Online Person-to-person (P2P), Account-to-Account (A2A) Payments and Electronic Cash

Other electronic payments include person-to-person, account-to-account, electronic cash, and electronic benefit transfers.  These payment instruments are usually associated with an established consumer deposit account and facilitate consumer access to recurring or one-time debit and credit transactions and a variety of federal, state, and local government benefit programs.

Online P2P or e-mail payments typically use traditional payment networks to transfer funds electronically from one consumer to another.  Though these payments are named for their ability to send funds among individuals online, the majority of P2P payments are Internet purchases at online auctions or small businesses.  In most cases, P2P transfers use existing retail payment systems to add and withdraw funds from accounts.  The simplest case is when the person making a payment and the receiver maintain accounts at the same bank.  This type of payment is called an "on-us" transaction.  They are settled by posting accounting entries on the books of one financial institution.  P2P transfers also may occur outside the traditional payment networks and, in their simplest form, may take place as an exchange of cash between two individuals.  As technology advances, the transfer of funds through the use of proximity devices, such as mobile telephones and personal digital assistants (PDAs), is likely.

Most P2P services charge to the receiver of the funds a fee that varies depending upon various factors, including payment method and the sender's credit history.  Payments made with funds that originated from either ATM or ACH transactions are less expensive than payments made with funds originated from credit cards.  P2P systems may offer to the receiver an opportunity to obtain funds through a check and for an additional fee.


Figure 11 - Online P2P Clearing

Legend: Solid lines represent the flow of information and dashed lines represent the flow of funds.

Figure 11: Online P2P Clearing and Settlement

Online P2P payments typically occur using the process described in Figure 11.  The sender of the funds must have an account with the P2P service provider (Step 1).  Depending upon the service, the funds may come from an existing credit card or transaction account or may be drawn from a previous balance with the online P2P payment provider (Step 2 and Step 3).  The sender can designate the e-mail address of the intended funds recipient (Step 4).  The P2P network transfers the funds to the receiver's account as an "on-us" transaction.  Once the funds reach the receiver's account, notice of the transaction is sent through e-mail to the receiver (Step 5).  The receiver of the funds must join the service if it does not already have an account (Step 6).  The online P2P payment service can disburse the funds from the receiver's P2P account through an ACH payment, a check payment, an EFT credit, prepaid card, or a credit to a credit card account (Step 7).

Account-to-account (A2A) payments are similar to P2P payments.  They involve the transfer of funds from one customer's account to another account at either the same or another financial institution.  Like P2P payments, A2A transfers can be initiated through the customer's Internet banking service, a biller's payment Web site, or by telephone instruction from the customer.  Unlike P2P transfers, consumers must access an existing retail payment account (deposit account) at a financial institution in an A2A transaction.  To complete a transaction, the customer must know the recipient's account number or some other identifier.  A2A payments can be effected on the ACH or ATM networks.  On the ACH networks, funds are cleared and settled within two to three days.  The ATM networks may allow same-day funds availability although settlement may not occur for two or three days.  Same-day transfers using the ATM networks are usually less expensive than traditional wire transfers.

P2P payments are a growing segment of the A2A market.  The success of the P2P online auction model is attributed to the consumers' demand for convenient and reliable P2P transactions.  P2P payments may include transaction accounts and may be conducted through the use of proximity devices such as mobile telephones or PDAs.  P2P payments are expected to grow as more reliable and convenient payment methods are introduced.

Financial institutions and retailers are also developing electronic cash-payment instruments.  Similar to P2P payments, individuals can transfer electronic cash value to other individuals or businesses, generally through the Internet.  Consumers can use the cash payment instruments for purchases at retailers' Web sites or they can transfer cash to other individuals through e-mail.  Pre-funded accounts that consumers can use for online auction payments are among the most recent applications.  In these applications, individuals use a credit card or signature-based debit card number to pre-fund the Web certificate or electronic account, and recipients redeem the value from the issuer.

Electronic Benefits Transfer (EBT)

EBT systems allow recipients of government benefits to authorize transfers from their benefits accounts to health care providers and retailers.  The federal government and several states routinely use these accounts to issue food stamps and other benefits.  The government distributes all food stamp benefits using this technology and, while the average transaction value is low, total transaction volumes are significant.  The institution holding the account authenticates transactions using PIN technology.  EBT programs now use cards with either magnetic-strip or microchip technology.  Since cards using chip technology have larger storage capacities than cards with a magnetic strip, they can handle more complex transactions.  Security measures can be encoded on the card strip or microchip as well to help prevent unauthorized use.


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