P2P payments are part of a payment system that is fully installed in most countries around the world. They involve sending money via mobile applications to specify any type of transaction between individuals, transfers, or payments for services.
These types of applications generally depend on banks, or some are independent, such as PayPal or Venmo. The latter, for example, even converts crypto-currencies into the official currency of each country.
What characterizes P2P networks is the direct exchange of information, in any format, between interconnected computers.
However, P2P systems did not originate with the function with which they are used today, but rather emerged as systems for the exchange of information between peers.
How did P2P originate?
P2P technology is a network in which there is no central point of connection or control, and which is made up of different parties acting independently in response to a common communication protocol.
If you think of P2P technology from this point of view, you could say that its origins lie with the UUCP protocol in 1980. This was a machine that ordered a connection call via a modem to communicate with the target machine. The aim of the connection was to share information from one point to another, without intermediaries.
First P2P generation
In 1996, Adam Hinkley created the first program with the P2P communication system. It was called Hotline Connect and was created for use in universities. In its first version, this network was used to share music and software between computers, but before long it was forgotten.
Three years later, in Boston, Napster took up the P2P technology and used it to enable two people to exchange music without external intermediaries with those on the network and its servers. But Napster was forced to close in 2001 due to allegations of piracy.
The next development of a P2P network was made by Gnutella, Justin Frankel, and Tom Pepper’s company. Gnutella is the largest P2P network in existence, with over 12 million operational nodes worldwide. It was the first decentralized network, in which no server served as a bridge, a turning point that gave birth to the second generation.
Second P2P generation
This second generation was characterized by decentralization. In other words, no central server was needed, as all nodes were, i.e. every node was both a server and a receiver of information. This is the functionality that extends to today’s P2P networks.
Within this generation, and around 2007, programs like Crux and eMule were born and other popular file-downloading alternatives emerged such as Kazaa, Ares, LimeWire, and BitTorrent, programs that have always remained in limbo between legality and piracy. Then other pay-per-download tariffs emerged, such as RapidShare, SendSpace, MegaUpload, and FileFactory.
What is P2P (peer-to-peer) technology?
P2P is a computer technology that allows any device (computer or cell phone, for example) to act not only as a client, but also as a server, i.e. there is no centralized power from which you can store information and share it in the same way by all clients (the cell phone, for example).
The simplest example of this mechanism is eMule or BitTorrent, programs used to download files, songs, and films online. With these tools, you access a network of computers that store and share your files on the network. Similarly, or very similarly, P2P payments work.
What are P2P payments?
Person-to-person payments (P2P payments) are an online technology that allows users to transfer funds from their bank or credit card account to another person’s account using technologies such as the Internet or cell phones.
How P2P payments work
In one case, a third party (such as PayPal or the Postepay application) is trusted to store credit card or account information, and the third party is authorized to transfer funds to and from that account with other people belonging to the same network.
You can also use the online bank account or the financial institution’s application to send funds to another bank account. In this case, the person receiving the money does not need to be part of the same network (bank or financial institution) as the sender.
Increased consumer acceptance of online, mobile, and e-commerce banking has paved the way for greater use of P2P payments. After years of PayPal dominating the market, the major banks and credit card companies are finally getting in on the act.
This is an important step for banks and credit card companies as commerce evolves beyond the relationship between individuals to a broader, individual-to-individual exchange.
What are P2P connections and how do they work?
P2P networks are connections made up of millions of computers located all over the world, operating under the orbit of a common communications protocol, with the aim of creating a huge shared network. The fact that the network is decentralized means that network members can exchange information directly and without intermediaries.
The only thing needed, then, to make P2P networks work is a common protocol, language, or software that enables connection information to be shared between those running it. The more decentralized the network, the more people will be able to create their own nodes, thus increasing the size of the network. In this way, its reach is increased and its possibilities enhanced.
In other words, the more pairs or peers a network has, the more likely it is that the network can’t be censored, has a resilient operation, and improves its own capabilities. The key element of P2P networks is therefore pairs or equals, i.e. entities capable of doing useful work and communicating the results of that work to another entity in the network.
