A hand belonging to someone offscreen extends a smartphone toward a handheld credit card machine. The credit card machine is a rectangular device with a numerical keypad and a flat surface for scanning credit cards and other forms of payment. The machine is held by someone seen from the shoulders-down, wearing a white shirt and black apron.
Peer-to-peer payments can create more convenience for both business and customer, but there are some points to consider before you sign up for a payment platform. — Getty Images/AsiaVision

The future of financing continues to shift with more technological advancements. Peer-to-peer (P2P) payments have become commonplace, especially among younger customers. With online payments becoming easier than ever, many people may be wondering what P2P payments are.

Discover below how P2P payments work and the considerations for adopting them.

What are P2P payments?

Peer-to-peer payments are systems that enable customers to connect their bank accounts to a digital application to instantly send and receive money to and from friends and family with the touch of a button. Ease of access, the ability to transfer to bank accounts, and the convenience of buying without having to use cash are what attracts many users to P2P payment apps such as PayPal, Venmo, or Cash App. Businesses that don’t accept P2P payments can miss out on purchases from buyers who prefer the convenience of using these platforms.

How do P2P payments work?

Peer-to-peer payments are a digital replacement for cash or a check. The user can link his or her credit card or bank account to the application, then look up the user that they are paying. The receiving user can choose to keep the money in the application (in case they would like to use that money to pay for something else at a later time) or transfer that money into their own bank account.

Businesses can also utilize P2P payments by creating an account for their business, to which people can instantly pay through their mobile devices. Many businesses utilize P2P platforms as the main form of accepting payments from customers and clients, as it’s a quick and convenient process on both ends.

[Read more: P2P Income Tax Reporting Requirements]

What can businesses use P2P platforms for?

Businesses can utilize P2P services to have as much convenience and variety in payment methods as their customers need. While cash may be preferred for some businesses, the peer-to-peer payment option allows businesses to instantly receive money through their mobile devices and easily transfer it into their accounts, removing the need to take a trip to the bank. Many P2P applications, including PayPal and Venmo, also allow users to input their credit card information, as opposed to their full bank account.

Peer-to-peer payments are a digital replacement for cash or a check.

Businesses can also utilize P2P lending to fund startups, which involves borrowing money from lenders without having to go through a bank. This has become a popular form of lending, as it’s a simple and effective method of collecting passive income.

[Read more: 10 Nonbank Lenders for Small Business Loans]

P2P considerations for small businesses

While P2P payment systems seem near perfect, there are many details to consider before fully investing in a P2P account for your business.

  • Convenience: Convenience is one of the biggest influencers for businesses that would be interested in P2P payment systems. Mobile businesses such as landscapers, cleaners, and mobile dog groomers would benefit the most from a P2P option due to the payment method’s instant availability; however, P2P payments were not necessarily designed for business. They were originally designed for the facilitation of payments between people who know and trust each other.
  • Security: With that said, P2P systems are generally secure. These apps offer two-factor authentication, making sure that these accounts do not get compromised.
  • Fees and payment delays: Unfortunately, businesses do pay a price for these P2P systems. Many of these platforms have transaction fees that can take away up to 3% of purchases made with credit and debit cards. Also, while the notification of a payment may appear instantly, the money may not hit your bank account for a few business days.
  • Difficult refunds: Refunds can also be difficult. Since the P2P system acts as a middleman, the refund process may take a few extra days.

While peer-to-peer platforms may not be a fantastic option for your business right now, overall trends are certainly moving in that direction. The amount of money invested in digital and mobile payment platforms will almost certainly keep increasing, and with that, P2P apps like PayPal and Zelle will continue to adapt to the ever-growing market.

[Read more: What to Do If Your Business Loan is Rejected]

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Published July 08, 2022