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Why some payment methods might cost you (and your customers)

The peer-to-peer(P2P) transactions space is on fire with services like Venmo and Zelle leading the storm. Undoubtedly, the Covid-19 pandemic is behind much of this growth. According to Allied Market Research, over $1.8 billion dollars was generated by the global P2P payment market. A P2P payment transaction occurs when two people complete an exchange of funds from their bank and use the internet to complete the process. 

As a small business owner, you’re probably considering adding these payment methods. After all, you use it personally and know that it’s a convenient and easy-to-use payment tool. Below the surface, however, these P2P transactions can actually cost you and your customers. So before you implement Stripe and others to your business, consider the following potential consequences discussed here. 

New Tax Implications for Small Business Owners

A person appears frustrated in front of their computer screen. P2P platforms can cause unexpected frustration for business owners and customers.

P2P platforms can cause unexpected frustration for business owners and customers.

Previously, businesses were required to report income to the IRS for higher thresholds:

  • $20,000 or more in payments
  • 200 or more transactions using a payment service

Changes go into effect for 2022 for businesses that accept payments through an app like PayPal, Venmo, or Square. The IRS has announced that these digital payment apps must report on a person’s business transactions. Each payment app must provide a Form 1099-K to any business that receives $600 per year in goods or services.

If you receive less than $600, you’re still required to report that income. This law affects LLCs, partnerships, and freelancers. 

Costs of Taking P2P Transactions

One of the reasons that you might be considering accepting P2P transactions is to avoid credit card transaction fees. But Venmo and others have transaction fees that you must pay on the business side. 

Venmo is actually owned by PayPal and its transactions are processed through its parent company or Braintree (another of PayPal’s businesses). You pay 1.9% plus $0.10 for every payment that’s above $1.

For example, if a customer pays you $100 for a product or service through Venmo, you will actually receive $98 after the processing fees. These fees are non-refundable too. 

If your customer decides to use their credit card to pay for their purchase through a P2P payment, you’re going to get hit with transaction fees. For example, a flat 3% fee for credit card transactions is charged on Venmo for payments.

Cash App, which is owned by Square, is a P2P that allows consumers to use cash to pay for things. When you sign up for a “Cash for Business Account” which allows you to make transactions for goods and services, you are charged a transaction fee. Cash App for business also has its own Terms of Use which outline how you must deal with costly issues like chargebacks. 

Security and Fraud Concerns

While P2P payments are secure, they’re still a hotbed for fraudulent activity and security concerns. There are many cases of Venmo users who have had their funds vanish without an explanation for instance.

“I didn’t know that you can’t get your payment back,” said Angela Kincaid who spoke about her story of trying to purchase a puppy using a P2P payment

P2P payments simply don’t offer the type of protection that businesses and consumers are used to with credit cards. These P2P payment apps were not designed for businesses and other small business payment options are better developed for business use. 

Your Funds Will Take Time to Arrive

P2P transactions could take one to three business days before you have access to the money. Do you want immediate access to that money in your business bank account?

You’ll need to pay more to do that. 1% (maximum of $10) is taken out for these “instant transfers” from services like Venmo, Apple Pay, and PayPal. The instant transfer can take anywhere from immediately to 30 minutes to happen. 

If you’re moving thousands of dollars at a time, that 1% might not hurt as much. But it’s not worth it with smaller transactions. 

To avoid the fees, you will need to wait out the period indicated by the P2P service. Here are some of those waiting periods you might be susceptible to:

  • Apple Pay – One to three business days
  • Venmo – One to three business days
  • Stripe – One to five business days

Additionally, some P2P payment services have limits and other restrictions. For example, you can only transfer up to $10,000 per transfer and up to $20,000 within a seven-day period with Apple Cash. 

Platforms that are built for businesses to accept payments may offer access to funds faster. For example, Finli can settle a transaction the next business day after receiving funds. 

Takeaways

Peer-to-peer platforms like Zelle and Venmo are great tools for personal transactions. The popularity and familiarity with using these payment solutions are why some businesses may use them for their payments initially. However, their offerings aren’t built for business payments, and accepting them could cause unforeseen costs. To save your business money and time, look into services that offer what your business needs and will be able to grow with you.


Need help getting started? Finli was founded to help small businesses instantly invoice, collect immediate payments, and more seamlessly handle their accounts receivable. Sign up for a free trial here!