Peer-to-peer Transaction
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Peer-to-peer transactions (also referred to as person-to-person transactions, P2P transactions, or P2P payments) are electronic money transfers made from one person to another through an intermediary, typically referred to as a P2P payment application. P2P payments can be sent and received via mobile device or any home computer with access to the
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, offering a convenient alternative to traditional payment methods. Through the P2P payment application, each individual's account is linked to one or more of the user's
bank account A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded. Each financial institution sets the terms and conditions for each type o ...
s. When a transaction occurs, the
account balance In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...
in the application records the transaction and either sends or pulls money directly to the user's bank account or stores it in the user's account within the application. Since this concept's inception, many business entities have developed P2P transaction capabilities, increasing the competition in the space and the convenience brought to the consumer. The prevalence of mobile devices has also forced the adaptation of P2P payment applications to become more convenient for users.


Historical background


Birth of eCommerce

P2P payment originated in the
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with a company called
PayPal PayPal Holdings, Inc. is an American multinational financial technology company operating an online payments system in the majority of countries that support online money transfers, and serves as an electronic alternative to traditional paper ...
, which specialized in electronic money transfers. The payment system initially served to assist both
eCommerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain managemen ...
businesses and individuals, reaching massive scale following PayPal's acquisition by
online retailer Online shopping is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the Internet using a web browser or a mobile app. Consumers find a product of interest by visiting the website of the r ...
eBay eBay Inc. ( ) is an American multinational e-commerce company based in San Jose, California, that facilitates consumer-to-consumer and business-to-consumer sales through its website. eBay was founded by Pierre Omidyar in 1995 and became a ...
in 2002. This event marked the beginning of the rapid growth of P2P transactions. eBay's business model required a transaction intermediary to facilitate payments between customers and sellers, whether they be businesses or individuals. Buyers needed the service because they did not want to divulge
credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
information to random sellers. Sellers needed the service because many consumers did not have the means to open up a credit card
Merchant account A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for t ...
to accept online payments. Peer-to-peer payments were now in full effect in the online marketplace.


Rise of smart mobile devices

Smartphone A smartphone is a portable computer device that combines mobile telephone and computing functions into one unit. They are distinguished from feature phones by their stronger hardware capabilities and extensive mobile operating systems, whic ...
technology affected many aspects of modern-day life, one of those being the ability to transfer money to other people anywhere in the world within seconds. Right now, there are many innovators in the P2P transaction mobile space, with industry leaders such as PayPal,
Venmo Venmo is an American mobile payment service founded in 2009 and owned by PayPal since 2013. Venmo was aimed at friends and family who wish to split bills, e.g. for movies, dinner, rent, or event tickets etc. Account holders can transfer funds t ...
,
Square, Inc. Block, Inc. (formerly Square, Inc.) is an American multinational technology conglomerate founded in 2009 by Jack Dorsey and Jim McKelvey and launched its first platform in 2010. It has been traded as a public company on the New York Stock Exch ...
, among myriad others. All of these apps allow users to easily send and receive payments in a short time frame, with little to no fees involved. The prevalence of smartphones allows most people to use their phones as a type of
wallet A wallet is a flat case or pouch often used to carry small personal items such as paper currency, credit cards; identification documents such as driver's license, identification card, club card; photographs, transit pass, business cards and oth ...
, particularly when splitting bills or dealing with personal debts. P2P payment volume is expected to reach 86 billion dollars by 2018.


Operation/functionality

P2P payment application functionality varies, but the processes generally follow a similar structure: * First, the user downloads the application and creates an account and links it to a credit card, debit card, or bank account. * Then the user can create contacts and send payments using another user's
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,
phone number A telephone number is a sequence of digits assigned to a landline telephone subscriber station connected to a telephone line or to a wireless electronic telephony device, such as a radio telephone or a mobile telephone, or to other devices f ...
, or account handle. * During a transaction, money is taken out of the user's account within the application and transferred to the receiving user's account. If there is not enough money in the account to complete the transaction, money is taken directly from the user's bank account to finish the transaction.


Information and money security

In a survey conducted by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, 42% of respondents said the reason they would not send money through a P2P payment application is because they are concerned about the security of their payments. Because of the ease of use and accessibility of large sums of money straight from individual's bank accounts, security measures have been put in place to minimize theft. Most applications require password-protected sign in or a
pin number A pin is a device used for fastening objects or material together. Pin or PIN may also refer to: Computers and technology * Personal identification number (PIN), to access a secured system ** PIN pad, a PIN entry device * PIN, a former Dutch d ...
to access a user's account. Bank account and credit card information is encrypted. However, if there is a requirement for bank or credit card, its not a real peer-to-peer anymore. There are some loopholes that some thieves have exploited. For example, Venmo's platform makes it look as though a payment is registered and complete immediately when the button is clicked, but the actual transaction does not process for a couple of days. Thieves can exploit this by pretending to send a payment to someone in exchange for something (i.e.
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), which Venmo registers as a transaction. In reality, the transaction is not yet complete, meaning the payment can bounce back and be declined by the bank. Although typical fail-safes come into play for worst-case scenarios, such as the $3,000 limit per week on Venmo transactions, financial institutions themselves may notify their customers of theft and fraud. P2P payment applications, as third party intermediaries, typically deflect responsibility to the banks and financial institutions who actually hold and process the user's transactions and funds.


References

{{Reflist Payment systems