Obopay Inc. has struck a deal to route person-to-person transfers over First Data Corp.'s Star debit network, which accelerates the payments and could make the service more appealing to bank customers.

The Redwood City, Calif., company is set to announce Wednesday that it can deliver instant, person-to-person payments between accounts at banks that are connected to the Star network.

This agreement is the latest step in Obopay's transformation into a vendor to U.S. banks and away from its original model of offering its services directly to consumers.

Obopay has long offered person-to-person transfers directly to consumers, who could use their mobile phones to send each other funds through the automated clearing house system.

David Schwartz, Obopay's head of product and corporate marketing, said that people who turn to their mobile devices to make payments typically do not want to take the time to go back to their computers. To ask users to wait several days for an ACH payment to settle was not delivering on the promise of mobile.

"There's an expectation of instant, particularly when it comes to mobile," Schwartz said.

To reach a wider audience, said Michael Diamond, Obopay's senior vice president of business development, the company has recognized that it makes sense to target banks instead of consumers and that it must offer faster transactions.

"As far as the financial institutions are concerned, they want to make sure that the value proposition for their consumers is as strong as possible," Diamond said. Faster payments are "more attractive for the financial institutions."

The agreement also addresses a pain point for Star, which introduced its own person-to-person payments system, the Star Expedited Transfer Service, nine years ago and has struggled ever since to build a strong market for it.

Julie Saville, Star's vice president of product management, said that its service was ahead of its time but that the market has since caught up. Besides Obopay, several companies, including Fiserv Inc. and CashEdge Inc., offer transfer services to banks, and a growing number of banks are rolling out the service.

"We were thinking too big, too soon," Saville said.

She also said Star's original service was hard for banks to integrate into their online services but that this is not an issue with Obopay, which is already designed to integrate with banks' software; Star's expedited transfer service also can be woven into this system.

Without a partner like Obopay, "it's a lot of work for … [banks] to integrate this into their online banking channel and offer this on a mobile device," Saville said.

So far, the pairing seems to be working; some banks have already agreed to offer the service, though Obopay and Star wouldn't name them. (First Data is a unit of Kohlberg Kravis Roberts & Co.)

To send Obopay transfers over the Star network, customers of participating financial companies must first enroll their debit card.

Customers of banks that send debit payments over Star but do not choose to offer Obopay could still use the service by enrolling at Obopay's website, though in practice, observers said, few are likely to do so, in part because they might not even be aware the service exists if their banks are not promoting it.

Star serves 4,800 financial companies and, through them, 80 million cardholders, Saville said.

Once enrolled, users can initiate transfers with a mobile phone or online. Funds move instantly from their bank accounts to Obopay, and if the recipient is also at a Star bank, the second leg of the transfer could also be instantaneous.

If not, the transaction is completed via ACH; such payments are slower but still take about half the time that would be needed if both legs of the transfer were routed across the ACH system.

George Tubin, a senior research director at TowerGroup, said that faster transfers are "certainly an improvement" for Obopay, but he stressed that the company has more work to do.

"I don't think it gets them all the way there to real-time or near-real-time, … but it moves in the right direction, and it's also bank-centric, which banks are going to like," he said.

The more appealing the service is to banks, the more marketing the banks would put behind the service if they offer it to consumers, he said. "The banks have to sell to customers and get customers to take it up, ultimately," he said.

Because Obopay's service still relies on slower ACH payments, Tubin said, it may not be the first choice for consumers who would want to turn to mobile as the most convenient way to make a payment in an emergency.

"If I need to get you money right now in New York because you need to get a train ticket, … it doesn't help with that," unless the sender is certain the recipient is at a Star bank, Tubin said.

Aaron McPherson, a research manager for payments at the research firm IDC Financial Insights, said faster settlement makes Obopay's "service a lot more attractive," but warned that offering it through banks means it has lost some control over how the service is marketed to end users.

"By going with the banks, they end up with a better product, but they have this dependency" on banks, he said, particularly when it comes to how the service is pitched to consumers.

"I just get worried that where this is going to fall apart is that the bank is going to price it too high," McPherson said. Pricing is "a big risk factor" with services like this one, and banks "always find a way to cripple it somehow," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.