These days, it's not enough for a customer to merely be able to transfer money from a checking account to a savings account, and having to enter long routing numbers to pay bills isn't going to cut it. Today's customer wants to make a car payment, pay the phone bill, and pay back the $20 borrowed from a friend--all quickly and electronically.
Consider this: last year alone, U.S. households made more than $865 billion in person-to-person payments, or 11 billion transactions, according to Aite Group LLC. The size of that market has not passed unnoticed by major banks.
Big banks want a piece of the pie
Picking up on the trend, this week Bank of America Corp., Wells Fargo & Co. and J.P. Morgan Chase & Co. added a new service offering into the mix that allows customers to transfer funds to each other from their checking accounts using an e-mail address or cell phone number.
As The Wall Street Journal reports, banks are looking for ways to hang on to customers by fulfilling more of their payment and transfer needs. Checks and cash are falling out of favor with many consumers, and banks need ways to stay in the game--billions of dollars in credit card, overdraft and checking fees are on the line.
"Customers want to move payments from paper to electronic methods, so if we can meet our customers' financial needs, they will be better customers with us," said Mike Kennedy, a payment strategy developer at Wells Fargo and chairman of the new payment service, in a statement to The Wall Street Journal.
Payment service to be free…for now
Called clearXchange, the new system will allow consumers to use a smartphone or computer to transfer money to another person's account at another bank. One bonus feature is that customers who use the service won't have to set up a separate account as PayPal users have to do. For now using the service is free of charge. After the testing period, the three banks will determine whether or not to charge for it.
Competition for PayPal, Google
The big banks have a lot of competition. Market leader PayPal has been a giant in the electronic-based payments industry, accounting for one-third of parent company eBay's revenue, and tripling in profit since 2005.
Google also has thrown its hat into the ring, with plans to facilitate both payments and deals for local merchants, such as those offered by companies like Groupon and LivingSocial.
Service could affect banking business
The new venture by big banks isn't without its risks. The service is aimed at personal payments between individuals, but it's possible that small- to mid-sized businesses could request that customers use it to pay for products and services. Businesses would save the fees charged for processing debit and credit cards, and banks would lose revenue.
Nevertheless, making the move to electronic payment can save and make money for financial institutions, as well. Cash and checks are expensive - the cost of transporting dollar bills, for example, is a considerable expense for banks. In addition, the service is another way to potentially attract and retain customers who later may sign up for more profitable services such as credit cards and mortgage loans.