If you need to send money quickly to someone you know and don't want to hand over cash, person-to-person payments can be a faster alternative than other options like traditional wire transfers. Taking advantage of this payment method usually involves installing an app or using the service's website, entering your bank account or card information and then making transactions using people's identifiers on the service.
Before you get started making a money transfer, learn more about how P2P payments work, which popular services you can use and which pros and cons apply to these financial transactions.
The Basics of P2P Payments
When you make a peer payment using one of the many services available, you're able to send people money either using a connected credit card, debit card or bank account as well as receive funds from other people who use the same service. Regardless of the app or service used, the P2P payment service usually acts as the intermediary between the two financial institutions involved in the P2P transaction. This is beneficial to privacy, since neither you nor the other person involved in the transaction will see each other's card number or banking information.
Sending money using such a service typically involves identifying the other party through a username, email address or phone number registered with the P2P payment service. Payments can be made with a mobile phone and tend to be fast or even immediate. However, the service's security checks may put transactions on hold if something seems off about a party's identity or payment method.
You have a few options for using the money that you've received in your P2P payment account. You can use it for transfers to other people through the service or to make purchases through retailers that accept that payment method. If you'd rather transfer received funds to an external bank account, you can do so, but this can take a few business days and come with a fee that may be based on the transfer amount. Some services offer a debit card for more convenient access to funds.
Common Uses for P2P Payments
As making financial transactions on mobile devices and shopping online have become more common, P2P payment services have become useful for plenty of business and personal uses. You can use them to send your friends and family money for holidays, help out with bills or provide quick cash in an emergency. If you hire someone to babysit your kids, do lawn work or perform a home repair, then a P2P payment app allows for easy payment.
Merchants have caught on with the popularity surrounding these services and sometimes offer buttons for popular P2P payment services at checkout alongside other options like credit cards and bank transfers. Brick-and-mortar stores can use a special QR code that you can scan within some of the payment apps and directly pay for your purchase without needing to search for the retailer manually.
Benefits of P2P Payment Services
While the particular benefits can depend on the P2P payment app you're using, here are some reasons why you might opt for this this kind of money transfer option:
- Ease of use: Since sending money is as easy as a few taps on your phone and receiving funds involves a simple request, P2P payment apps don't have much of a learning curve to use. They're also convenient, as you don't need to make a trip to the bank to give someone money or wait for a friend or family member to visit and hand over cash to you.
- Fast transfer of funds: With many services having an option to instantly transfer funds to people who've already set up their accounts, P2P payment services offer an advantage over traditional bank wire transfers that can take one to three business days to complete. This is especially important when you need cash in an emergency.
- Variety of payment options: Whether you've got a checking account, savings account, credit card or debit card, you can usually link multiple payment options for sending money. You can also use money others have sent you within the app for purchases and transfers.
- Wide selection of services: You get a variety of P2P services you can choose from, and it's easy to get accounts through multiple options for the most flexibility. Each service has specific perks, different numbers of users and fees, so you can do some research to find the ones that offer the terms you prefer and have widespread usage near you.
- Debit card option: Some P2P payment services give you the option to request a debit card so that you can spend the money in your cash balance anywhere. This debit card might also come with certain benefits like cash back or reward programs.
- Private money transfers: While you'd need to give someone your bank account and routing numbers for a regular wire transfer, this information gets hidden from the person you're sending money to with P2P payment services. This offers privacy as well as a sense of security versus letting another person know your banking details.
Disadvantages of P2P Payment Services
Before using any P2P payment service, check the service's terms and conditions and know these common disadvantages that may apply to your chosen provider:
- Fees: While you can often avoid fees if you only send money from a bank account, it's common to pay fees when you're using a connected credit card for the transfer. Moving money to your linked bank account using the instant transfer option often comes with a fee unless your bank has an agreement with the service to waive this extra cost.
- Difficulties dealing with mistakes: Once you send money to someone, it can be hard to handle mistakes that can happen, like accidentally sending too much money or using a wrong username. You'd have to deal with the payment service to request a refund, and this may not be possible. This leads to extra risk with P2P payment services.
- Location restrictions: As long as both the recipient and receiver are based in the United States, there usually won't be a problem, but some services don't work across borders or allow the use of international bank accounts. This can make it hard to transfer money to contacts in other countries.
- Transfer limits: While some services won't limit your transfers as long as you complete a verification process, others may have daily or weekly limits that can raise issues if you pay people often or need to make a one-time large transfer.
- Technology requirements: For a P2P money transfer to work, both parties need to be users of the same service and have compatible devices. So, if your friend doesn't have a smartphone or uses a different service than you, then you likely can't send money to each other without more work. Some services may also be limited to a particular platform like Apple devices.
- Transfer times vary: How fast you can get cash depends both on the service and whether any issues happen with the transaction. Even if the funds do arrive immediately in your payment account, unless an instant transfer option exists, you can run into delays if you need to move the funds to a bank account rather than spend them directly through the P2P payment service.
- Fraud issues: P2P payment apps are often targets for fraud since the terms of service for these services often make the user fully responsible and can make it hard to get your money back if something goes wrong. You also have to consider that someone could gain access to your account credentials and log in and complete transactions without your authorization.
