Awareness and adoption of digital payments are at an all-time high. Mobile phones, connected devices, and other emerging technology all contribute to increased consumer demand for speed, efficiency, and convenience. Peer-to-peer (P2P) payments are becoming more popular as consumers switch from physical payment methods like cash and credit/debit cards to digital alternatives, especially in the post-pandemic economy. More people are choosing to use P2P as a convenient and flexible way to send money to others.
What Are Peer-to-Peer Payments?
As mentioned, P2P stands for peer-to-peer and is used to describe a type of payment sent directly from one person to another. This removes the need for middlemen like banks and credit card companies. Rather, P2P uses technology to allow transactions between individuals.
How Do P2P Payments Work?
To make a P2P payment, you first need a digital platform to transfer funds between two accounts. Usually, this system takes the form of a mobile app or online portals which allow the movement of money from any location and at any time.
When you connect to a P2P payment service, you first need to create an account and connect your linked bank account, credit card, or mobile wallet (depending on the type of account). Then, you’ll be able to send money to any other individual signed up with the same service.
P2P payments were first made popular by payments giant PayPal, which made it possible to transfer money to other PayPal users via the web or mobile devices. The market soon expanded to include similar services from Google, Dwolla, and others, but PayPal continued to dominate the space. Now, Venmo and Zelle® are among the most popular brand names in the world of P2P payments. Here’s a closer look at both solutions.
Are P2P Payments Safe?
Naturally, one of the prevalent concerns of those new to P2P payments is the safety of sending money online. Are the services secure enough to send your money reliably and keep your bank details safe?
Rest assured, most peer-to-peer payment systems have security features in place that safeguard your transfers. If you’re still worried, you can check the specific provider’s safety and fraud prevention policies to get more details.
Common safety measures built into mobile P2P platforms, include:
- Encryption
- Activity alerts
- Biometric authentication
- Multi-factor authentication
Pros and Cons of P2P Payment Apps
Peer-to-peer payments have many advantages, which is why they’re quickly increasing in adoption. Having said this, they’re not without their flaws. Let’s discover some of the main pros and cons to help you make an informed decision.
Benefits:
- Fast and convenient: One of the principal draws of P2P payments is that they allow users to send and receive money quickly once enrolled. It only takes a matter of minutes, if that, to send money.
- Flexible: Unlike more traditional payment methods, P2P platforms have the advantage of being accessible through multiple interfaces (such as an app or a website). Some of these platforms are also lenient with what payment source you use to send and receive money, whether it’s a bank account, credit card, debit card, or other. What’s more, some allow you to make international transfers.
- Security: As previously noted, P2P services often encrypt transactions and use authentication and other fraud prevention tools to protect transactions made through their platform
Risks:
- Privacy: As with many digital tools, some peer-to-peer payment apps collect data for marketing purposes, which can raise privacy concerns (though they should have a privacy policy specifying what they collect and how its used). This data runs the risk of being targeted in hacking or data breaches, however
- Protection: Despite having security measures in place to prevent fraud, it can be difficult to recover funds from a P2P platform if people accidentally send money to the wrong person or are a victim of a scam. Once sent, you might not be able to get your money back, and some services charge a fee to reverse certain transactions.
Examples of Popular P2P Payment Systems
Venmo
Launched in 2009, Venmo quickly captured attention by offering users the option to send and receive money via bank accounts, debit cards, and prepaid cards without incurring a fee. Since its introduction, Venmo’s mobile-centric approach and social component have made it a front-runner in the P2P payments space.
Venmo was acquired by payment service provider Braintree Payments in 2012 before PayPal absorbed the parent company in 2013. Venmo has 361 million active accounts and is on track to generate $900 million in revenue in 2021.
Zelle
The success of P2P payments platforms like Venmo spurred innovation from the banking sector as well. Individual banks long offered their customers the ability to send and receive money to and from other customers; however, due to a lack of centralization, none of these services were formidable competitors for solutions like PayPal.
A bank-owned consortium, Early Warning®, launched its own P2P payments solution in 2017 named Zelle. It uses alias-based authentication of account holders via email addresses and mobile phone numbers to connect users and facilitate near-instantaneous money movement without fees. As of Q2 2021, 1700 financial institutions are signed on with Zelle, representing 74 percent of all U.S. DDA accounts and $120 billion worth of payments sent over its network.
Visa Direct
Visa Direct is Visa’s real-time payments network that enables funds to be sent and received quickly and securely to eligible debit or prepaid cards worldwide. It facilitates P2P payments by leveraging Visa’s global infrastructure of more than 3 billion cards across 200+ countries and territories. By connecting directly to participating financial institutions, Visa Direct allows money to move seamlessly between accounts, eliminating the need for checks or manual transfers.
What’s Next for P2P?
In an age when people might be more likely to carry a smartphone than cash and cards, P2P payments are a viable digital alternative to traditional payment methods—and demand only continues to increase as consumers demand more contactless options. These solutions make it easy for consumers to split a restaurant check, pay a friend back for a concert ticket, or send a monetary gift. But many P2P solutions have expanded beyond person-to-person payments. Zelle® offers solutions for both disbursements and small businesses. And Venmo is expanding its reach into merchant acceptance and diversifying with its branded debit card. Read more about P2P in P2P Money Movement—The Retrospective You Didn’t Know You Needed.
Read more about P2P in P2P Money Movement—The Retrospective You Didn’t Know You Needed.
*This is an update on an original post published December 2021
Today’s legacy and siloed banking technology infrastructure limits financial institutions’ ability to rapidly innovate. It’s time to look at money movement in a new way. Alacriti’s Orbipay Unified Money Movement Services does just that. Whether it’s loan payments, P2P, A2A transfers, payouts, or Requests for Pay (RfP), our cloud-based platform enables banks and credit unions to quickly and seamlessly deliver modern digital payments and money movement experiences. To speak to an Alacriti payments expert, please call us at (908) 791-2916 or email info@alacriti.com.
