It wasn’t very long ago that making a payment to someone could only be done using cash, a credit card or a check. These limited options could sometimes make paying people inconvenient, particularly if doing so required a trip to the bank or an ATM. That’s no longer the case thanks to the rise of digital peer-to-peer payments.
Here at Addition Financial, we have seen the impact that the rise of the P2P app has made in personal finances. We want to make sure that our valued members understand the differences between peer-to-peer payments vs. traditional payments. Here’s what you should know about the differences, as well as an overview of the risks of using P2P payment apps.
What are peer-to-peer apps?
Peer-to-peer or P2P apps are a type of financial app that allows users to send and receive money with a few taps on a mobile device without visiting a credit union, bank or ATM. The money is sent instantly. In that way, P2P payments are a lot like cash payments, since there’s only a short delay or waiting period for the recipient to transfer the money that was sent to their bank or credit union.
Some of the most popular peer-to-peer payment apps include PayPal, Venmo, Cash App, Zelle, Apple Cash and Google Pay. The last two may be used to send money to friends and family but many retail stores are equipped to accept them, too.
P2P payment apps make it easy to reimburse a friend when they use their credit card to pay for dinner or drinks. They are undeniably convenient because they minimize the need to carry cash with you when you go out.
Key differences between peer-to-peer payments vs. traditional payments
There are some important differences between traditional payments and peer-to-peer payments. Understanding them can help you keep yourself and your money safe.
Peer-to-peer payments often happen more quickly than traditional payments
The first difference to know is that peer-to-peer payments are often much quicker than traditional payments. Some traditional payments that take longer than P2P payments include the following:
- Writing a check. When you write a check and give it to someone, they need to endorse the check, deposit it in their account and wait for the funds to clear.
- Paying with a credit card. Credit card payments may be approved immediately but it usually takes a few days for funds to be transferred to the payee.
- Transferring money from your financial institution. Wire transfers happen instantaneously but there’s a process involved in sending them that can take some time. ACH transfers can take several days to process.
The traditional payment that comes closest to P2P payment’s speed is handing someone cash from your wallet. You can complete the payment in just a few seconds.
Traditional payments offer more protection than P2P payments
Sending money with P2P payment apps is easy and convenient but it also comes with some risks that aren’t an issue with traditional payment methods. For example, anybody who has your unlocked phone can potentially access your P2P apps and use them to take your money.
If someone steals your credit card and uses it to buy things, your losses are limited to $50, meaning that you are protected if someone makes fraudulent charges to your account. Some credit card companies will even wipe out fraud charges entirely. That’s not the case with P2P apps, where there’s little to no recourse if your money is stolen.
Refunds are more difficult with P2P apps than with traditional payments
If you write a check or make a credit card payment, while inconvenient, it’s not difficult to reverse the transaction or cancel the check. That is because the the money you spend doesn’t leave your account immediately, and that delay gives you time to correct any errors you make.
With P2P apps, the money is sent instantly and is most akin, as we noted above, to a cash transaction. If you fall victim to a P2P payment scam or make a mistake, it may be extremely difficult or impossible to get a refund. The one exception is PayPal, which offers a Purchase Protection Plan that applies in some cases.
Human error is more common with P2P apps
There is a risk of human error in any transaction, but it’s higher with P2P apps than it is with traditional payments. And, as noted in the paragraph above, it’s a lot harder to get your money back if you make a mistake using a P2P payment app than it is with a traditional payment method.
If you’ve ever tried to find someone on Venmo, you know that it can be difficult even if you have their handle. There’s a risk that you could pick the wrong handle from a list and send money to them. If you do that, then there may be no way to get your money back even if you report the error right away and/or contact the recipient to request a refund.
Scams are common with P2P apps
An important difference between P2P payment apps and traditional payment methods is that scams have become increasingly common with P2P apps. Because money you send is the equivalent handing someone cash, these apps have proven to be fertile ground for scammers.
Some of the most common scams include modified money laundering schemes, which may involve sending money to an unsuspecting party and asking them to send it back or overpaying and asking the target to forward the overpayment to a third party.
What are the risks of using peer-to-peer payment apps?
There’s always some risk involved when you’re sending money from one place to another, but here are the most common risks of using P2P payment apps, plus some tips on how to protect yourself:
- Human error. As we mentioned above, there’s a risk that you’ll send money to the wrong person. Always double and triple check the recipient’s handle before you click send. Some apps, including Venmo, require you to enter the recipient’s phone number to verify before sending.
- Phishing, vishing and smishing scams. These scams have been around for decades, but there’s a new twist involving P2P apps. If you get a text or email asking you to enter your personal information or account information, don’t do it. Instead navigate to the app or to your financial institution’s website to check on your account.
- Unexpected payments & overpayments. Two of the most common scams using P2P apps involve someone sending you an unexpected payment or paying more than agreed upon and then requesting a refund. If you experience either of these things, the best thing to do is to advise the P2P app of what happened and let them handle it.
- Easy access. Once you have a P2P app installed on your phone, anybody who has possession of your unlocked phone can access your P2P apps and use them to send money to themselves or an accomplice. Don’t ever give your phone to anybody you don’t know and trust. Instead, offer to make a call or look something up on their behalf.
- No refunds. As we mentioned above, getting a refund after sending money using a P2P app is almost impossible. While PayPal offers some purchase protection, most P2P apps do not.
Being aware of these risks can help you avoid being scammed and losing money with no chance of getting it back.
How to safely use P2P payment apps
While there are some risks involved with using peer-to-peer payment apps, there are some practical, easy things that you can do to protect yourself and your money:
- Double check before sending money. It’s always a good idea to verify the recipient’s handle before you send a payment. Considering how difficult it may be to get a refund if you make a mistake, it’s worth spending a few extra seconds to be sure you’ve got the correct information.
- Enable two-factor authentication. P2P payment apps usually offer an option for extra security by using a second authentication method in addition to a password. You can use your phone's biometrics scanner or ask the company to send a code via text message to confirm that you’re the one using your account.
- View unexpected transactions with suspicion. If you’re at all uncertain about who sent you money, why they sent it, or the amount you got, don’t try to handle it yourself. Instead, report the transaction to the app and let them handle it.
- Take screenshots of unusual activity. If anything unusual happens with your account, take screenshots to document it. In the event you need to report an attempted scam, you’ll have proof of what happened.
If you are targeted by a scammer or lose any money, you’ll need to report it to your credit union or bank, the P2P app, the local authorities, the Federal Trade Commission and the three main credit bureaus. In the event that your personal information is compromised, we recommend freezing your credit to avoid any additional losses.
Keep Your Money Safe with Addition Financial
If you’ve been wondering whether you should use peer-to-peer payment apps, we hope the information we’ve included here will help you understand how they work and most importantly, how to protect yourself and your money if you decide to use one.
Do you want to put your money with a financial institution that cares as much about financial protection as you do? Addition Financial is here to help! Click here to read about the benefits of membership and open an account today.