P2P Transfers 101: How Sending Money Really Works

updated on 17 December 2021

5 minutes, by Thomas Martchek

It just works, right? Here is what actually happens when you hit
It just works, right? Here is what actually happens when you hit "send."

Welcome to P2P Transfers 101! According to PMNTS.com, 71% of American adults use P2P apps. Therefore, we assume you understand the concept, but may be curious about how they actually work. Next week, we will publish a guide that evaluates transfer providers and gives our perspective on when to use each P2P transfer service.

What exactly are P2P transfers?

The “P2P” in P2P transfers stands for peer-to-peer. P2P transfers are electronic payments made directly from one person to another through an application like Venmo, PayPal, CashApp, or Zelle.

Transfers can be one-time or recurring, between two or more people, direct to the bank or into a digital wallet, in one currency or two, and instant or in several days. There are many different options to consider when picking a service for your needs, but for now, let's start with how P2P payments work.

Fraud Prevention

To conduct P2P transfers, the process begins with a user entering personal information. Personal information is used to validate:

  1. You are not pretending to be someone else
  2. You own the funding account
  3. Compliance with state or federal laws

Banks and financial institutions require enough information to ensure someone is not stealing from someone else or sending for illegal purposes, such as money laundering. We will write in more detail about fraud prevention later, but if you are curious, we recommend reading this Investopedia article.

Typically, financial institutions will validate your phone number, home address, date of birth, social security number, and card or bank information. On the backend, these fields are validated in large, national databases and confirmed before transfers can be scheduled.

Find A Friend

P2P transfers occur between people.  After an account is authorized, the user connects their account to friends or family. Adding friends and family to a transfer request can be simple, and is usually done by typing in an email or name.

P2P apps help users find their friends and family by revealing user avatars, user handles, friends in common, and frequent connections first. However, validation still relies on the user. While no one intends to give the wrong person money, it does happen. Please always double check you are handing money to the right person!

Funding Sources

Depending on the P2P app, a user can connect a bank, debit card, credit card, or digital wallet balance to fund a transfer. Typically, most bank or digital wallet transfers are free, while credit card funded transactions are surcharged.

Credit cards are surcharged, as they are often considered "Quasi Cash" transactions or similar to withdrawing cash from an ATM. Card issuing banks typically charge a service fee and interest on the entire balance on your credit account to send from a credit card. This is in addition to the 3% convenience fee for the amount sent by the P2P app. Some people need the credit, but make sure you are sending from the right account or you could see unexpected fees.

After Hitting "Send"

There are typically 3 main transfer models to move money from you to a friend. Funds can be sent from your bank or card: directly to another bank, through an intermediary to another bank, and to a digital wallet.

There are 3 main ways to facilitate P2P transfers.
There are 3 main ways to facilitate P2P transfers.

Direct to Bank

Your bank can directly send from your bank account to the recipient bank via the ACH network (automated clearing house). Banks and credit unions submit instructions and value to be confirmed by the network and arrive in the recipient account after 2-5 business days. Alternatively, there are "instant" transfers available, discussed below, but the point-to-point concept is the same.

Intermediary Transfers

Transfers via Western Union or WellPaid, or ones that are "instant," require two steps to arrive in the recipient's bank account, settlement and disbursement (inflow and outflow). First, the P2P service will securely pull funds from your funding source via the ACH or card networks.  From there, the P2P service will send a separate transaction to the receiving bank.

Depending on the transfer speed, the P2P service may not have received the funding amount when they initiate the transfer to the recipient. To facilitate faster or "instant" transfers, P2P services or banks need to "pre-fund" the second transfer. As "pre-funding" ties up cash and has some risk, these types of transfers typically have an expediting fee (ex., Venmo and CashApp both charge 1.5%). While not all banks are yet enabled for instant transfers, the Fed and ACH are expanding the Real-Time Payments (RTP). The Payments Journal has more details here.

Digital Wallets

Similar to intermediary transfers, digital wallet transfers have two steps when using an external funding source. Money is pulled from the funding bank or card by the P2P service, and balance is separately added to the receiving wallet account.

For a consumer, adding a balance is typically instant, though to move funds to a bank will take 2-5 days via the ACH or instantly with "pre-funded" transfers described above. Once balance exists in a digital wallet, it can be transferred instantly to other digital wallet accounts without moving money, just changing the balance of each account.

We hope you enjoyed our little primer on P2P transfers! In the near future, we will publish a second portion of this article to guide how to pick the right service for your transfer needs. Most of us have used or are aware of more than one service, so we will explore their differences and recommend options based on the transfer purpose.

WellPaid provides automated and recurring transfers to help people split subscription or living expenses. From our lesson above, we are an "intermediary transfer" service that allows users to send from one bank to another. Unlike others, WellPaid has an autopay function to split subscriptions or living expenses so you get paid back by roommates or others whenever your account is charged. Join our beta and give us feedback on what you want here! www.getwellpaid.com

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