What Does P2P Mean in Banking? How P2P Payments Work

P2P payments, or peer-to-peer transfers, are a popular digital way to send money to and receive money from other people. With P2P, you can send a friend your half of the dinner bill, gas money, or other payments, quickly and easily from your mobile device.

To move money via P2P, all you need to do is to download a P2P app, like Venmo or PayPal, and connect your bank account, debit card, or credit card to it. Or your financial institution may offer app options you can enable. Either way, once you are set up, you are just a few clicks away from being able to send money.

Read on to learn what P2P is and how P2P payment works.

What Is a P2P Payment?

What P2P means is peer-to-peer, and it’s a quick and easy way to send money to someone. With a P2P payment, you can send money to a friend with just a few clicks on your mobile device. This replaces the need to get cash at an ATM or write out a personal check, options that aren’t always quick or convenient.

For traditional P2P apps like Venmo or PayPal, both parties need to have an account with the transfer service in order to make the transaction. For example, if you want to use Venmo to repay a friend for the salad they bought you at lunchtime, that person would also need to have a Venmo account to receive the payment.

Typically, a P2P account is attached to your online bank account. Some P2P platforms, however, allow customers to link their P2P accounts to a debit card or even a credit card, though it may involve additional fees.

Recommended: Guide to Direct Deposit

How Does a P2P Payment Work

Here’s a closer look at what goes on when you use a P2P payment app.

Overview of the P2P Transfer Process

Say that you want to send money P2P to your sister for your mother’s birthday present. Depending on the type of P2P service you use, you’ll follow some variation of these basic steps.

•   Creating a P2P account. You will need to download a P2P app and then sign up for an account. In order to send money to your sister, you’ll both need to have an account with the same money transfer service.

•   Linking your bank account to your P2P account. Some P2P services have the ability to hold funds, but they generally must be linked to a primary bank account (such as your checking account), credit card, or debit card in order to be fully operational. This is how the account will pull any funds needed to make a payment.

To link your checking account, you may need your checking and routing number (which appear at the bottom of a check). Some P2P transfer services may only need your bank log-in information. Others may allow you to set up extra verification measures.

•   Searching for a user to transfer funds to. To send money to your sister, you’ll need to find her on the P2P platform. You can typically search by username, email address, or a phone number.

•   Initiating a transfer. The next step in how P2P payment works is getting the money moving. Your sister can request a payment from you, or you can initiate the payment yourself. This requires choosing the option to pay, entering a dollar amount, and confirming the transfer. If you’ve enabled additional security measures on your account, you may need to enter a PIN that gets texted to you as well.

You may have the option to add a description or note to your transaction. Some P2P services may require this information so that they can charge a fee for business-related transactions. Others offer the option to act as a personal ledger should you need it in the future.

•   Waiting for the transfer to complete. Now the funds are in motion via a P2P bank transfer. When money is sent from one customer to another, it moves in the form of an electronic package safeguarded with multiple layers of data encryption. This makes it hard for hackers to access data (like your bank account number) within the transfer while it is in motion. Similarly, data encryption is designed to keep your money and account information safe. Once the data set reaches its destination, it is decoded and deposited as currency.

•   Transferring the funds into the payee’s bank account. When a P2P transfer is completed, the funds may be deposited directly into your sister’s bank account, such as a savings account. Or they may go into an account created for her by the P2P service. Funds received into P2P user accounts can then be transferred into a person’s bank accounts at little to no cost. (Recipients are likely to pay a fee if they want the funds transferred ASAP versus in a couple of days.)

Your sister will likely receive some combination of email, text, and/or in-app notifications that the funds have arrived. If she decides to leave the money in her P2P account, she can use that account balance the next time she needs to pay someone or purchase something from a business that accepts P2P transactions.

How Long Do P2P Transfers Take?

Money transferred via P2P is usually available instantly for use within the app. However, if you choose to transfer the money into your bank account, the amount of time it takes depends on whether you opt for a standard transfer or an instant transfer.

For a standard transfer, the general rule of thumb is to allow one to three business days to complete and the money to land in your bank account. That’s because standard bank transfers use the ACH (or Automated Clearing House) system.

If you choose an instant transfer of the money from the app into your bank account, some apps may not charge a fee; others may assess a charge of 0.5% to 1.75% of the overall transfer amount.

Are P2P Money Transfers Safe?

You may wonder if mobile payment apps are safe. Any time your bank account, credit, or debit card information is online, there is a chance that someone can get a hold of it, and P2Ps are no different. While all major money transfer companies encrypt your financial information, no P2P system can say it’s totally impervious to hacks and scams.

There are additional measures you can take to make sure that your account remains secure. For example, you may be able to set up two-factor authentication, which might involve typing in a unique pin number that is texted to your phone for each transaction. Or you might elect to receive notifications each time there’s a transaction posted on your account, enabling you to spot financial fraud right away if it were to happen.

You may also want to take care when you type in a recipient’s email address, phone number, or name. A typo could lead to the money going to the wrong person.

How Do Peer-to-Peer Transfer Companies Make Money?

