What is peer-to-peer (P2P) payment, and how does it work?

Convenient, fast, and easy, P2P payments allow individuals to send and receive funds in minutes among friends, family, acquaintances, and even for goods and services. This method bypasses the need for cash or physical cards, making it easy to split bills, send gifts, or repay money.

In this guide, discover how peer-to-peer transfers work and ways they can help make sending and receiving payments hassle-free.

Table of contents

• How does peer-to-peer (P2P) payment work?
• Examples of P2P payments
• Pros and cons of P2P payments
• What do peer-to-peer payments cost?
• Are peer-to-peer payments safe?
• What are P2P payment apps?
• Safe and secure money transfers with PayPal
• Frequently asked questions

How does peer-to-peer (P2P) payment work?

P2P payments work by transferring money between digital accounts. P2P means peer-to-peer, which describes the direct transfer of money between individuals. The service handles account communication so that users don’t have to provide bank information to one another.

Here’s how P2P payments generally work:

1. Choose a P2P payment service: Download and create an account for a P2P payment service or platform. Some mobile banking apps may also offer P2P payments.
2. Link a funding source: To send and receive money, individuals must link a bank account, debit card, or credit card.
3. Add recipient and initiate payment: To send money, add the recipient's information, such as their username, phone number, or email address associated with their P2P account. If available, users can scan a recipient’s QR code to populate their information as well. Specify the amount of money you want to send and confirm the transaction. Be sure to verify that the person receiving the money is legitimate and be wary of any potential scams.
4. Complete transaction: The P2P payment service will deduct the specified amount from the linked funding source and transfer it to the recipient's account.
5. Get funds: If the recipient wants to transfer the funds to their bank account, they can initiate a withdrawal from the P2P service to their linked bank account. This may take a few business days to complete, though same-day transfers to a bank account may be available for a fee. Alternatively, individuals can choose to keep their balance in the app and use it for other payments. For example, users could leave their funds in their PayPal account and then use those funds to check out with PayPal.

Examples of P2P payments

P2P payment platforms facilitate the transfer of money from one individual to another, typically through a mobile app or a website. These services act as intermediaries, providing a quick, convenient, and secure way to move money between people.

Mobile P2P money transfers make this even easier, allowing people to split costs and pay bills from their phone. Here are some examples of P2P payments:

• Quickly checking out online: When shopping online, a user logs into PayPal during the checkout process. This allows them to pay without entering their bank account information into the store’s website.
• Splitting a meal with friends: A group of 6 friends wants to order pizza. One friend orders and pays $60. The other five friends each send them $10 using a P2P app on their phone, and the funds transfer in minutes.
• P2P money transfer: P2P payments make it easy to send money directly to people as a gift, and gifting money often doesn’t have additional fees.
• Pooling money for a group gift: PayPal offers a pooling feature that creates a shared bucket to which multiple people can contribute. The person who created the pool can then use the money they collected to make the final purchase.
• Roommates dividing up utilities: P2P services allow users to request money from one another as well as send it. One roommate could pay the bill, enter the details into a split payment request, and add the second roommate. The second person will receive a request notification and will be able to see the details.

P2P payments benefits and limitations

P2P payments facilitate cost sharing, shopping, and money exchanges between people, but they may not be able to handle complex or high-stakes financial transactions.

For example, making a loan deposit or paying the first month of rent may require a certified check or direct funds transfer instead. Below are a few more benefits and limitations of P2P payments.

Benefits of P2P payments

These benefits make P2P payments perfect for many day-to-day transactions:

• Convenience and speed: P2P payments allow people to send and receive money quickly, often within minutes or even seconds.
• Privacy between parties: P2P payments keep bank information confidential so that users don’t have to give it to others or enter it into e-commerce websites.
• Flexibility: P2P payment platforms are typically accessible through mobile apps or websites. Also, P2P payments are flexible in terms of funding sources — people can link their bank accounts, credit cards, or debit cards to send and receive money. Certain P2P providers, like PayPal, allow users to send money internationally.
• Security: P2P payment services often employ encryption, authentication, and fraud prevention measures to protect financial information and transactions. For example, PayPal users can select “Goods & Services” when making a payment to a merchant or professional service to qualify for Purchase Protection.

Limitations of P2P payments

P2P payments aren’t ideal for all types of transactions. Consider these limitations carefully:

• Fees: While many P2P payment services offer free transactions, some may charge fees. Fees are common for business transactions.
• Transaction limits: Many P2P networks limit how much money people can send to one another.
• Limited protection: Someone who accidentally sends money to the wrong recipient or becomes a victim of fraud may find it challenging to recover their funds.
• Transaction types: People may not be able to use P2P payments for transactions that require high levels of validation, such as deposits.
• Data privacy concerns: Some P2P platforms collect and analyze data for marketing and advertising purposes, raising privacy concerns. Also, data could be vulnerable to hacking or data breaches.

What do peer-to-peer money transfers cost?

Many P2P services allow users to create accounts and send money for free.

Platforms may charge fees to the person receiving money during commercial transactions. The following example is based on estimates of values that can change (sales tax, transaction fees):

• Violet owns an independent hair studio.
• Darren visits, and Violet cuts his hair, charging $50.
• Violet sends Darren a text with a secure payment link.
• Darren pays using his PayPal account, including a 6% sales tax: $53.
• Violet receives the money minus a 3.49% transaction fee: $51.15
• Violet is responsible for the $3 sales tax, so the total she receives is $48.15.

The fees platforms charge may depend on the service, transaction type, and payment method. For example, PayPal charges a flat 2.99% for payments that a sender flags as “goods and services.”

Different percentages apply to PayPal’s merchant services, such as guest checkout. These are further modified by:

• Payment method: debit, credit, PayPal account.
• Location: flat international fees plus specific country rates.

The service fees apply to the total amount of money transferred (including tax). In exchange, users receive the benefits of privacy, encryption, transfer speed, and other merchant-focused services such as invoicing and total calculations.

Are peer-to-peer payments safe?

P2P payments are generally safe, but users must be careful when sending money. Safety features typically include encryption that protects payments and users’ private information. Funds transfer across the P2P network instead of directly between banks, offering enhanced privacy for many purchases.

However, that enhanced privacy and security can make it difficult to recover funds if a user falls victim to a scam. Transactions are easier and require less information, so it’s possible to accidentally send money to scammers.

Tips for P2P users to protect themselves from fraud:

• Be wary of service providers asking to receive money via “friends and family” transactions, as these do not provide as much protection.
• Verify that the person receiving funds is legitimate.
• Use a secure password and never give account information away.
• Be wary of calls or emails that claim to have detected suspicious activity.
• Be wary of unsolicited payment requests and “accidental” transfers of funds. Contact the P2P provider first if someone sends money in error.

What are P2P payment apps?

P2P payment apps are phone applications that allow users to send and receive payments on their mobile devices.

They enable features like tap-to-pay, where users can tap their mobile device to initiate payments. Users can also pay through the app and with a QR code.