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Venmo, PayPal, Square Cash and More: What Are Peer-to-Peer Payments?

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What Are Peer-to-Peer Payments?

There’s nothing quite so lame as being stuck with the dinner check every time you go out. But technology has your back — it’s harder and harder now for your friends to use the excuse that they don’t have cash on them. With the advent of peer-to-peer payments (P2P for short), or money transfer apps, splitting tabs and bills with friends and family has never been more convenient.

Quick and easy to use, P2P payments like Venmo, PayPal and Square Cash allow users to send one another money from their mobile devices through a linked debit card. Here’s what to know about how it works, how to use it safely and how to choose which service to use.

How P2P payments work

Paying friends and family by phone or computer was first popularized by PayPal and has since been offered by Google, Venmo (which is owned by PayPal), Square and others. The service is increasingly available through banks and credit unions, too, and on social media networks like Facebook and Snapchat.

Say you’re out to dinner with your cousin Charlie and want to split the check. Instead of fumbling around for and exchanging bills and coins, Charlie puts down his card and you take out your phone. You’ll open your app of choice, pick Charlie from your list of contacts, tap out the amount you want to send and your PIN, and voilà — Charlie gets a notification saying the money’s been sent.

Once the money gets to Charlie, he can leave it in his P2P account so it’s there when it’s his turn to pay, or he can transfer it to his bank account.

The P2P service is sort of like a middleman: You link your bank account or a credit card, and it expedites these sorts of transactions. Different services may have different steps or requirements, but that’s the gist.

» MORE: How to send money to an individual

Are P2P payments safe?

Though all of the major P2P systems are encrypted, meaning that your financial information is shielded, some have been subject to hacks and scams. Security policies for each platform vary, but all boast of their fraud monitoring and support teams that will help you resolve any unauthorized transactions. Read and understand a provider’s security procedures and fraud policies before signing up.

And go above and beyond to keep your money safe by doing the following when using P2P services:

  • Add a PIN or two. Each platform should have a way to add and require a personal identification number to complete transactions. For added protection, set one up on your mobile device, too, so in case you ever lose your phone it’s not exactly like you lost your wallet as well.
  • Opt in for notifications on every transaction. Some platforms do this automatically, but if yours doesn’t, dig into your settings so that you get emails or texts any time there’s a transaction on your account.
  • Pay and receive money only with people you know. Don’t pay strangers with P2P.
  • If you’re still worried, use your bank’s equivalent. Many banks have jumped on the P2P bandwagon and set up free services that will let you send money to someone, often regardless of where they do their banking, through the bank’s mobile app or website.

The FDIC recommends linking a bank account or a credit or debit card when using peer-to-peer payment services. Why? If money is misdirected, you can have the error resolved by federal law. If you use funds kept in the P2P account, you are subject to state laws and the provider’s own policies, which can vary.

How fast is it, and what does it cost?

Keep these things in mind when you use peer-to-peer payments.

There can be delays. Although notifications of transactions are sent and received right away, the transactions themselves may take one to three business days to go through, depending on the P2P service. Some providers, though, are less of a middleman and more a simple conduit, moving money to and from your linked bank account instantly.

There can be fees. Generally speaking, you can make P2P payments from a linked bank account or straight from the P2P account for free. But some providers charge small fees — 2% or 3% to process payments drawn from a credit or debit card, for example, or taking a few cents per transaction — for certain services. Check a platform’s fee policy thoroughly.

There can be errors. If you mistype a recipient’s email address, phone number or name, the money could go to the wrong person. Double-check the accuracy of your recipient’s information before you send off a payment.

Next steps: Which one should you use?

Snapcash, Square Cash, Venmo, Popmoney — the world is flush with peer-to-peer payment services with snappy names. Here’s what to consider if you want to join the P2P club.

Security and user experience: The service should be easy to use and understand, and be secure. Most well-known platforms have good security in place, but you should still err on the side of caution. Avoid apps that have bad customer ratings and bad histories with data breaches.

Your social circle: The most widely used platform for peer-to-peer payments is PayPal, with 184 million active accounts worldwide. But there’s no sense in getting it if your friends and family all use another P2P service. If your aim is to make splitting bills and sending money easier, get what people in your social circle are already using.

There are other factors that might matter to you and influence your decision. For more, check out our roundup of the best ways to send money.

Amber Murakami-Fester is a staff writer at NerdWallet, a personal finance website. Email: amufe@nerdwallet.com.

This article was updated Oct. 21, 2016. It was originally published Aug. 4, 2014.