party or shared meal, and transferring money between two accounts held by the same person.
Despite some of the positive results that TD Canada Trust has had, Mr. van Duynhoven agreed with Mr. Whitwham that the task now is to broaden use of the system to include business customers. "I don't believe it can rest on P-to-P," he said.
The change in emphasis is not the only one for Certapay over the past year. In September the four banks now using the system bought the company from the original founders for an undisclosed sum. The chance to get an ownership stake in the payments enterprise compelled Royal Bank, which had been the only major holdout of the top five, to participate as well.
One of the first steps the new owners took was to narrow the geographic focus to Canada, Mr. Whitwham said. They stopped negotiations the previous owners had initiated to bring Certapay to other countries, including Mexico, Australia, and the United Kingdom. They also had plans to enter the United States through a deal with the NYCE Corp. subsidiary of First Data Corp.
Over time, by working through major multinational retailers, Certapay expects it will begin jumping borders again. For example, Future Shops, a Canadian electronics store on the Internet, is owned by Best Buy Co. Inc. of Minneapolis. Getting the system up and running on Future Shop may open the door to Best Buy in the United States, Mr. Whitwham said.
He said the Certapay system works well in Canada, where a handful of major banks dominate, but might not be suited to the United States, where banking is less centralized. "The tough part relies on a number of banks agreeing on how to do it," he said.
