The Real Story About Transferring Money

Ron Lieber wrote an article with a moving headline in the NYTimes on Friday: “Why It’s So Hard To Transfer Cash To Your Friends.” I am passionate about this issue – Splitwise’s mission is to reduce the awkwardness of sharing money. Stress about money poisons relationships and dealing with the logistics of repayment is one cause of stress. Let me elaborate on that story and give you Splitwise’s take.

PayPal has long given users the ability to transfer money to their friends with a credit card for a roughly 2% fee. However, not many users use it to reimburse casual expenses because it’s expensive for large amounts and because it takes a few extra steps to get the money out of your PayPal account. That’s why the user “still has to think about it,” as one expert is quoted in Ron’s article. For now, it’s easier to just do these little debts as an IOU and repay them later (which is one good reason to use Splitwise). PayPal’s newer mobile applications do have a way to transfer small amounts of money to your friends for free with less fraud protection, but you still have to get the money out of your PayPal account.

It’s true that Square makes this much easier by only requiring one user to have an account and allowing the user to pay back right away using a credit card in real life, but unlike PayPal, there is no way to avoid the 2.75% fee. This means that the primary market for Square is really small merchants (for whom that 2.75% is offset by profits). Despite Ron’s contention in the NYT article, I believe Square’s fees are prohibitive for daily use, except as a curiosity or a method of last resort. Plus, you have to carry around the little square, which is annoying.

Popmoney and the individual bank-based solutions that have emerged are cool and I have used them myself now and then. But the limits are still quite low ($500 a month is not enough for rent in many cities, for instance) and their user-experience is laden with the underlying non-awesomeness of bank websites. Banks aren’t good at creating delightful user experiences, either by culture or by regulation. Plus, no one bank is incentivized to solve the problem for everyone, so it seems unlikely to me Popmoney will be used at the dinner any time soon. We’ll see if new bank-based offers like the recent product from American Express prove me wrong.

Why wouldn’t some enterprising tech company or start-up (like Splitwise!) create the obvious, truly seamless mobile and web based payment system, with super low fees and transfers straight from one checking account to another? Fraud risk. If you can transfer money to a friend, you can also transfer it to a Nigerian prince. While the infrastructure to do bank-to-bank transfers exists and isn’t even particularly expensive, managing the risk of a hacker or fraudster getting into the system and stealing the crown jewels makes it really hard to make a good person-to-person payment company.

There are barbarians roaming the plains of the internet, and until you can afford to build a castle, you can’t put a flag in the ground. For some reason, reporters don’t like to write about this.

There are start-ups that have found ways around the fraud problem to some degree, but so far those methods really disrupt the user experience. From Splitwise’s perspective, we would love to partner with a payments engine that handles fraud and lets us create the beautiful and automatic money sharing experience that we believe still doesn’t exist yet.

We believe our users want to be totally zen about IOUs and have everything just be automatically paid back at the end of the month. That’s our dream, and we are constantly researching to see if another start-up (or if a big company like PayPal, Facebook or Google) creates a service that lets us realize that dream.

Whatever happens in the payments world, we’ll be here to help you with the other side of the problem. Splitwise will go on making it easier to communicate and organize shared expenses and help you figure out what’s a fair split in the first place.