The Role of Third-Party Payment Apps

Posted by Deborah Peace on Mar 13, 2019 9:30:00 AM


Blog Series 3  third-party apps

Understanding the Various Payments Systems Series: Blog 4

In the wake of new and expanded payments methods like same-day ACH and Real-Time Payments (RTP), another option that continues to make headlines is the use of third-party payment apps like Venmo and Zelle.

In our previous two blogs, we discussed the unique differences and use cases for same-day ACH and RTP, but financial institutions and their account holders must also have a clear picture of third-party apps and their use cases. Only then will they be able to leverage the different methods to their full potential and adequately support them from a strategic standpoint.

The Rise of Third-Party Payment Apps

Third-party payment apps have been growing in popularity, and are a sound option for peer-to-peer (P2P) transactions. For P2P payments, this method is extremely convenient because it uses an identifier, such as a phone number or email address, so that consumers do not have to disclose their bank account information.Thanks to smartphones and apps like Venmo and Zelle, which facilitate mobile payments, it is extremely convenient to send virtual cash. The use of mobile payments has soared, and according to research from eMarketer, it is estimated that more than 91 million people will use these services by 2019, up from 31.4 million in 2015.

Mobile Apps Are Not Truly “Instant”

However, it is important to clarify – while these mobile services may seem “instant,” the payment is not actually settled in real-time. The value may be transferred instantly, but that does not necessarily mean the funds are immediately available. In most cases, these payment apps rely on the ability to store funds in a digital account; meaning that in order to use the money outside of the app itself, all funds must be transferred to a user’s bank account. Most people do not deposit checks anymore, but remember when it could take up to three business days for those to clear? It is a fairly similar situation with third-party payment apps.

Venmo, one of the more widely popular payment apps, reports that it processes more than $1 billion per month. The standard transfer services for this app are free of charge; however, because the funds are not settled in real time, the company recently updated its terms and conditions. Now, users can make real-time transfers, but for a small fee of $0.25, deducted straight from the transfer amount.

Venmo has also stated on its website that there are plans to increase the instant transfer fee to one percent of the total transfer amount, with a minimum of $0.25. To put it in perspective –

if someone wants to send $500 as a gift, they will pay a transfer fee of $5, so they actually pay $505. These fees may not be large in size, but they do add up. Regardless, Venmo’s plans indicate the benefits of real-time transactions.

While same-day ACH, RTP and third-party apps all bring value to the payments space, deciding which is best for your financial institution and account holders requires careful consideration.

Topics: Payments