Some of the functions, therefore, for which this type of network is used is for file exchange and retrieval, for example, with the use of BitTorrent. They have also been used to form part of the dark net and constitute so-called anonymous peer-to-peer, in which the aim is for users to disseminate all the information and content they want, without being able to identify their origin.
Today, it is used as an alternative to the conventional distribution of films and TV shows, and as the language par excellence that enables use and transaction via virtual currencies, such as Bitcoin.
What are the advantages and disadvantages of P2P?
The advantages of P2P networks are as follows:
- They are complex to censor, due to their decentralized nature.
- They have very high performance, because if one node goes down, another can take its place immediately, enabling the network to operate at all times.
- They have broad scalability to provide global services.
- The decentralized network generates trust and security among its users.
- They can be used to securely exchange any type of digital product, from songs or movies to millions of dollars.
- Applying interoperability due to the use of each participant’s bandwidth, to turn it into a network.
Some of the disadvantages that can be listed around this type of network are:
- P2P networks are not immune to security problems. They have been the victims of cyberattacks to take control of their nodes.
- The larger the network, the longer it takes for information to reach all nodes. New algorithms and protocols are always being researched to help overcome this problem.
Types of P2P networks
There are three different types of P2P networks, which have changed over time. The first was hybrid or centralized, then those known as pure or decentralized were succeeded, and finally, mixed.
Centralized model
The first generation of P2P or centralized networks had a client-server network structure. The central server maintained a database of information, and every time a user connected or disconnected from the network, the database was updated. In other words, all search and control messages passed through the server.
The server’s function was to search its database for each client request and send the corresponding message. One example of such networks was first-generation dial-up networks such as Napster.
Pure P2P: a totally decentralized model
The second generation of P2P, which began with the creation of Gnutella, differed from the previous one in one fundamental respect: it was no longer necessary to use a central server, but all nodes became servers and receivers at the same time.
In other words, every node participating in the network is both a server and a client. Thus, every node that receives a request and can respond to it, does so by including additional information of interest.
Semi-centralized P2P model
This model is the most widely used today, as most third-generation P2P applications consider it.
In this model, certain network peers are selected as super-peers and help manage traffic directed to other peers. The super-peers, in turn, change dynamically as new peers connect.
The effect of this new virtual topology is to make the network scalable and to solve the problem of the speed of response of the decentralized model, since the network speed of the mixed model is comparable to that of a centralized P2P environment.
This is the model currently used for payment applications. All over the world, there are hundreds of applications that enable money transfers between people and other P2P networks which, although they don’t have the functionality to transfer, function as virtual wallets. Currently, P2P payments are used by over 62% of American millennials.
How P2P payments impact businesses
Peer-to-peer (P2P) payments are transforming businesses in a variety of ways. In what ways?
Facilitating transactions
P2P payments enable businesses to make and receive payments more efficiently and quickly. This is particularly beneficial for small and medium-sized enterprises (SMEs), which can use P2P applications to manage their day-to-day operations, pay suppliers, or receive customer payments without the need for slower, traditional banking processes.
Reduce costs
Some P2P payment platforms offer lower rates than traditional payment methods such as bank transfers or credit card payments. This can help businesses reduce the operating costs associated with financial transactions.
Access new customer segments
Companies that adopt P2P payments can attract a younger, more technologically-skilled customer base, who prefer this type of payment method. Offering P2P payments can be an important differentiating factor in attracting the attention of this market segment.
Improve cash flow management
P2P payments can be processed almost instantaneously, improving cash flow management. This is crucial for financial planning and can help businesses maintain a more stable operation.
Increase competition and innovation
The popularity of P2P payments has encouraged businesses to innovate and improve their payment systems and financial services. This has led to increased competition in the financial sector, benefiting both consumers and businesses with better products and services.
