Let’s face it. It’s not easy to get a small business off the ground and keep it running—which is why many business owners look at peer-to-peer payment services as a money-saving alternative.
But here’s the hard truth: It’s not. In fact, it can be downright dangerous.
So why are peer-to-peer (P2P) payments appealing? Simple. Processing fees can feel costly. In months where you’re operating lean, it can feel like an unnecessary or intrusive expense. But it’s helpful to keep in mind that there’s a reason for those expenses and that the peer-to-peer option often comes at a greater cost.
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Venmo, Cash App, PayPal, Kik, and other P2P payment apps are easy, especially for mobile businesses like home services, home care providers, pop-up shops, art vendors, lessons, and more. And according to a 2022 LendingTree survey, 84% of consumers have used P2P services. This means customers who invest in products or services likely have a P2P payment app right on their phones.
It seems like the perfect solution. Little or no fees, no cash, and easily accessible apps on your device. It’s also painless to transfer the money right to your bank account—so why wouldn’t you use it?
The name “peer-to-peer payments” perfectly describes what the apps were designed for: To transfer money between friends or acquaintances. It’s ideal for sending money to your coworker to help pay for lunch, or to your sibling for your portion of a parent’s gift. Basically, P2P was not created with business in mind.
Because peer-to-peer payments are not business-focused, they can put you at risk.
Banks, credit card companies, and other financial institutions are making security and privacy a core part of their services. And in a world where scams, fraud, and cyber attacks run rampant, it’s a crucial part of keeping consumers and businesses safe.
According to a 2021 report by VMware, 63% of financial institutions experienced an increase in destructive cyber attacks, an increase of 17% from last year.
In response, these banks and other companies within the financial sector are increasing the amount they spend on cyber and data security. Customers have likely seen more multifactor authentications, which is just one way financial institutions fight the problem.
With P2P apps, users must use due diligence to optimize security. This may mean updating the app consistently, choosing multifactor authentication if it’s available, and personally evaluating how easy it is for a user to get an account.
For example, do they require you to send any identifying information? If not, security standards may not match that of a bank or credit union, or give you the protections credit card companies do.
Privacy is another issue. It’s essential to know what P2P payment apps put in place to protect your information, and how to use privacy settings.
As an example, Venmo states on its website that you must set transactions to private, otherwise they may be public to anyone on the internet. It’s also helpful to note that you can look up other “users,” which isn’t something you can do in the banking world.
As a business, customer security and privacy should be something you prioritize, which makes it more necessary to understand the potential issues with peer-to-peer transactions.
One of the first things to note as a P2P platform user is that often, once the money is sent, it’s gone. Unlike checks or credit cards, there’s very little put in place for fraud protection. And scammers know this as well. Consider what could happen if your phone was hacked, or someone who looked like they may be a customer “accidentally” sent you too much money and wanted you to send some back.
The LendingTree peer-to-peer payment services survey found that 15% of people using P2P payment apps have been victims of scams, and for those who used them several times a week, the percentage increased to 22%.
Human error can also cost you. Whether it's a typo or money sent to the wrong person, it can become a time-consuming issue that may result in financial loss.
In the same survey mentioned above, 23% of respondents sent money via a P2P app to the wrong person, and if they used the apps multiple times a week, the percentage jumped to 42%.
From time to time, businesses face disputes. For small businesses, this can be a huge hassle, especially without a fraud department to advocate on your behalf. If there is a disagreement between a consumer and a vendor, there is no arbitration system in place, leaving you to deal directly with any accusation that comes up.
Businesses use P2P for speed, convenience, and to avoid fees, but you’ll likely still deal with those things and more. Here’s why:
With new IRS rules, you may incur holds on business transactions until you provide tax information—and users should be wary about the potential IRS crackdown on underreported business transactions through P2P payments.
Before you accept any business transaction through a P2P payment vendor, make sure you know the rules and regulations. If you use the platform in a way that’s not listed as acceptable, you open yourself to legal action and other consequences.
Venmo explicitly states that you cannot use them for business transactions unless it is authorized by Venmo, and warns against transactions that involve purchases or sales between people who don’t know each other.
Make sure you read the fine print before using any peer-to-peer payment platform for your business.
If you’re a business owner using peer-to-peer payment services for business transactions, you may also be inclined to keep a balance within your P2P account. One important safety feature many businesses and individuals have through banks is being FDIC-insured.
FDIC deposit insurance covers many financial institutions and is there in case of an institutional failure. This means your money is covered up to a certain amount to prevent catastrophic loss in a rare financial crisis. P2P apps do not have this coverage, which means it leaves your money more open to risk.
Time is a precious commodity for small businesses. If you have to take the time to tie payments to invoices in your accounting system, it ends up costing you. It’s also essential to note that any payment you receive via a P2P platform must be reported to the IRS as taxable income.
It’s important for you to decide if what looks like speed and convenience actually benefit your business. To do that, you have to look at how P2P payment transactions stack up to professional payment solutions—and if it fits within your overall accounting system.
A dedicated payment solution offers businesses more options. With peer-to-peer payments, you are likely to need several applications since each customer typically favors one. So while they may use Cash App, they may not have Venmo. Or they use Kik over Google Pay. P2P platforms also tend to lack readily available business support.
An ideal professional payment solution will:
In today’s fast-paced, information-filled world, business owners do not benefit from having to log in to multiple apps or dashboards daily. The more they can centralize the process, the better.
Using a professional payment solution gives you the ability to draw your business data into a more unified source. If your payment processor can integrate with your accounting software, invoicing system, customer communications tools, or simply has all those features, it means you’re able to spend your time in one place. This in turn gives you more time to focus on other tasks that help you grow your business.
The key to any successful business platform partnership is finding providers that make running your business easier. When looking for the right professional payment solution, look for:
A professional payment solution is likely to have far more capabilities than a peer-to-peer payment app. The features they provide allow you to:
Another thing to think about is looking professional. Peer-to-peer payments can’t give your customers a branded and business-like transaction. Even more, it may result in a negative payment experience. Imagine if a payment is scrutinized or declined, and how uncomfortable that is for both the business and the customer.
Professional payments services can help amplify your reputation, and let you come across as responsive, efficient, and professional.
Many small businesses have gotten caught up in the convenience of P2P transactions. Is it really as good as it seems?
The industry is rapidly growing but that doesn’t mean it’s an optimal solution for businesses. And it certainly doesn’t ensure that it will save you time and money in the long run. In fact, the best move you might make for your business is to invest in a professional payment solution. It’s security, convenience, and professionalism that you and your customers will appreciate.