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How does Peer-to-Peer Payment Work?

Life happens. You’re out to dinner with a friend and when the bill comes, you realize your wallet is at home. Or, maybe it’s vice versa. Perhaps your cousin owes you some money for a joint family gift you purchased for grandma.

Cash and checks still work, but, more often, people are relying on electronic money transfers when they need to pay somebody money that is owed.

In recent years, a host of so-called peer-to-peer payment apps have begun to grow in popularity as people look for reliable ways to get the money they are due, or make payments to someone else. With just a few taps on a smartphone, these peer-to-peer payment apps make it easy to get that money back. To sign on, users simply download the app and, typically, link their bank account or a credit card or debit card to it.

Paypal is among the biggest players on the market. Money transfers are immediate and there’s only a charge if you receive money or services through a transaction on the site.

Other apps include Venmo, Square Cash, Snap Cash through the Snapchat app, Google Wallet, Popmoney and payments through Facebook’s Messenger.

And, more recently, banks, facing new competition from these peer-to-peer startups, have joined the crowd. In 2016, seven banks -- BB&T, Wells Fargo, PNC Financial Services Group, Capital One, Bank of America, JPMorgan Chase and US Bancorp -- created Zelle, a digital payment app.

For each of these apps, terms vary widely. So it’s critical to read the fine print before signing up with any of them.

Here are four things to consider before signing up for a peer-to-peer payment app:

1.Your friends and family might have to sign up too.

These P2P payment apps often only work if the people you need to send money to or get money from also are part of the network. So, if you sign up for one app, but all of your friends are using another, the app won’t be of much use to you. So, check around with your friends and family to find out what they’re using so you all can be on the same page.

2. You might not get your money right away.

Again, the terms vary widely. But, in some cases, it may take a few days for the money to move from one account to another. That might be fine if your friend owes you $10 for a movie ticket. The delay, however, could be a big problem if you’re using the app to receive your roommate’s half of the rent and it doesn’t clear before your landlord expects a check.

3. You might have to pay a fee.

Some apps are free, but others do charge for specific kinds of transactions. Venmo, for instance, charges a 3 percent fee for credit card payments. At Popmoney, there’s a 95 cent fee for most transactions. That might seem like a small amount, but, over a year and after many payments, it could add up.

4. You might not be protected.

This extends to your privacy, your money and your rights. The Federal Deposit Insurance Corporation lists several concerns, including how the apps use your private information or what happens when the service pays the wrong person or the wrong amount.

The agency recommends reading the service’s user agreement and linking only your checking or savings account or credit card to the account. Federal law protects money withdrawn from these accounts. But, if you’ve linked another account, such as one created by the peer-to-peer app, they may not have the same protections, according to the agency. Instead, you could be at the mercy of state laws or the service’s own policies.

In other words, before signing up for any service like this, do your research.

Consumer Education Services, Inc. (CESI) is a non-profit committed to empowering and inspiring consumers nationwide to make wise financial decisions and live debt free. Speak with a certified counselor for a free debt analysis today!



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