Photo Credit: Oleksiy-Mark-iStockThinkstock
If you have a smartphone you have access to the world’s financial markets. Not only through accessing information and shopping, but now you have the ability to make and receive personal payments with Peer-To-Peer (P2P) banking apps. Just like writing checks on your personal account, your smartphone can be used to store money and send money to other users and businesses. In the “old days” you would write a check to pay a bill or get paid by check which you would deposit into your bank account. Now a text message moves real money in the same way.
How Do P2P Apps Work?
Set up a payment account with your bank or other payment provider. Many banks and credit unions have a P2P system on their banking app. If your bank does not offer this option, the account can be accessed through apps, such as Venmo, Square Cash, and PayPal, on your smartphone. The app is linked to your bank account, your debit card, or a separate account with a payment provider. You use the app to instruct the payment provider to send money from your account to someone else. You could send money to a business that you want to buy something from or to a friend or relative. Just like mailing a check, the message moves the money from your account to theirs.
Soon Facebook will have an app to move cash between friends. All of these systems are slightly different and have their pros and cons. Generally the system that is right for you will be the system that is most popular with your friends and relatives because it will be easiest to move money using the same app.
Here are some things to consider when choosing which app to use:
Security: You want to make sure that you use the most secure system available and that you use all of the safety features that are offered. This is your money and you want to protect yourself from fraud and theft. If you use an iOS, each transaction can be verified with the Apple’s Touch ID and the fingerprint scanner on your iPhone. Other systems use multifactor authentication for secure transactions and send authentication codes to your phone for secondary verification. All the systems will send you text messages to notify you of a transaction on your account.
Fees: The fees you pay to use the systems vary between providers so check this carefully. The bank systems are generally free but may limit the size and frequency of payments. The fees can also differ if the payment is made to your personal account or your debit or credit card. For commercial users who have frequent and large transactions, the provider my charge a fee of between 1% and 3% for each transaction. There is no universal rate structure so check with the provider.
Availability of Funds: Check to see when the funds will actually be delivered to the recipient’s account. Some transfers appear immediately while others can take several days to clear. This can be important when you are sending emergency cash to friends and relatives who may need the cash right away.
Dispute Resolution: Know what your rights are if you dispute a transaction. Credit cards have limits to your liability while debit cards generally do not. You should check the provider’s policy on dispute resolution and how you would go about claiming a loss. Some systems will give you more protection than others.
Privacy: The system will be able to gather a lot of information on how you and your friends spend their money. Do you want to share this? Do you want your Facebook friends to see when you are sending money? Some social networks post the transfers. It’s one thing to share your financial information with governments and the financial/industrial complex but your friends don’t need to know about your personal finances.
Insurance: The bank-based systems are protected by bank regulations and FDIC insurance on deposits. It may be a small probability but how will your funds be protected from fraud and default by the service provider?
Anonymity: If you want to send or receive money without revealing your true identity you should use a P2P system that isn’t directly through your bank. For example, Square Cash allows you to set up a $Cashtag account to move money anonymously, this could be helpful for Craigslist transactions.
P2P payment systems are just starting to gain a foothold for ecommerce in North America, but they are already commonplace in many developing countries where people do not have access to a robust financial system. The Bill and Melinda Gates Foundation cite “digital financial inclusion” as one of their primary goals for improving the lives in third world countries. Maybe joining the digital financial revolution could improve your life too.