Consider a common problem: You go out to dinner with some friends. When the bill comes, no one has enough cash, so you decide to split the tab on your cards. The restaurant reasonably declines to divvy up the bill six ways, so you enter the inevitable five-minute end-of-meal tango—dividing, adding, negotiating, avoiding offense. Does anyone already owe anyone else money? Whose card should it go on? Who would pay back whom? The meal ends with the tab on a single card and a byzantine set of handshake agreements.
It is an annoyance one would think the market would remedy. But the market has mostly failed. Sure, you could have all gone to an ATM, paid a few dollars each in fees, and settled the bill in cash. You could have used a system like PayPal to make sure everyone got made whole, again paying a toll for the privilege. You even could have used Western Union to send one another money. Somewhat remarkably, there really is no simple, cheap way to transfer funds immediately from person to person in the United States.
But our long national post-meal nightmare may be nearing an end. On Wednesday, Visa announced a new person-to-person payment system that could transform how we pay our baby sitters, split our checks, and reimburse our friends. Starting in the second half of the year, users will be able to send money to any other Visa cardholder, regardless of where they bank or where they live. The sender need know only her recipient’s 16-digit account number, cell number, or e-mail address. Either the cash just shows up in the account linked to the recipients’ credit card, debit card, or prepaid card or the recipient gets a notice to OK the transfer.
This system would make everything easy. Nobody would need to sign up for a new application or program, as with PayPal or some of the newfangled competitors in the person-to-person payment space. There is evident demand, from everyone who has ever needed to get a friend back for dinner or pay their coworker for a ticket. It could also be useful for small businesses that don’t now accept credit cards, such as locksmiths or dog-walkers.
Such easy-to-use, designed-for-the-commoner transfers have been around in basically every other developed country—and many developing ones as well—for the better part of a decade. Visa itself has operated its personal payments system abroad since 2005. More than 70 banks participate in it, as do millions of people. Visa cites a few factors in the delay in bringing the system to the United States. First, it needed to make “technical enhancements to VisaNet,” upgrading its processing network. It also formed strategic partnerships with the parent companies of Popmoney and ZashPay, already working in the electronic payment space. Finally, it needed to introduce “a new Visa transaction type that allows financial institutions to accept incoming funds.” Translating the bank-speak, that means it needed to create a way for banks to accept the transfers, since Visa is just the middleman pushing the money around.
That’s the real hurdle to the wide acceptance of such a system in the United States: The banks themselves. Many banks let you transfer money to account holders of the same bank for free. But they generally charge hefty fees to transfer money to account holders at other institutions—plus, you often need to know routing numbers and all sorts of other details that make making the transfer cumbersome. If you and your baby sitter both use Bank of America, it is pretty simple to send her $40 when you come back from a night out. But if your baby sitter banks with Wachovia, given the hassle and cost of making an electronic transfer, you’d probably rather write her a check. If Visa makes it cheap and effortless to transfer to different banks’ accounts, banks say goodbye to those fees.
But Visa’s new system is not necessarily the panacea to our pay-your-baby-sitter or split-your-check problems. A few important questions remain. First: How secure will the system be? Second: Will banks opt into it, letting their customers use the Visa program even if it cuts into the banks’ revenue? Third and perhaps most important: What kind of fees might banks or Visa charge for the pleasure of transferring money so easily? Currently, Popmoney is free and ZashPay charges just 75 cents per transaction. But fees for common transactions have a mysterious tendency to rise—particularly when big banks are charging them.
Competition in this market, suddenly crowded, could help keep fees down—dozens of start-ups are seeking to transform the way we get one another back. There is Venmo (tagline: “It’s like your phone and your wallet had a beautiful baby”), which lets owners of BlackBerrys, iPhones, and Androids ping money to one another securely and quickly. There are also the aforementioned Popmoney and ZashPay and a number of other similar systems.
And, of course, there is PayPal, the company that has the most to lose if Visa’s program takes off. PayPal stepped into the person-to-person market neglected by the banks way back in 1998. It has built a network of 94 million account holders. But it built a product that requires both parties to register and exacts a toll with most transactions. * Visa’s competition could force PayPal to get cheaper and easier to use.
Even if PayPal improves, though, there would still be one big reason to bet on Visa: It is huge. Already, the company is the biggest middleman in the payments business. As of Sept. 30, the company had 269 million credit cards and 397 million debit cards in the United States alone—and more than a billion worldwide. The next biggest player, MasterCard, has about half that nationally: 171 million credit cards and 123 million debit cards. If virtually everyone has a Visa card, it means virtually everyone can transfer funds to one another immediately and easily on the new system, provided the banks sign on.
So let’s reimagine that six-person dinner bill. Right now, one person pays and the others give her cash, or promise to. In the future, one person might pay while everyone else at the table whips out a smartphone and transfers her part of the bill to her, right there and then, at least if they have her account number, e-mail address, or cell number, and if everyone has a Visa. There is still the question of divvying up the bill. But at least the payment part is easier.
Correction, March 25, 2011: This article originally failed to make clear that PayPal does not charge a fee for person-to-person transfers between bank accounts. It does charge a fee for person-to-person transfers made via debit or credit card. (Return to the corrected sentence.)