“Unfortunately, there are no mulligans when it comes to contracts.”
– Jay Mohr, Jerry Maguire
Many banks and credit unions understandably see person-to-person, or P2P, payments in the “startup” stage. Consumer interest, at least conceptually, is fairly high. Proven options, at this point, are fairly few. Usage, therefore, is low and centered on the early adapter group at the institution.
This is true in an area where there is almost a daily need to research new ideas and innovation. If you were to poll bankers regarding the area where it is hardest to predict the ultimate business model and winners, a large portion of them would say it is in the entire area of money movement.
In the middle of this, however, bankers have to look at providers for the “startup” P2P users and that generally is the vendor providing bill payment services. This is particularly true if the core vendor is the bill payment provider. Often, what we see in contracts is P2P being obtained under the same contract paper as a bill payment signing or renewal, i.e., the same term (often five years or even longer) and same cost per-transaction. More than once I have heard a statement like this: “It’s no big issue because we don’t really have any usage anyway.”
Perhaps it’s time to ask yourselves this question: Are we in effect signing a five-year agreement to get P2P services at the same cost as bill payment? If the answer is yes, it might be time to stop and think about that decision. Some things to consider:
Does anybody have any idea what a P2P transaction will really cost in three to five years? Is it five cents? Twenty-five cents? One dollar? Good luck answering that. We don’t even know which business model will win, much less how much it will cost. If we don’t know that, we also don’t know whether your current cost of a bill payment transaction is even close to being a reasonable P2P transaction fee.
This is not intended to be an attempt to bash your vendors. To be fair, they also lack any idea of how much a transaction will cost them or what volumes might be. They just know that they will need to make some kind of investment. So, you could argue that tying P2P charges to bill payment is as good a guess as anything else.
Are you, in effect, signing an exclusive deal for P2P processing? Often in these types of contracts we see language stating that during the term of the agreement the vendor will be the exclusive provider of these services. That may be fine or may not. Again, it is hard to know whether this will be an issue in, say, 2017, because we don’t really know what new market entrants there might be. At Cornerstone, we call this one of the “eyes-wide-open” issues, meaning the answer is not necessarily that you don’t do it but that you have to be aware of the implications if you do.
What if there is a skyrocketing of P2P volumes in years four and five of this contract? Have you modelled potential costs? What if, for example, half of your mobile customers in 2018 signed up for P2P and did 10 transactions a month? One view might be that this would be a great thing because it probably means you have a relationship cemented. Another might be that high costs of delivery just became higher (we’ll agree that this is the glass-half-empty view of things).
How would any of this apply to small business customers? Does the P2P language apply to business bill payment?
There are several ways that these issues can be mitigated. Shorter term contracts, especially for P2P, almost always reduce price risk. Delaying the signing of a P2P addendum altogether is another, if customers are not champing at the bit.
It is entirely possible that the issues discussed here will turn out to be non-issues. Or, there may be new ones. But, ultimately, banks and credit unions are going to have to commit to some P2P solution. And there will be a contract that needs signing. Just be aware of what you are agreeing to. And remember that payments is so competitive an arena that long-term price compression is a far bigger likelihood than price increases.
Mr. Roche is a principal with Cornerstone Advisors, Inc., a Scottsdale, Ariz.-based consulting firm specializing in bank management, strategy and technology advisory services. He can be reached at email@example.com.