What is a P2P payment and how does it work?

Peer-to-peer payments, also known as P2P payments, are a way to send and receive money. Many find the speed and relative simplicity of P2P payments convenient for quick, informal transactions between individuals like friends and family for things like splitting a dinner bill or paying friends for a movie ticket.

Let’s look at what you may want to know about P2P payments before making your first transaction.

What is a P2P payment?

A P2P payment is a digital transaction that allows you to send or receive money from other people directly using a digital platform or app. Let’s say you and a friend are going to a concert and they’ve bought the tickets. You can repay them through a P2P platform, provided you both have access to the same one using a linked bank account, debit or credit card.

How P2P payments work

Generally, P2P apps require that you create an account with the app and then link a bank account or a debit or credit card as a funding source for the P2P app account. You can then send or receive money using your P2P app username, email or phone number. If you receive money from someone through the app, it will get deposited into your account with the P2P app, where you can store that value for future use to send money from the app, or you can withdraw the money and transfer it to a linked bank account. Zelle requires that you enroll a U.S. phone number or email address that you associate with your deposit account at a financial institution. When you send or receive money through Zelle, it moves directly between your bank account and the other person's bank account.

Pros and cons of P2P payments

Peer-to-peer payments may offer certain conveniences but can come with caveats to consider as well.

Let’s look at some of the pros and cons of P2P transactions.

P2P payment pros

• Convenience: P2P transactions typically take place through digital platforms, allowing you to send and receive money without having to visit a bank or an ATM.
• Speed: P2P transactions typically begin processing instantly or within minutes, and more quickly than traditional methods like checks.
• Privacy: You don't need to reveal your bank account number to send or receive money.

P2P payment cons

• Potential fees: Some P2P transactions may come with added fees, particularly if you want to get immediate access to funds sitting in your P2P app's stored value account. Most P2P apps charge a fee to instantly transfer funds from your P2P app account to your linked bank account. 
• Scams: Like any method of payment, risks from scams remain. However, P2P payments are like cash. They typically process within minutes and cannot be canceled or reversed once sent so if you fall for a scam, you may not be able to get your money back.

Are P2P payments safe?

P2P apps encrypt your payment information within your account, and generally offer two-factor authentication upon login to your account. P2P apps generally also include additional authentication like biometrics (e.g. fingerprint, facial scan).

In summary

P2P apps are fast and convenient ways to send money to others, but if you are sending money to someone you don't know or trust, you should be wary of scams. While this can happen with any payment type, scammers like to use P2P payments because they get the money right away and because the payment is like cash, you won't be able to cancel or reverse the payment once you send it.