Regulation and compliance
The rapid growth of P2P payments has attracted the attention of financial regulators. Companies must comply with regulations to ensure that their P2P payment operations comply with local laws and regulations.
Best P2P platforms
P2P applications have advantages for their users, which is why they have become so popular worldwide in recent years. Benefits include, for example, ease of use. To make payments via P2P apps, all you need is a bank account that provides this service and the app on a cell phone or tablet.
Some of the most popular and widely used are:
Google Pay
This is an app that lets you pay quickly and easily in physical stores, apps, or websites, and send money to acquaintances and relatives thanks to credit card synchronization. Its use is based on the fact that you don’t need to add physical money to pay, but set up a payment method, such as a credit or debit card.
Apple Pay
Apple’s iMessage messaging service is compatible with Apple Pay Cash, allowing users to send funds directly from a text chat. It is one of the most widely used shopping platforms in the United States. As well as being a P2P platform, Apple Pay uses the NFC antenna on your iPhone devices to specify transactions.
Binance
This is a global blockchain company, owner of the world’s largest digital asset exchange. P2P trading allows users to buy and sell cryptocurrencies directly with other verified users or merchants. Currently, payment methods accepted by Binance P2P are: PayPal, International Wire (SWIFT), Western Union, Yandex Money, Sberbank, Payeer, M-Pesa Kenya, Monobank, BBVA, Mercado Pago, Bancolombia S.A, GoPay, OVO, Paytm, IPS, UPI, PayNow, LinePay
PayPal
This is the platform par excellence for making payments abroad. It is used worldwide to make transactions to and from abroad, both to buy and to sell. Transactions can be carried out via several cards, provided they are activated for international payments. As a result, the platform charges a commission.
For example, if transactions are carried out between two accounts located in the same country, PayPal does not charge a commission to the buyer. However, if the purchase involves a currency conversion, for example, from dollars to pesos, there is a 4.5% commission. Another 3.5% commission is charged when a transfer is made between two accounts in different currencies.
Venmo
Owned by financial giant PayPal, this platform gives users greater control over their payments and receipts. Launched in 2009 as a startup, over ten years ago, it enables its users to send and receive money via a simple cell phone application to another user with a Venmo account.
What’s more, it’s unique in that it functions like a social network: users can add contacts, interact with them from the app, and make publications. Users can even share their transaction history in their profile, and their contacts can comment on it and even qualify it with their emojis.
Huobi
Supports over 90 types of payment methods to buy and sell crypto-currencies with local fiat currency. It securely converts fiat currencies into cryptocurrencies and vice versa with users worldwide with no risk of fraud and no commissions. In addition, it provides information on individual buyers and sellers, qualifying and verifying them.
Zelle
It’s a convenient way to send money between individuals that’s only available for US bank accounts. You don’t need to enter the recipient’s bank details, just their phone number. If you have an account in the U.S. and your bank is Zelle-enabled, you can access it directly from your entity’s app or website. In the main menu, you’ll find an option to send or request money. Enter the e-mail or cell phone number of the person you are sending or requesting money from, and confirm the transfer.
ClearXchange
Allows you to send money to anyone with a U.S. bank account, as well as transferring money between major banks, with just an e-mail or cell phone number. This is the system chosen by US banks Bank of America Corp, Capital One Financial Corp, and JPMorgan Chase & Co, USA. Bancorp, and Wells Fargo & Co have decided to hire ClearXchange.
Paxful
Founded in 2015, it is one of the world’s leading peer-to-peer Bitcoin marketplaces. It has 9 million users and over 350 payment options available on the platform.
P2P risks and scams
One of the main reasons why users choose to use P2P payments is the immediacy and efficiency of sending money. However, this type of payment also has a downside that has to do with possible virtual scams. It’s important to note that, while there are no 100% safe systems, there are certain requirements and procedures to consider in order to avoid them.
