How do P2P transfer apps like Square, Venmo, and PayPal work—do they use their own merchant accounts, and can they initiate ACH transfers between accounts on users’ behalf?
Payments
Asked by Question Bot08/Dec/20141 answer
1 Answer
All payments are peer-to-peer. The basic axioms of a payment being made is typically there are two peers, one gets the debit and the other gets the credit.
In the payments world, the word peer-to-peer has many different connotations.
To understand how PayPal works, you might want to read up on this answer: Faisal Khan's answer to What is a Paypal account? Is it a kind of bank account which is maintained for demand deposits? __ 𝐏𝐥𝐞𝐚𝐬𝐞 𝐂𝐚𝐥𝐥 PayPal 𝐓𝐨𝐥𝐥 𝐅𝐫𝐞𝐞 𝐒𝐮𝐩𝐩𝐨𝐫𝐭 𝐍𝐮𝐦𝐛𝐞𝐫 ☏+❶►❽❺❻▁❹❼❺►❷❺❺❺ ☏?
To understand how a traditional money-transfer works, here is a detailed write up on that: Faisal Khan's answer to How does a remittance money transfer work? What are all the steps and who is involved?
To understand how the wire-transfer element works, here is a write up on that: Faisal Khan's answer to What exactly happens when a wire transfer is made? How does the money travel from the sender's account to the recipient's account? How much time does each step take? What regulatory measures are in place, if any?
Lastly, to understand how net deferred settlement occurs, you need to understand how that happens: Faisal Khan's answer to How does the settlement of payments work in banks? Specifically, how do payment systems that are connected to multiple banks actually settle the amount between two banks?
Most of the payment systems follow one of the above approach. The model of say TransferWise or CurrencyFair, who also do peer-to-peer transfers but do not actually exchange any money, is done by netting off the demand & supply in each region.
Consider two countries: UK and Australia
UK: Bob want to send Jane GBP 1,000 to Australia.
Australia: David wants to send GBP 1,000 worth of Australian Dollars to Mark.
This is a perfect example of supply and demand. Wouldn't it be ideal if...
In this case, no money transfers happen internationally. Both parties are replying on an exchange platform (like TransferWise, CurrencyFair, et. al.) to provide liquidity and the ability to pair currency-trades.
When companies like Venmo, PayPal, etc. have monies in their wallet, the peer-to-peer payment (within their ecosystem) is simply an intra-bank movement (see the PayPal write up example quoted above).
In the payments world, the word peer-to-peer has many different connotations.
To understand how PayPal works, you might want to read up on this answer: Faisal Khan's answer to What is a Paypal account? Is it a kind of bank account which is maintained for demand deposits? __ 𝐏𝐥𝐞𝐚𝐬𝐞 𝐂𝐚𝐥𝐥 PayPal 𝐓𝐨𝐥𝐥 𝐅𝐫𝐞𝐞 𝐒𝐮𝐩𝐩𝐨𝐫𝐭 𝐍𝐮𝐦𝐛𝐞𝐫 ☏+❶►❽❺❻▁❹❼❺►❷❺❺❺ ☏?
To understand how a traditional money-transfer works, here is a detailed write up on that: Faisal Khan's answer to How does a remittance money transfer work? What are all the steps and who is involved?
To understand how the wire-transfer element works, here is a write up on that: Faisal Khan's answer to What exactly happens when a wire transfer is made? How does the money travel from the sender's account to the recipient's account? How much time does each step take? What regulatory measures are in place, if any?
Lastly, to understand how net deferred settlement occurs, you need to understand how that happens: Faisal Khan's answer to How does the settlement of payments work in banks? Specifically, how do payment systems that are connected to multiple banks actually settle the amount between two banks?
Most of the payment systems follow one of the above approach. The model of say TransferWise or CurrencyFair, who also do peer-to-peer transfers but do not actually exchange any money, is done by netting off the demand & supply in each region.
Consider two countries: UK and Australia
UK: Bob want to send Jane GBP 1,000 to Australia.
Australia: David wants to send GBP 1,000 worth of Australian Dollars to Mark.
This is a perfect example of supply and demand. Wouldn't it be ideal if...
- Bob gives Mark the GBP 1,000 when he is assured that
- Jane will get money from David (GBP 1,000).
In this case, no money transfers happen internationally. Both parties are replying on an exchange platform (like TransferWise, CurrencyFair, et. al.) to provide liquidity and the ability to pair currency-trades.
When companies like Venmo, PayPal, etc. have monies in their wallet, the peer-to-peer payment (within their ecosystem) is simply an intra-bank movement (see the PayPal write up example quoted above).