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What P2P payments are and how they work

What P2P payments are and how they work

Updated: 13 December 2021 • Reading time: 5 minutes

P2P, meaning peer-to-peer or person-to-person payments, allow one person to transfer money instantly to another via a digital platform, normally an app, where the money are deposited from a bank account, a credit or debit card or with a cash top-up. The service is available for digital wallets, applications that differ from more traditional payment methods due to their low costs, whereas standard versions are often free, and the fact they are easy to learn and use.

The use of P2P payment instruments, which fall into the group of alternative payments, has been growing sharply in the last few years, as explored in detail in the latest whitepaper on digital trends in payments in 2022. According to the research published by Statista¹, transactions with alternative payments will reach a global value of around $14 trillion by 2022, thanks to the rise of the Ecommerce channels and the increasingly more frequent use of proximity payments in store, and generally in its alternative forms (e.g. interactive touch-screen totems, self-checkout scanners, POP self-service/ordering kiosks etc.).

Who prefers peer-to-peer payments

Statista Global Consumer Survey concluded that as of August, 2021 the majority of adults in the UK preferred traditional bank transfers as a P2P payment method (67%) over direct money transfer services, such as PayPal (33%). However, the alternative P2P payments user base has been growing exponentially worldwide every month.

P2P payment apps are used predominantly by the younger generations. We have analysed the topic in depth in an article dedicated to the generational comparison on the use of payment methods, in which we explore some of the advantages offered by these platforms. In addition to the already mentioned low costs, user experience and transparency are two of the most relevant features for those who, thanks to these solutions, often have their first contact with the world of financial services.

Millennials and Gen Z choose the digital channels when looking for solutions to meet any type of needs. Information, social relationships, purchases and simplified financial services are offered now more than ever through new instruments, increasingly more different from traditional ones.

How P2P payments work

One of the strengths of these applications is that they are easy to use. Registration is usually completed in just a few steps, and is carried out once the app has been downloaded, and is activated very quickly, how quickly depends on the type of service offered.

After having activated the account, the digital wallet must be loaded with funds from a credit or debit card, or be connected to it in order not to keep replenishing the wallet but draw from the card automatically when the payments are transferred, also replenishment can be done via bank transfer or, in some cases, also with cash via an ATM or another authorised physical point.

Crediting occurs either instantaneously or may take a few days, depending on the instrument used to load funds and the service conditions. At this point, users can make a purchase by choosing contacts from their address book who receive the money straight away if they are already the service users, and if they are not, they receive an SMS, which notifies them of the transaction and invites them to activate the service in order to receive the sum transferred.

Many P2P payment solutions also offer alternatives to a simple money transfer. For example, the function that enables users to request money, perhaps in the form of a loan repayment, is widely used, or when splitting the costs between friends to pay the bill in a pub, or when organising a whip-round to purchase a gift from a group of people.

Some applications, in addition to P2P transfers, offer P2B transfers, which normally require on-line authentication with the app credentials, while at physical sales points, this depends on the platform. HYPE, which we have first-hand experience with considering that it is a company in our Group, offers different modes of authentication: bringing your smartphone close to the POS enables you to make a NFC payment, select the store from the app or you can use the associated prepaid card, not always available with all digital wallets.

Some applications, in addition to P2P transfers, offer P2B transfers (platform-to-business), which normally require online authentication with the app credentials, while in stores the requirements depend on the platform. HYPE, which we have first-hand experience with, since the company was born within the Sella Group like Axerve, and now is a part of the same fintech ecosystem Fabrick, offers different authentication methods:

  • placing your smartphone near the POS terminal enables you to make an NFC contactless payment
  • selecting a store from the app
  • using the associated prepaid card, which is an option available with a limited number of digital wallets.

Which P2P application to choose

Many platforms offer this type of service, the most well-known examples worldwide are PayPal, MANGOPAY, Alipay, WeChat Pay, Neteller, Skrill, EcoPayz and Click&Buy.

Despite the fact that all these platforms offer a P2P payment service, often an instant payment, and are very similar to one another, the choice of service may be based on different factors. We'll start by reiterating that an important factor is how common the instrument is in your country and within your circle of friends.

Alipay and WeChat Pay, for example, are applications targeted exclusively at Chinese users and include the P2B function, i.e. the possibility of paying at commercial enterprises; it is no coincidence that many European and American merchants, which operate on this market, are integrating these payment methods in their POS terminals or Ecommerce sites. HYPE and Satispay which, like their Chinese competitors, offer the possibility of paying in store and online, are two of the most commonly used applications in Italy and the choice of one or the other can also be influenced by how common they are amongst friends and relatives.

However, choosing the service is not only based on these factors, but also on the value-added services that these applications offer. In fact, these platforms are often distinguished from one another for the additional, free or paid functions depending on the business model chosen, which help to make the user experience unique and to ensure customer loyalty. There are applications that offer the possibility of creating virtual spaces or piggy banks to make it easier to save, perhaps linked to the wish lists of goods or services, others have found their unique strengths in the possibility to trade cryptocurrencies, or in the elimination of withdrawal fees abroad or in the offering of travel insurance services.

How P2P payments affect business

As mentioned earlier, an ever-increasing adoption and choice of platforms over traditional payments is because they are favoured and preferred by the younger generations and because they meet the ever more burning need of the European institutions to reduce the use of cash. In fact, these solutions are compliant with the PSD2 regulation, which oversees payments within the European Union and the UK, as well as in a form of B2P payments between people and companies.

In conclusion, the acceptance of these collection methods can improve the customer's purchasing experience and reduces the risk of the sales opportunities loss caused by a limited offer at the check-out page or in store. Subscribe to our newsletter to keep up with the latest news and insights from the payments world.

Source
1

Annual transaction value of the next-generation payment technology market worldwide from 2015 to 2022

TagDigital paymentsPayment methods
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