Peer-to-peer payments: How and when to use Venmo, Zelle, and others

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Make sure you know who’s getting the payment you’re sending.

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Technology has made it easy to split restaurant bills and send money to friends and family with just a few taps on your phone thanks to peer-to-peer payment apps. You’ve probably seen—and perhaps made—peer-to-peer transactions using apps like Cash App, Venmo, and Zelle.

But how safe are these electronic payment apps? And what happens if your money disappears? Those concerns and others are worth delving into if you’re using—or considering using—one of these apps.

Peer-to-peer (P2P) payment apps are designed to allow you to send money directly to someone else, usually instantly. Want to send a friend money for picking up the tab for dinner or drinks last night? Just tap the Venmo or Zelle app on your smartphone and send them some cash.

In some cases, P2P payment apps can even be added to your digital wallet so you can use them to make payments at a store. If a retailer accepts Cash App, for example, just pull up the app, hold your smartphone near the merchant’s point-of-sale (POS) terminal, verify, and the payment is made.

Need to send your share of the rent to your roommate? If you both have Zelle, you can send the money directly to your roomie’s bank account. Peer-to-peer transactions make it easy to put money instantly in others’ hands without waiting for the funds to clear the bank.

P2P payments are relatively straightforward. Typically, you need to connect the P2P payment app to a funding source, usually a bank account or debit card. You may also be able to connect it to a credit card. To initiate a P2P payment:

With those steps completed, you can now send money to any recipient using the same app. The funds are sent immediately, and the amount you request is deducted from your funding source.

In some cases, if you have insufficient funds in the funding account, the app won’t allow you to send money to the recipient. In other cases, the cash might go to the recipient, but if you’re short, you could end up in debt to the app provider—and your ability to use the app could be restricted.

In general, P2P payments are considered relatively safe, but there are some considerations to keep in mind.

Money held in P2P app accounts isn’t FDIC insured. Federal Deposit Insurance Corporation (FDIC) insurance protects the money you keep in a checking account or savings account for up to $250,000 should the bank fail. So, if your bank fails, you get your money back.

That’s not the case with most P2P apps like Venmo, PayPal (which owns Venmo), and Cash App. Suppose you’ve received several payments from friends that have added up. You might even think of PayPal or Venmo as mini bank accounts. Both allow you to connect your accounts online, make payments, and send money to friends and family. But if PayPal suddenly goes out of business (taking Venmo with it), any funds you have sitting in your account could just disappear. There’s no guarantee you’ll get your money back.

Cash App is an exception. If you have the app’s Cash Card debit card or sponsor a family account, your Cash App balance is held at a partner bank, Wells Fargo, that is FDIC-insured. That’s not the case if you have only a Cash App account and keep a balance there.

Zelle is different. In many cases, Zelle payments are handled by your bank. So, you’re holding the money in your bank account and then sending it directly to someone else’s bank account. As long as your connected bank account is at an FDIC-insured institution, that balance is protected should your bank fail.

Fraud protections are almost nonexistent. Using P2P payment apps is pretty much like handing cash over to a friend. If your friend spends the cash, there’s no guarantee you’ll get it back if you change your mind. It’s the same with peer-to-peer transactions. Once you send that money, it’s unlikely you’ll get it back.

Fraud involving Zelle cost consumers $440 million in 2021, according to a U.S. Senate investigation. Because you’re sending cash, it’s gone, much as sending money to a fraudster using a service like Western Union results in losses. If you send money via Zelle or some other P2P payment app, there’s not much recourse if you find you’ve been scammed.

The company behind Zelle, Early Warning Services, has said its responsibility for ensuring customers’ funds are kept safe ends with those who’ve been hacked. But EWS isn’t responsible for transactions in which Zelle users are duped into sending money to someone or some entity they think is legitimate.

To that end, if you’re a Zelle user, you’ll get a warning prompt before you send money. The app will remind you to be sure you know who the recipient is since the payment can’t be canceled, and that there is no purchase protection if Zelle is used to pay for goods or services. In other words, user beware.

With PayPal, you may be protected, depending on the transaction. If you’re using PayPal to purchase an item on eBay, for example, and it arrives damaged (or doesn’t arrive at all), you may be able to get a refund through PayPal’s dispute process.

It’s generally safer to use a credit card (or to connect your credit card as a payment method) rather than have funds directly debited from a bank account. With a credit card, you can dispute the charge with the issuer should something go wrong.

Other ways to reduce the chances of loss from peer-to-peer transactions include:

Peer-to-peer payments can be convenient, especially if you don’t like carrying cash or writing checks, but they’re not perfect, and paying by credit card ensures safety that many P2P payment apps can’t offer. Read the terms and conditions of each service to understand what happens with your money before you send cash through a P2P app.

Specific companies and funds are mentioned in this article for educational purposes only and not as an endorsement.