Exploring Popular P2P Payment Services
While P2P payment services have many similarities in the features they provide, there are plenty of different options to choose from with their own fee structures and perks. Here are some of the most popular services for P2P payments:
- PayPal: Known for allowing P2P payments alongside other personal and financial business transactions, PayPal has become known worldwide as a way to easily shop and handle money transfers using their website and mobile app. Users can send money without a fee as long as they use a bank account and send the funds to someone within the U.S., and credit and debit card transfers come with a fee equal to 30 cents plus 2.9 percent of the transfer amount. International transfers come with fees for the transfer itself plus currency conversion. PayPal offers a debit card for spending and withdrawing cash as well as a PayPal app that allows withdrawals and deposits at certain retailers. Users can instantly transfer funds to their bank accounts for a maximum $10 fee or do so free if they're willing to wait one to three days.
- Zelle: Zelle has a connection with certain banks to allow P2P payments, usually directly through the banks' apps, and a standalone app exists for people without affiliated banks. Unlike PayPal, this service doesn't work for online shopping, and it only allows debit cards and bank accounts for transfers between members of the service. You don't usually have to pay a fee for transfers unless your bank incorporates their own fees, and you usually see received funds instantly in your bank account for more convenience.
- Venmo: Allowing users to make transfers through their website or app, Venmo has also become a PayPal alternative for paying for items bought through certain websites. It accepts bank accounts alongside debit and credit cards, and users can set up direct deposit so that their paychecks arrive in the account for transfers and shopping. P2P transfers happen immediately, and you usually only pay a 3 percent fee if you make a transfer with a credit card or a maximum $10 fee to instantly send received funds to your bank account. There's a Venmo debit card available that provides ATM access for a fee alongside the ability to spend your balance at retailers.
- Cash App: Square has created the Cash App to allow for P2P transfers using cards or bank accounts and to allow members to invest in stocks and cryptocurrency using the app. Users only need to pay a 3 percent transaction fee for credit card transfers, and users can request a debit card and get free ATM withdrawals as long as they get their paychecks directly deposited. Something that sets Cash App apart from the alternatives is the "cash boost" feature that lets users choose a specific perk to receive when they use their debit card.
Tips for Using P2P Payments
To get the most out of P2P payment services, avoid fees as much as possible and stay safe, keep the following tips in mind:
- Consider sticking with your bank account to fund transfers whenever possible since this helps you avoid the typical fee of 3 percent or more that you incur with credit card transfers. While you need to enter your bank routing and account numbers in the app or website, you can rest assured that the other party won't see this information.
- Know that the funds held in the cash balance of many P2P apps won't have federal insurance against loss, so consider transferring the funds to your bank account once you receive them. The Privacy Rights Clearinghouse suggests using a bank-sponsored P2P service like Zelle since the funds directly go into your bank account that should have federal deposit insurance.
- Since fraud happens with P2P payment apps and the service may not have policies that help you easily get your money back, avoid transferring money unless you know the person or business. Also, avoid paying for something from an individual until you receive it since scammers may end up never sending you the item.
- Double-check the recipient name and payment amount before you transfer funds, since it's easy to make mistakes and much harder to correct them with these services.
- Since someone could get into your P2P payment account and make transfers you don't authorize, use a strong password, keep your login details safe and take advantage of any extra security features that are offered, like two-factor authentication.
Read More: How to Report a Fraud on My Banking Account
- Discover: What Are Peer-to-Peer Payments?
- Federal Reserve Bank of St. Louis: Peer-to-Peer (P2P) Payment Services
- Practical Ecommerce: Understanding P2P Payments for Merchants
- NerdWallet: Top Peer-to-Peer Payment Apps: Pros, Cons and How to Use Them
- Clover: What Is Peer-to-Peer Transfer? What Are the Pros and Cons?
- ZipBooks: PayPal vs Venmo vs Zelle: Who’s the Best?
- NerdWallet: How Does PayPal Work?
- CreditCards.com: How to Send, Receive Money Using Zelle
- Time: How to Send and Receive Money Using Venmo
- NerdWallet: Cash App Money Transfer: What It Is, How to Use It
- Privacy Rights Clearinghouse: Using Peer-to-Peer Payments More Safely
- Nacha. “What is ACH?.” Accessed June 4, 2020.
- Nacha. “BEYOND SIMPLE AND SAFE: OPPORTUNITIES TO EXPAND THE USE OF DIRECT DEPOSIT VIA ACH FOR PAYROLL,” Page 10. Accessed June 4, 2020.
- Nacha. “ACH Quick Start Tool.” Accessed June 4, 2020.
- Nacha. “How Direct Deposit Works.” Accessed June 4, 2020.
- Nacha. “How Direct Payment Works.” Accessed June 4, 2020.
- Nacha. “October 2017 - Faster Payments Tracker,” Page 6. Accessed June 4, 2020.
- Nacha. “Leveraging the Mobile Channel for ACH Payment Innovation,” Page 25. Accessed June 4, 2020.
- Nacha. “Leveraging the Mobile Channel for ACH Payment Innovation,” Page 8. Accessed June 4, 2020.
- Nacha. “Direct Payment for Consumers.” Accessed June 4, 2020.
- Nacha. “Expanding Same Day ACH.” Accessed June 4, 2020.
- Smart Asset. “What Banks Charge for Wire Transfers.” Accessed June 4, 2020.
- My Bank Tracker. “ACH Transfer Limits at the Top U.S. Banks.” Accessed June 4, 2020.
- Board of Governors of the Federal Reserve System. “Regulation D Reserve Requirements,” Page 3. Accessed June 4, 2020.
- Nacha. “Same Day ACH: Moving Payments Faster (Phase 1).” Accessed June 4, 2020.
- Venmo. “A quick look at our fees.” Accessed June 4, 2020.
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.