How do you want to pay?

If you’re of a certain age, you remember when financial innovation was Saturday morning hours at your bank and a toaster for a new account. Times have changed. Now, you never step inside a bank, cash is disappearing from the economy, and new peer-to-peer payment methods have emerged.

In this note, I summarize four of the most important ones and mention a key risk inherent in all of them:

  1. Venmo
  2. Apple Pay Cash
  3. Zelle
  4. TransferWise

All of these are phone apps to which you connect your bank account to make and receive payments.

Venmo may be the most well known and commonly used. (Older readers may not know that “to venmo” is a well-used verb in our lexicon.) Payments you receive remain in your Venmo balance until you choose to transfer them to your bank account. Payments you make from Venmo are drawn from your bank account unless your Venmo balance can cover the payment in full. There are no fees unless you request an immediate transfer of funds from your Venmo account to your bank. It should work for any Android or iPhone user with a debit card.

Apple Pay Cash is similar to Venmo but you must have an iPhone. Instead of a separate app, you make and request payments through iMessage. Like Venmo, it’s simple to use and you can easily send the money back to your bank account. However, it doesn’t transact with Android users.

Note that Apple Pay Cash uses your Apple Wallet but the two are different. With Apple Wallet, you load your credit and/or debit card(s) onto your iPhone and when you make payments at a business, it uses either your debit or credit card, as you chose. Apple Pay Cash is for payments to and from other people.

Zelle is the newcomer. It was created by a consortium of banks and is designed to be used within your bank’s existing app if they’re part of the consortium or if they’re not, there is a Venmo-like app to use. The advantage of Zelle is that payments you receive go immediately into your bank account, rather than sitting in your Venmo or Apple app until you request a transfer. Like Venmo, it works across Android and iPhone users.

TransferWise is used to send money in a different currency. Similar to Venmo, each party connects the app to their local bank. They’ve developed a low cost way to send money in one currency and deliver it in another. If you want to send or receive money overseas with people you know, this is a cost-efficient and convenient way to do so. As TransferWise says, “Banks charge a lot for overseas transfers. We don’t. Transfer money abroad easily and quickly with our low cost money transfers.”

All of these peer-to-peer payment models have one serious shortcoming about which you should be careful. You have little or no fraud protection or recourse on the payments you make using them. You should assume that you are paying with cash and your payment is irreversible.

They all make somewhat clear that they should be used to transact with people you know and trust and you should take that to heart. All these apps work great for any situation where you would have otherwise paid cash but not as well when you’re dealing with strangers or making payment before receiving the goods or services.

I recommend that when making a payment to someone for the first time, the person receiving payment should initiate the request, rather than the payor. You don’t want to mistakenly send a payment to the wrong person and then have to try and get it back (again, think cash). Most of my clients pay me using Venmo and I always initiate the payment request for this reason.

You may want to try one of these peer-to-peer payment systems the next time you’re transacting with someone you know. Checks and cash are the new dinosaurs.

Two updates:

  1. The NY Times weighs in on Apple Pay Cash.
  2. The Wall Street Journal weighs in on the risk of paying the wrong person with Venmo.
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