With the ubiquity of smartphones and the rise of mobile banking, person-to-person (P2P) electronic payments may be the next wave of payments technology, and financial institutions are in a good position to capitalize on that opportunity.

But only if they can overcome a few obstacles first.

Until now, fintech companies have mainly dominated this space. Think PayPal or Venmo (which was recently acquired by PayPal). But those who study the P2P space say that traditional, established financial institutions have a leg up on the newer, shinier competition.

“Consumers trust their financial institutions to handle this type of transaction and they’re looking to their financial institutions for this service,” said Sarah Grotta, director of the debit advisory services group at Mercator Advisory Group in Maynard. “I think that is a great opportunity and financial institutions are in a great position to pick up on this in the short term.”

Grotta, who recently authored a research paper for Mercator titled “The Opportunity of Person-to-Person Payments,” argues that not only can P2P payments achieve scale faster than other new payment types, but that financial institutions (that is, banks and credit unions) are in the perfect position to take over this space.

While it’s difficult to get your hands around the size of the P2P market right now, Lee Kyriacou, managing director of Novantas, estimated that person-to-person transactions numbered around 10 billion last year. Novantas came up with that figure by feeding Federal Reserve payments data into a model the company built.

But Kyriacou clarified that that 10 billion figure encompasses all person-to-person payments. And right now, most of those are made by cash and check.

“If we look at some of what the Fed has told us – about consumers to businesses for bill payments or for consumers to pay small to micro businesses – and you also have consumer-to-consumer check transactions and cash transactions, if you take those three circles, if you will, I think those are all open for P2P opportunities,” Grotta said.

What’s The Holdup?

Financial institutions run into two main obstacles where electronic P2P solutions are concerned: building network scale and monetizing that payments solution. Those are two of three components Kyriacou identifies as being critical to any innovation in the payments business. The first component, an unmet consumer need, is already there.

But even the very largest banks (e.g. Bank of America, Wells Fargo) only have about 10 percent deposit market share nationwide. That means that there does not yet exist a single network encompassing most banking customers through which consumers could send each other payments, Kyriacou said. The closest thing right now might be PayPal, which presently boasts over 100 million users worldwide.

“The banks, tomorrow if they chose, could have a directory that had every single bank account and every single customer of a bank in it,” he said. “But they have to work together and that’s something banks aren’t that good at.”

Moreover, even if the 10 or 20 largest banks could put aside their competitive differences to resolve the network issue, the next hurdle is getting people to pay for it.

“Most of the successful payment innovators use the fact that merchants are accustomed to paying something to receive payments. In particular, they’re used to paying card fees and they’re used to paying their bank to process a check,” Kyriacou said. “If there is a merchant on one side of the transaction, you can probably build a business model.”

Retail consumers – long accustomed to free checking accounts, debit cards and check-writing – might balk at coughing up even a small fee to send payments to each other electronically, though Kyriacou notes that several banks are experimenting with very modest fees – perhaps 25 cents per transaction.

“For us, the reason that we haven’t gotten into the P2P game before now was there wasn’t a really very elegant solution out there in the market for both the senders and the receivers,” said Chris Tremont, executive vice president of virtual banking at Radius Bank in Boston.

Noting that Radius will launch its own P2P solution later this month, Tremont said, “I think that’s probably why you don’t see more banks out there doing it; they haven’t been able to find that right combination of security and user experience to roll out to their clients.”

Radius isn’t looking to monetize P2P payments, he said. Rather, the bank believes the investment will pay off in customer acquisition and retention.

Tremont said, “There is a growing consumer demand for all things virtual banking and person to person payments is something that’s only going to get more talked about as time goes on.”