When mobile payment apps can cost you

Editor’s Note: This story originally appeared on Living on the Cheap.

When you’re out to dinner with a group and it’s time to share the tab, the odds keep getting better of someone saying “Let me Venmo you” instead of pulling out their wallet.

But while setting up a tab with friends is a quick, easy, and sensible use of a payment app, there are times when you might want to think twice about tapping an icon on your phone to send the money.

Here’s what to know when using a payment app makes sense and when it can unexpectedly cost you money.

Why people love payment apps

A 2020 NerdWallet survey showed that 79% of Americans had used a mobile payment app. For the purposes of the survey, a mobile payment application was defined as:

• A “peer-to-peer service”, used primarily for money transfers between friends and family, and
• Applications used primarily to pay for goods and services in person or online

These distinctions aren’t set in stone, as many apps can be used for both peer-to-peer and business payments.

Unsurprisingly, the #1 reason cited by payment app users is convenience. For most people, that just means not having to worry about having the right number of ones and fives in your wallet to pay off a friend for a few happy hour beers. (And the friend doesn’t have to worry about giving change for a $20 bill.)

However, as you’ve probably heard, there’s really no such thing as a free lunch (a way to pay someone back). All payment apps need to make money for the companies that run them. This means that all of them charge fees for certain types of transactions.

If you think that makes payment apps look a lot like your bank, you’re right and wrong. Between the fees and the fact that the apps aren’t regulated the same way a bank is, you may end up shelling out money you didn’t expect to pay.

What to pay attention to when using payment apps

In general, convenience, affordability, security and reliability have made mobile payment apps very popular. But there are some things to watch out for that involve fees. I haven’t used all the popular payment apps, but the ones I’ve used make it very clear when you’re about to pay a charge.

Here are some charges you may face in certain situations.

Fees for in-app payment using a credit card account

Different payment apps have different rules for paid payments, but the most important one involves using a credit card. Not all peer-to-peer apps let you connect to a credit card, but those that do usually charge a small fee — around 3% — for payments.

The high fees, however, arise if your bank treats the payment as a cash advance on your credit card. Then, your credit card issuer may charge an additional fee based on a dollar amount or percentage, as well as other cash advance service fees, including a higher APR. If you don’t want to play this roulette game, don’t link your payment app to a credit card.

Fees for Instant Transfers

If you want to transfer money from your app balance to your bank account, it’s usually free if you don’t mind waiting a few days for it to appear in your bank balance. If you need money immediately, some apps will charge a fee for this convenience.

Fees for accepting payments for commercial transactions

Starting in July 2021, Venmo began charging fees to people who receive money in exchange for goods and services. If someone paying through Venmo indicates that the transaction was for goods and services, the seller receiving the payment will be charged a transaction fee of 1.9% plus 10 cents.

PayPal, owner of Venmo, charges a similar fee. When this article was written, Zelle was frequently mentioned as a cost-free alternative for business transactions.

If you have a side business and have accepted payments through Venmo, this policy reduces your profit margin. People who created a business profile with Venmo already had to pay a fee, but people with non-business accounts weren’t supposed to transact business on them. Other apps have similar restrictions.

For buyers, the new Venmo fees — which are paid by the seller — help protect purchases of goods and services. This brings us to our next topic: how in-app payment can offer significantly less protection than other payment methods.

When paying with an app can hurt you

The biggest problems arise when you have a problem with a payment. For example: “No backsies” when you send money to the wrong person.

I thought I had a pretty unusual name, so I didn’t specify my username when I asked a group of friends to pay me back for a wedding gift using a popular payment app. Imagine my surprise when I found out there was another person with my username plus a “1” at the end – and my friend was worried she had just sent $50 to the wrong person.

In the end, my friend had used the correct username and the money got to me. But if not, she would have been out of luck if the money had already been transferred. His only recourse would have been to ask the other user to return the money to him and hope for the best.

To prevent this from happening to you, always verify usernames and phone numbers with the person you are sending money to, and check for typos before confirming the transaction!

A lower level of consumer protection than you get with a credit card

There’s a reason Venmo started offering purchase protection, and it’s not just about profit. Many people are surprised to learn that they don’t have certain consumer protections or the ability to dispute a transaction when using a payment app.

When you split the cost of a wedding gift with your co-workers, disputes are unlikely, but what if you’re paying for an item you never receive?

A May 2021 report from the Public Interest Research Group states it simply: “Credit cards have stronger protections than debit cards. Apps have the least protection. The National Consumer Credit Law Center has an excellent publication that outlines all of your rights when buying something with a credit card. It’s worth reading because you might not know how using a credit card provides consumer protection in many situations.

The PIRG report offers the following recommendations on the use of payment apps, many of which are taken up by the mobile payment companies themselves:

• Using a P2P application is like spending money. Use it only for friends and other people you know and trust.
• Check and set all your app privacy settings to the most secure options.
• If possible, keep a separate bank account to link to P2P accounts. Do not link P2P accounts to your main account or an account with a large balance. Consider linking your app to a credit card, which is more secure than using a debit card or bank account.
• Be aware that money received through an app can be withdrawn if the transaction involved a hacked or fraudulently accessed account. For example, if someone buys you a used bike using a hacked app account, the transaction could then be reversed, meaning you, the seller, sold your bike for nothing.

All financial transactions, including those made with cash, cards and checks, present different types of risks. Knowing which payment methods are best for different situations can help you avoid paying for a tab in ways you never intended.