P2P transactions are largely offered for free to consumers, which may beg the question of how the companies that offer these services stay in business. Here are two major ways that P2P money transfer apps may generate income.

Account Fees

Typically, you can make P2P payments from a linked bank account or straight from the P2P account for free. But if you want an instant transfer or you are transferring money using a credit card or from depositing checks into your P2P account, there may be a fee involved.

Business Fees

P2P platforms aren’t just for consumers — they are used by businesses as well. Compared to the free transactions offered to standard users, businesses are generally subject to a seller transaction fee for each customer purchase made with a P2P money transfer app. Venmo, for instance, charges a fee of 1.9%, plus 10 cents for each transaction.

What Are the Benefits of P2P Money Transfers?

There are three main benefits to using online money transfer services.

•   They’re fast. Depending on the service, P2P money transfers can happen very quickly. They can take anywhere from just a few seconds to a couple of business days.

•   They’re cheap. When exchanging money between friends and family, P2P money transfers are often free. There may be a small fee, however, if you want an instant bank transfer, or if you’re using a credit card instead of a bank account, making a transfer above a certain dollar amount, conducting a high volume of transfers, or using the service for a business transaction.

•   They’re easy. P2P transfers eliminate the need to make trips to the ATM or a local bank branch to get cash, which can make money management more convenient. They also eliminate the need to get out your checkbook, write a check, and then mail it to someone. For a P2P transfer, all you likely need is a mobile device, the app, and cell service or wifi.

Alternatives to P2P Money Transfers

What if a P2P money transfer isn’t available or doesn’t suit your needs? Try these options instead to move money.

Sending a Check

You can go old-school and write a paper check. You fill out the necessary details and hand or mail the check to the person you are paying. Typically, no fee is involved, although you may sometimes have to pay for a new checkbook when you run low and order more checks.

Money Orders

Money orders are in some ways similar to a check, but you don’t write them from a bank account. Instead, you purchase them (essentially pre-paying for the amount you are sending) at the post office, businesses like Western Union or Moneygram, or from certain retailers.

Typically, you will pay a small fee. For example, the United States Post Office will issue domestic money orders up to and including $1,000. Those that are for amounts up to $500 will be assessed a $2.65 fee; for ones that are $500.01 to $1,000, $3.75 will be charged. Once you have a money order, you can either give it to the recipient in person or mail it. You can also typically track a money order to see when it’s cashed.

Using Online Bill Payment Services

Many financial institutions offer ways for their customers to pay bills electronically. A key feature of mobile banking, this bill payment service can be a simple way to send funds from your checking account, regardless of where you are or what time it is. You may be able to set up recurring payments as well for bills you receive regularly.

Wire Transfers

Wire transfers are another way to send funds electronically using a network of financial institutions and transfer agencies that operate globally. Typically, you will make a wire transfer via your bank, its website, or its app.

The process for how to wire transfer is fairly simple. You’ll need to have your payee’s banking details and will likely pay a fee to wire money.

For instance, domestic wire transfer fees can be anywhere from $0 to $30 (depending on whether they are incoming or outgoing), and they can often be processed in a few hours or within a day. International wire transfers can cost more (with both the sender and recipient possibly paying fees, typically $35 to $50 for the sender) and can take longer, typically two days. Certain banks may offer free wire transfers, perhaps only for certain types of accounts (such as premium ones), so if this is an important feature for you, it can be worthwhile to do your research.

You can also use wire transfers to transfer money between bank accounts you may have.

Recommended: Wire Transfer vs. Direct Deposit

The Takeaway

Peer-to-peer (or P2P) payment apps facilitate mobile money transactions. You can use them in place of cash or writing a check when you want to give friends or family money, whether it’s to cover your portion of a dinner bill or split the cost of a vacation rental. Some businesses also accept this form of payment.

All you need to make a P2P transfer is a mobile device, an internet connection, and your P2P app, which you must link to your bank account, debit card, or credit card.

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FAQ

Can you cancel a P2P payment?

You cannot typically cancel a P2P payment once the recipient has accepted it. Be sure to check the recipient’s username, email, or phone number to make sure the information is correct before sending a P2P payment.

Is P2P digital money?

P2P itself isn’t a form of money — instead P2P is a digital way of moving money from one person to another. Once a P2P transfer is complete, the recipient has money they can use to pay for purchases or transfer into their bank account.

What’s an example of a P2P payment?

An example of a P2P payment would be to use a P2P app such as PayPal or Venmo to send funds to a friend you owe money. You could also use a P2P app to send a payment to a service provider, like a hair stylist for a haircut, or a retailer when you buy an item.

Do banks use P2P?

Many banks offer their own version of P2P apps. For example, you might be able to send funds from your account to a friend, a retailer, or a service provider by using a bank’s app.

Are there tax implications for using P2P payments?

If you are using P2P to send money to friends or pay for personal goods or services you received, there are no tax implications involved. However, if you use P2P payments for business, there are potential tax considerations. If a business uses P2P to accept payments from customers, those payments need to be reported as income.

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