Peer to Peer Money Transfers Under the Microscope
Are peer-to-peer platforms a valid alternative for making cross-border money transfers? How much can one save compared to conventional money transfers? Learn more about p2p payments in this article.
International money transfers were once a monopoly of banks and money transfer companies. However, peer to peer money transfers emerged with the dawn of the Internet. In recent years, p2p transfer has grown significantly as a valid and inexpensive alternative.
How Does Peer to Peer Money Transfers Work?
In principle, the peer to peer money transfers function in the same way as banks and other financial institutes. Apart from banks and companies, hawala networks have been active in this domain for centuries. Herein, sender adds money to a financial pool at his place while receiver withdraws from another pool at recipient’s place. However, there is no physical transfer of money involved.
The original peer transfer practice involves a trust-based exchange of money between private persons without the intervention of a bank.
Example: Suppose you want to transfer 1000 Swiss Francs to your sister living in Brazil. You first pay 1000 Francs to a Brazilian expatriate living in Switzerland. The latter, in turn, transfers an equivalent of 1000 Francs from his Brazilian bank account to your sister’s Brazilian account. For this service, the Brazilian expatriate charges a small commission. Or he is satisfied to have exchanged reals in Swiss francs without transaction expenses transaction or loss of exchange.
Such peer-to-peer money transfers, as originally practiced, still exist today. This is a particularly case of “Hawala”, a century-old mode of exchange many parts of the world have been practicing.
With the Internet, numerous people are accessing this money transfer system using online platforms. Users include people willing to make transfers and others who wish to take part and offer such services. In this way, peer-to-peer money transfer services ensure security in a high-risk area of activity. Service providers ensure that all exchange participants get their money back as per the terms of transfer.
International peer-to-peer platforms
Originally, Peer-to-Peer (P2P) transfers used platforms like social networks or chat rooms (“chat rooms”). With time, people demanded for cheap alternatives to conventional money transfer services. As a result, several peer-to-peer intermediary services are available today.
Service providers like UK’s Transferwise and Ireland’s Currencyfair are simplifying larger p2p payments among peers from across the world. However, sometimes acting as counter-parties, these companies also provide additional liquidity to make transactions possible.
Let’s return to the previous example: You want to transfer 1000 francs to your sister in Brazil. You pay 1000 francs from an account in Switzerland to a peer to peer money transfer service. Meanwhile, a couple in Brazil wants to transfer an equivalent of 400 Francs to their daughter studying in Switzerland. At the same time, a small company wants to transfer 600 francs to a Swiss producer for an order. The service provider pays your sister an equivalent of 1000 francs from Brazilian account. Similarly, it pays the student and the producer in Switzerland 400 and 600 francs respectively from a Swiss account. The peer-to-peer service provider charges a commission for the transfers.
Generally, p2p intermediaries require paying the transfer amount to a bank account with a special reference number. The intermediary then transfers the amount you are legible to receive to your bank account. Both Currencyfair and Transferwise have bank accounts in Switzerland.
Benefits of Peer to Peer Money Transfers
The biggest advantage of peer to peer money transfers is the low cost. This is true for “real” p2p payments, i.e. those allowing two people to exchange money without an intermediary.
When using a p2p transfer service, you pay a commission for the security and the service. This is often lower than the amount Swiss Bank and traditional money transfer companies like Western Union or MoneyGram charge.
Generally, p2p transfer companies don’t charge an additional fee on interbank exchange rates, in contrast to the often-high bank spreads. With this, an international transfer through p2p mode pays more money to the recipient than the conventional/bank-based service.
Transferwise, for example, charges a minimal commission of 1.5 francs per transfer. For transactions involving Swiss francs (CHF) against Euros (EUR) or Dollars (USD), the commission is 0.5% of the exchange amount. For a transfer involving a country with a currency less often used, you normally have to pay a higher fee. (Example: CHF in THB = 1% fee, CHF in RUB = 1.5% fee, CHF in ZAR = 0.7% fee). However, interbank exchange rates apply for each of these transactions.
Currencyfair charges a transfer fee of 3 Euros per transfer plus a commission of 0.15% depending on the transaction volume. The distinctiveness of Currencyfair is that it allows you to determine the exchange rate applied when transferring money. And, the transaction takes place only if another user accepts your offer. In case, no other “pair” is available for the deal, you can transfer money at the interbank rate. However, the latter case will be more expensive because of the 0.4% to 0.6% commission.
Peer to peer money transfers are an attractive alternative to traditional money transfer services. While intermediary-free P2P payments are free-of-cost, intermediaries like specialized online platforms charge a nominal fee for simple and secure transfers.
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