A peer-to-peer payment system is an app or website that allows you to send and receive money. The best-known example is PayPal but there are numerous competitors in the peer-to-peer payment space, including heavyweights like Google and Apple.
Each peer-to-peer payment service has advantages and disadvantages. Understanding how peer-to-peer payments work and evaluating the pros and cons of different services can help us decide whether to use peer-to-peer payments and choose the service that best suits our needs.
How Peer-to-Peer Payments Work
The great advantage of peer-to-peer payment systems is their simplicity. Using a peer-to-peer payment system usually requires only a few easy steps:
- Sign up for an account. Provide any needed verification information and secure your account with a strong password.
- Link a credit card, debit card or bank account to your account. You will be able to download money paid to you from your peer-to-peer account to your linked account or upload money from your linked account to your peer-to-peer account.
- Find other users. Locate other users by their username, email or phone number. Most networks only allow users to make payments to or receive payments from other accounts on their network.
- Receive payments. You are now ready to receive payments from other users.
- Make payments. Depending on the system you use, you may have to upload money from your linked account to your peer-to-peer account before you can make payments. Some services will let you make payments from either your account with the peer-to-peer service or your linked credit or debit card.
Transactions within the peer-to-peer network are often nearly instantaneous. Moving money between your bank and your peer-to-peer account may take several days.
You will pay a price for the convenience of peer-to-peer transactions. Most services charge a fee for each transaction, often a percentage of the amount of the transaction.
Peer to peer payment acceptance is growing rapidly in the US. In 2017 64.4 million mobile phone users used a p2p app. In 2019 the figure was up to 96 million.
Popular Peer-to-Peer Services
Several peer-to-peer payment services are competing for dominance in this fast-growing market. Let’s look at some of the most popular:
- PayPal is the most popular peer-to-peer network and has the largest user base. You can make payments to individuals and to some stores and online merchants. There’s no fee if your payment is funded by your PayPal balance or a bank account, but if it’s funded by a credit or debit card, you’ll pay 2.9%. Withdrawing money is free for a standard transfer but you’ll pay a 1% fee for an instant transfer. Transfers to your bank account may take three to five business days.
- Zelle (also called ClearXchange) is owned by a group of major banks. The network moves money from one bank account to another; credit cards are not supported. Transfers are almost immediate and there is no fee. You’ll need a smartphone or tablet to use the app. International transactions are not supported.
- Venmo is owned by PayPal but operates differently. It’s an app that allows you to spend or send money directly to and from linked bank accounts. The system has a built-in debit card that allows you to make purchases at many retailers from your Venmo balance and some retailers will even give you cashback. There’s a 3% fee for purchases funded by a credit card and a 1% fee for instant withdrawal. Venmo has over 40 million users.
- Google Pay is an app that runs on either Android (Lollipop 5.0 or above) or iOS (7 or higher) devices. You can send money to and receive money from other users and make payments at any retailer with a point-of-sale system equipped with a near-field communication (NFC) reader. There are no fees.
- Apple Pay Cash is an app that allows users to exchange payments with other users and make payments at NFC-equipped retailers. There’s a 1% fee on instant debit card transfers but no other fees. Apple Pay Cash only works on Apple devices, a drawback for some users.
- SquareCash is an investor-oriented peer-to-peer app that allows you to receive money from or make payments to other users. There’s an optional integrated debit card that lets you make purchases directly from your SquareCash balance. You can buy and sell stocks or bitcoin directly from the SquareCash app. SquareCash uses different fees for different transaction types, see this summary of SquareCash fees for a complete list.
- PopMoney is owned by Fiserv, a leading provider of technology services to banks and is integrated with many Fiserv products. You can exchange payments with other account holders and schedule payments in advance. All transactions are made directly between user bank accounts and there’s a $0.95 transaction fee. Credit cards cannot be linked to a PopMoney account
Peer-to-peer transactions are usually only possible if both parties to a transaction have accounts with the same network. This creates a substantial advantage for services with a large user base.
Are Peer-to-Peer Services Secure?
Peer-to-peer networks are encrypted and use a variety of advanced technologies to secure your transactions, but it’s always possible that your personal information could be compromised in a data breach. A more common problem is accidentally sending money to the wrong person by entering the wrong email address or phone number. These accidents may not be reversible.
It’s best to use peer-to-peer payment services for payments to individuals and businesses that you know and trust. These services do not have the fraud protection that credit cards offer and once payment is made you may not be able to get the money back if you are not satisfied with the transaction.
Peer to peer networks can be used by scammers to receive money. Only send money to people you know and trust.
Peer-to-peer payment services are an easy, convenient and popular way to make and receive payments and complete online transactions. Different services offer different options and you should review all of the possibilities to be sure you’re getting the package that best suits your needs. You’ll need to be careful with the data you enter and use these systems to pay people you trust: peer-to-peer payments may not be reversible.