How Canadian banks dominated peer-to-peer payments

In Canada, banks rule the roost when it comes to peer-to-peer payments. Bank-led innovation came out of Canadian banks working together to define the peer-to-peer payments experience with the formation of Interac. U.S. banks were late to the party, unifying under the Zelle brand this year, but long after Venmo gained its dominance. "On the Canadian side, the banks got together early -- you're talking about a 10-year head start [over U.S. banks], and again, you didn't see much traction with clearXchange until it was purchased by Early Warning and rebranded as Zelle," said Hisham Salama, vice president and head of emerging payments and innovation at TD Bank. A Canadian bank-backed peer-to-peer payment is called an Interac e-transfer. With all major institutions on board 15 years ago, the banks captured the lion's share of the market before Venmo-like non-bank alternatives could enter -- and Canada only has a handful of major banks. "If there are a few banks that own most of the deposit relationships, they can really dictate the digital behavior [of the customer]," said Mike Landau, payments research lead at PwC. "It works out quite nicely relative to the U.S., where the biggest problem was 'What platform do you use? Who do you bank with?' It just made it more complicated." The Interac brand has been around for more than 30 years. It was created in 1984 as a cooperative venture among major Canadian financial institutions with the goal to create a shared payments network that would give Canadians access to cash from ATMs across the country. In addition to peer-to-peer transfers, debit card payments on the Interac network at the point of sale have existed since 1994. They've long been a default way to pay for consumers (the Interac logo features prominently debit cards of participating banks). So since Interac has been entrenched in Canadians' payment habits, others haven't been able to make major inroads. "If you’re already banked with any of the institutions, and most Canadians are, why would you need another solution?" said Debbie Gamble, vp of digital product and platform development at Interac. In 2017, Interac reported $58 billion in transaction volume across 14.5 million unique users, and were on pace to reach $70 billion by the end of 2017, according to the company. By comparison, Zelle's transaction volume for the first three quarters of 2017 was $51.1 billion; Venmo's was $24.2 billion. For Scotiabank, the success of Interac peer-to-peer payments was the result of major bank players operating in a coordinated fashion for product launches and marketing efforts. "We all worked together as part of this association. We defined the service and how it would function," said David Metcalfe, director of day to day products at Scotiabank. "We didn't approach it as a competing service; we wanted our customers to have the capability to send funds to anyone who has a bank account." The Interac peer-to-peer payments tool was clunky at first. But getting people to adopt it was easy because most were used to using Interac for debit purchases at the point of sale. "The challenge is you have to have ubiquity," said Gamble. "A cool front end is great, but you have to be able to deliver those transactions in a secure way right across the ecosystem to be relevant." So far, nonbank players have failed to challenge Interac, with startup Tilt's peer-to-peer payments tool shut down in June following an acquisition, and a similar product from Payso (now finn.ai) was phased out last year. PayPal wouldn't provide Canadian peer-to-peer payments numbers.

In its 15 years, the Interac e-transfer evolved from an online money transfer tool to a peer-to-peer mobile payments feature that lived within financial institutions' mobile banking apps. Initially, a customer could send a payment to an individual by identifying them with an email address that was linked to the receiving individual's bank account. As mobile penetration increased, institutions began to accept phone numbers as account identifiers. Interac recently did away with a mandatory security question designed by the sender. Banks are now rolling out the next-generation of Interac e-transfers, with some institutions (RBC and Scotiabank, for example) rolling out e-transfers within iMessage. Others are embedding the feature within Facebook messenger. RBC has enabled Siri-based Interac payments. So, given that Interac solved the customer's peer-to-peer problem -- making it easy to pay back a friend, for example, -- a new entrant has no compelling reason to persuade the consumer to change their behavior and start using a new tool. "Our banking ecosystem is a tight knit group of a few banks, and it would be tough for a new player to come in and disrupt that market, unless the value proposition was significantly better," said Zishan Mohyuddin, senior director of payment strategy and services at CIBC.