Banking services are becoming less popular as peer-to-peer payment apps like Venmo, Cash, and PayPal are gaining popularity.

Peer-to-peer payment apps like Cash App, Venmo, PayPal, and Zelle are so popular that they have become verbs. After dining out with friends, you "Venmo" the money to whoever paid the bill instead of handling cash; you split utilities or Netflix bills with roommates, etc.

The appeal is obvious.

P2P payment, or peer-to-peer payment, enables you to make payments without requiring account information. You can search for someone using their name or phone number. The transfer is typically fast and free. While usage varies by age, the majority of Americans now use mobile payment apps. A study by Nerdwallet found that 94% of millennials use mobile payment apps, compared to 87% of Gen Zers, 88% of Gen Xers, and 65% of baby boomers.

Peer-to-peer payment apps have their advantages and disadvantages, as well as some overlooked aspects, that you should be aware of.

Don’t send to those you don’t know

More and more Americans are using P2P apps to make online purchases, rather than just paying back friends and family.

According to Nerdwallet, among mobile payment app users, 53% primarily use them for online purchases through retailers, while paying back friends or family members was the second most common reason at 43%, and paying bills was the third most common reason at 40%.

While using P2P systems to pay vendors is convenient, Ted Rossman, senior industry analyst at Bankrate and Creditcards.com, advises caution. It is still safer to use P2P payment systems with friends and family because they don't offer the same protections as credit cards.

If you purchase concert tickets through a P2P app and the tickets do not arrive, you may not be able to recover your money or the goods or services you received.

Rossman stated that in the event of the worst-case scenario, "it's gone once it's sent."

It may be more challenging to obtain a refund for a payment made through a P2P network, and it is crucial to know the individual or vendor with whom you are conducting business. Unlike credit cards, which offer more fraud protection and can be refunded quickly, money transferred through a personal account may take longer to return.

Rossman advised against using peer-to-peer services to send money to individuals you don't know and trust, as it can be challenging to recover funds if anything goes wrong.

Check fraud protection and refund policies

Rossman analyzed the consumer protections offered by P2P companies and concluded that PayPal provides better buyer protections than Cash App or Zelle, despite the latter being created by a group of major banks to compete with P2P challengers.

The use of P2P apps presents a tradeoff for consumers, who enjoy the convenience of instant transactions but assume the risk of irreversibility. To mitigate this risk, Zelle advises caution and recommends using the app only with trusted partners.

P2P apps can be a good option for trusted vendors such as electricians or babysitters, but using it with an unknown merchant and hoping for the merchandise to arrive is risky, according to Rossman.

When making a payment through Venmo, you can choose to pay a small transaction fee by clicking on the "goods and services" button. This becomes more crucial when dealing with an unfamiliar vendor and a payment that is not linked to your P2P app's credit card account.

If you need to initiate a refund request, it's important to note that if you have an underlying account linked to your P2P app, such as a credit card or checking account from a bank, there are additional layers of customer service to contact. While you can request a refund through a P2P network, it may require more legwork and persistence compared to a credit card company, which often reverses charges almost immediately and will fight on your behalf directly with a vendor. According to Rossman, "It's harder to get actual money back than get a line of credit restored."

Be wary of sending large amounts

Sending large amounts of money without fraud protection should make people cautious.

Before sending money to someone with the same name as 85 other individuals, ensure you're sending it to the correct person. Some apps, such as Venmo, may request the last four digits of their phone number for added security. However, you can still send without this information.

Rossman warned that P2P payment systems are vulnerable to scams and phishing attacks, and there are limited protections for buyers.

Check fees and features for additional P2P services

More and more individuals are utilizing mobile payment apps as their primary bank accounts, according to a study by Nerdwallet. The research revealed that approximately two-thirds of mobile payment app users keep a balance in their accounts, with an average of $287.

When transferring money, there are different options available. Most transactions are free, but some services come with fees. PayPal charges a 1% fee for instant transfers, while Venmo charges 1.5% (with a minimum of 25 cents and maximum of $15). Cash App charges between 0.5% and 1.75% for instant deposits.

Payments made with cash are free, while those made with credit cards incur a transaction fee.

Many apps are now providing banking-like services, including credit cards. For instance, PayPal and Venmo both offer credit cards. The PayPal cashback Mastercard provides 2% cash back on all purchases, while the Venmo card offers 3% cash back on your top spending category and 2% on your second category.

With Cash App and PayPal, you can now deposit your paycheck into a mobile payment app and buy and hold cryptocurrency. Additionally, Cash App enables users to file taxes through Credit Karma Tax.

PayPal offers a line of credit with an interest rate of around 30%.

The "buy now, pay later" installment plan has gained popularity as it allows individuals to pay for their goods using multiple payments over weeks or months with no interest. Banks have long offered layaway plans, but the concept is currently booming anew due to the user-friendly and mobile-friendly rebranding of upstart fintechs. If you have recently received an alert from a card provider that a purchase is eligible for an "easy" pay option, it is likely in response to the popularity of the rebranded buy now, pay later plan. However, there may be penalties and interest for late payments, similar to credit cards, if the buyer does not adhere to payment schedules.

Big peer-to-peer companies are still not banks

While banking services are becoming increasingly advanced, there are significant distinctions. Unlike banks or credit unions, mobile payment apps are not protected by FDIC insurance. In the event of a company collapse, your funds would be at risk.

Douglas Boneparth, the founder and president of Bone Fide Wealth, which targets a younger clientele, believes that as long as someone doesn't have thousands of dollars in their mobile banking app, the convenience factor is a significant draw.

"I haven't heard about FDIC insurance being needed for quite some time," he said.

While Venmo and PayPal are part of the same parent company and Block owns Cash App, these companies are now major players, so the need for FDIC insurance protection may not be as critical for the average person who doesn't typically hold large amounts of cash.

Boneparth stated, "Commerce is evolving, and many of them are becoming increasingly savvy. They are catering to, innovating, and adopting things that appeal to younger demographics. This is the future of commerce."

Rossman states that while it is true that big P2P companies are unlikely to go out of business soon, consumers should be aware of the risk without FDIC insurance, even though it is small. The main point is that P2P companies are not perfect substitutes for banks and should be considered as a supplement rather than a full-fledged bank account.

Although 5% of Americans are unbanked and three times as many are underbanked, there are still reasons to consider joining the banking system rather than completely avoiding it.

Securing loans, such as car loans and mortgages, may be more challenging for individuals without a banking history. Rossman explained that some people choose to be unbanked due to mistrust of banks or lack of access to banking services. However, relying solely on one banking option can limit long-term financial opportunities. Rossman advised seeking to join the banking system for greater financial flexibility. Having a bank account allows for writing checks, using ATMs, and paying bills.

Financial services can become overly complex and costly as options proliferate, just as consumers experiment with streaming services to recreate the value of a cable television account without overspending.

Rossman stated that while there are some benefits to the banking system and relationships, there are also workarounds, but it can sometimes feel like you're starting from scratch.

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