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By the end of this past March PayPal Holdings Inc. (NASDAQ:PYPLC) had custody of more than $13 billion in customer funds. That’s more than the holdings of all but 20 U.S. banks, according to The Wall Street Journal.

The thing is, PayPal isn’t a bank. PayPal sits in the credit services industry as nothing more than a technology platform. Banks are worried nonetheless.

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Differences Between PayPal And A Bank

Among the many differences between your money in a bank and your money in a PayPal account is the fact your PayPal funds are not insured by the Federal Deposit Insurance Corporation (FDIC).

Money you deposit with PayPal isn’t even a deposit. You receive no interest. Sometimes you have to pay to receive money into your account or to spend it. On the other hand, PayPal is convenient and fast, especially when it comes to transferring money.

Banks Fight Back

Some of the largest U.S. banks have come up with a way fight PayPal and others like Facebook, Inc. (NASDAQ:FBF) Messenger Payments when it comes to sending money from one person to another quickly.

JPMorgan Chase & Co (NYSE:JPMC), Bank of America Corp (NYSE:BACF), Wells Fargo & Co (NYSE:WFCC) and U.S. Bancorp (NYSE:USBF) have built and are in the process of implementing a system called clearXchange. The clearXchange system allows member bank customers to transfer money instantly when, for example, splitting a dinner check.

Since banks control the flow of money between bank accounts – something neither PayPal nor Facebook can do – the advantage would seem to be with the banks.

That Might Change

PayPal’s person-to-person transfer system, called Venmo, currently takes a day or two to complete the transfer. The same is true for other online payment systems. PayPal has said it will begin phasing in daily settlement in September, a move that would take away the banks’ advantage.

This would negate the current “instant” transfer advantage major banks will have through clearXchange. Of course, other disadvantages of using PayPal for banking, such as no FDIC insurance, remain.

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Banking Is Changing

The proliferation of mobile apps and online payment systems have already changed the face of banking. Amazon.com Inc.'s (NASDAQ:AMZND) Amazon Payments along with previously mentioned options like PayPal and Facebook Messenger currently siphon off billions of dollars in transactions from banks.

The banking industry’s time-honored standby, the credit card, is rapidly being replaced by a smartphone and an embedded chip in clothing or a watch. Some predictions say brick-and-mortar bank locations will either shut down or be turned into training centers where customers will be taught how to bank by mobile phone.

Experts suggest that ultimately smart banks will not try to compete with PayPal but will partner with it. In effect, banks will become huge IT companies moving and managing money from a variety of sources including PayPal and others.

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