Blog Getting started What are P2P Payments? Will They be The Future of Transactions?

What are P2P Payments? Will They be The Future of Transactions?

date November 28, 2021 time 6 min read 4669 views

Most of us are so used to reaching for our phones or contactless cards when we pay for anything now that it’s easy to forget just how much the world of payments has altered over the last few years. Now, P2P payments represent the next big change—in fact, they’re already here. Let’s take a look at exactly what they are and what they could mean for you.

Even if you’re not sure what P2P payments are, chances are you’re using at least one already.
Even if you’re not sure what P2P payments are, chances are you’re using at least one already. (Source: Pixabay)

The digital economy is well and truly here, and the way we pay for things is changing faster than ever before. Cashless transactions are skyrocketing, contactless payments surging, and mobiles are rapidly replacing cards—and the next frontier is peer-to-peer (P2P) payments.

Wondering what they are and how they could influence our future? We’ll cover all that, along with a few real-world examples, caveats to be aware of, and an aside on how they could shake up the investment trends too. 

Defining P2P payments

First, let’s get one thing straight: what are P2P payments? You can look for the answer in some of the best books for financial literacy, but let’s dive in here to save time. When something is peer-to-peer (P2P), it means it allows two people to interact directly without a middleman’s involvement. This isn’t just about payments—it can also apply to cases like marketplaces for goods and services and file sharing applications (Napster is largely considered to be the first P2P service of all).

In the case of transactions, there’s no third-party institution overseeing the payment—one person simply sends money directly to the other person (usually through scanning a QR code or entering in their username), and that person can then transfer it to their bank.

In contrast, payments have traditionally always taken place through services that require individuals to set up accounts and carry out everything through their infrastructure. They don’t allow you to send money at the click of a button—there are far more steps involved. Basically, any services that don’t require you to know somebody’s account details to send them money probably fall under the P2P umbrella.

However, P2P services can still offer additional services and features to protect users, like verifying accounts and processing transactions. So, if you’re still confused, you can find a financial advisor in Boston to give you more useful information to figure out the answer on your own.

Examples of P2P payments

The original P2P payment service was PayPal, which was launched back in 1998 and was a true pioneer in the space. It was established as an alternative to traditional, paper-based payment methods like checks and to enable easy money transfers online. The rest is history—it now boasts more than 400 million active users and is one of the best-known payment services in the world.

PayPal is one of the most successful mobile P2P payment services.
PayPal is one of the most successful mobile P2P payment services. (Source: Pixabay)

But it’s no longer the only P2P payment method around. Other prominent examples include Venmo, CashApp, and Snapcash. These are all mobile P2P services that let users transfer money to the people in their lives with a few clicks.

Cryptocurrencies like bitcoin enable P2P payments in the truest sense. Most crypto protocols were created with the main intention of being decentralized and giving “peers” full control over what they do with their money, without middlemen like banks getting involved. If you want to send money to someone, you can simply send it straight to their wallet address while remaining anonymous, and “nodes” in the network will validate the transaction to check that everything is legitimate.

Pros and cons

The primary advantages of P2P payment services are most likely the same reasons you’d give yourself when explaining why you use PayPal or a similar service.

Above all, they provide a much quicker and easier way to transfer money. If you head out to lunch with a work colleague who you’ve never met before and don’t have their bank account, you can use an app like CashApp to transfer the money over using their account name. It will be done a few moments later.

P2P payment methods usually involve no fees as long as you transfer your money in and out through a bank account (rather than a card) or already have the funds in your account.

However, it’s not all rosy. The biggest factor that should make you pause is the potential security risks that arise with P2P payments. The lack of involvement from third parties compared to banks increases risk at times (more on this later). 

Also, we’ve so far assumed that your family and friends happen to have the same P2P app you do, but life isn’t always that simple. If your service of choice is PayPal but one friend likes Venmo and another likes CashApp, you’re going to end up in a situation where someone is forced to download a new app just to receive a payment.

Finally, depending on the app, it might take a few days to transfer the funds out of your account.

Why P2P payments could be our future

Now you know what P2P payments are, what peer-to-peer lending for bad credit platforms are, it’s time to move on to an even more interesting question: could they displace more traditional ways of exchanging money? As always, the answer is: perhaps. But first, let’s be optimistic. 

Are mobile P2P services the future? Many people think so.
Are mobile P2P services the future? Many people think so. (Source: Pixabay)

COVID-19 changed many of our spending habits, and one of them is the increased use of P2P payment services—partly due to hygiene with cash pushing groups of people to learn how to use solutions they might have avoided otherwise. For example, older groups that may have been uncomfortable with using things like CashApp have now adapted, and they’re now unlikely to go back to their old ways.

Since the seeds have been sown already, it’s likely that P2P use will increase exponentially from here on out. Word of mouth and peer influence will encourage those who have resisted so far to bite the bullet eventually, and we’re likely to see P2P payments used in more places—therefore creating further incentives.

The caveat: security problems

We’ve already touched on how security problems are one of the biggest problems users face when opting for P2P payments, but we haven’t truly given the problem justice. This could be the biggest barrier to the global domination of P2P payment apps.

Although most services use security protocols, many people have fallen victim to scams and hacks. A common scam is when users receive money from a stranger who claims it was an accident and asks for the money back—but in reality a scammer used a stolen credit card to make the original payment, meaning it will later flag as a fraudulent transaction and the recipient will lose everything.

The unfamiliarity most people have with P2P makes it easy for them to be taken advantage of. Plus, victims are less likely to get a refund if this happens compared to those who get scammed by using their bank accounts. 

This won’t necessarily mean that P2P payment services will disappear—just that they might face more regulations in the future, or that traditional financial institutions may introduce their own variants and market them as safer alternatives. 

Besides, even using debit cards online involve similar issues, so the problem isn’t unique to P2P services.

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George Schooling

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