Among the most common scams, the following stand out:
- Phishing
- Avoiding scams
- Pump and dump
- Fake wallet exchanges
- Fraudulent gifts
Common types of fraud
In cryptocurrency trading, there are also market risks. Despite being a relatively new universe, these are the most common types of fraud:
Reversal of payments
It usually occurs from third-party accounts. Through this method, scammers try to use money that is not theirs for the purchase of cryptocurrencies. Thus, when the person holding that money or bank account files a complaint or is unaware of the payment for said transaction, the transaction is canceled but it is the seller who gets ripped off.
The ideal way to avoid this is to choose a payment method whose transactions are not easy to reverse, as some allow transactions to be reported up to three months after they have been executed.
Scams
While the cryptocurrency market has a legitimate framework, it has also become a point of new scams like phishing, pump-and-dump schemes, and exit scams.
Phishing is a scam that occurs when a cybercriminal substitutes the identity of an authority, company, or even someone, in order to deceive the victim into revealing confidential information. This mechanism usually involves the creation of cloned sites, fake support materials, or even voice phishing.
Exit scams are mainly found in exchanges. The essential characteristic of this type of scam is that, in principle, they didn’t plan to be a scam, but those managing ran out of funds to meet their customers’ withdrawals. To avoid this, it is important to secure transactions with reputable and reliable sites.
Pump and dump schemes usually occur on the stock market. The tactic involves artificially inflating the price of a little-known cryptocurrency through mass purchases and promotions coordinated with fraudulent advertising. Once the price reaches a certain level, a mass sale takes place to collect profits, which again reduces the value of the cryptocurrency.
To avoid this, it is important to study the fundamentals, achievements, and future plans of each crypto asset instead of simply looking at its market price.
Transactions outside P2P
Another common risk arises when buyer-seller transactions are conducted electronically outside P2P platforms. An example of this is when conversations are diverted to social networks like WhatsApp, Facebook, or Telegram.
Many scammers present themselves as verified merchants, but the only way to be sure you are really dealing with one of them is to take orders directly from the official sites on each platform.
Request money via P2P
This is the simple exchange of cryptocurrencies directly between the parties involved, without the help of a trusted intermediary. In social networks and chat rooms, there are numerous ads from people or groups offering to buy or sell cryptocurrencies with different payment methods. Some may be legitimate, but others require the sending of funds to disappear with them.
Fake cryptocurrency wallets
Not only can cryptocurrency exchanges be fake, but also wallets or purses. It is therefore important not to choose a random wallet from mobile stores, but to study what might be the best option. After making this choice, you must always use the official download page.
The most users of P2P payments
According to general trends and publicly available studies, P2P payments are particularly popular with younger demographic groups, such as Generation Z and Millennials. These groups have proven to be faster adopters of digital financial technologies, including mobile payments and P2P apps, due to their familiarity and comfort with mobile technology and online platforms.
In general, young users appreciate the convenience, speed, and efficiency of P2P payments for personal transactions, splitting bills, paying rent, or simply transferring money to friends and family.
How to protect yourself from scams? Safety tips for users
Users need to follow certain security tips to avoid falling victim to scams on P2P payment platforms. The most recommended tips are:
- Use a unique password: Although the easiest and most convenient thing for most people is to use the same password for many different websites, it is important to use one for each type of tool used. In addition, said password must have the minimum security requirements and be composed of uppercase, lowercase, symbols, and numbers. It must be at least twelve characters long and not contain any personal data.
- Enable Multifactor Authentication (MFA) – This is essential to prevent scams if a password is hacked.
- Frequently check connection histories.
- Be careful when opening links and image files.
- Don’t perform operations using public or shared devices.
Also, before sending money on your phone in a P2P application, it is important to anticipate:
- If making money transfers from a P2P account to a bank account, it is essential to confirm with the bank that the deposit has been made.
- When selling or buying products online, it is advisable to transfer a P2P payment to a bank account and make sure it is in that account before sending the item.
- Check the settings of a bank account to enable multi-factor authentication, which requires the use of a personal identification number (PIN) or fingerprint recognition.
- As some payment applications share data on social networks, it is important to adjust account settings according to what each user wants to make public or keep private.
