Modern software development solutions has made money transfers much easier: shopping around the world is now a matter of pressing a couple of buttons.

And it's not just FinTech startups and e-commerce platforms that offer more convenient experiences. Traditional banks are also looking for ways to transform the monetary transaction landscape, simplifying and revolutionizing the way we handle money.

But this field is not without challenges. So today we break it all down: the mechanisms, challenges and innovations that shape P2P transactions around the world today.

A closer look at the transaction process

Before talking about more complex ideas, let's look at how P2P transactions work. Contrary to logical belief, it is more complicated than taking money from one bank account and depositing it in the other.

The process consists of two parts: clearing and settlement, which help maintain a clear record of transactions and accurately transfer funds from the countless transactions that occur throughout the day.

Clear

Clearing is the process of validating transaction details, which includes identity verification, liquidity checking, and data aggregation. Since banks handle many transactions over any period of time, most of them are consolidated into a single amount during the clearing process. Let's look at it in more detail:

1. Initiation. During this stage, Bank A initiates the transfer to Bank B through a request from a customer of Bank A to send funds to a customer of Bank B;

2. Check.Banks validate the transaction, ensuring that their customers have sufficient funds in their accounts and confirming their identities;

3. Comunicación interbancaria.Two banks communicate over a secure network about the details of the transaction. In this way, they can check whether they have consistent and accurate information.

Settlement

By having all the necessary information, banks can exchange funds. This process is called settlement, in which banks use the aggregate data of transactions during a certain period and simply exchange the difference of those transactions. This process consists of several stages:

1. Transfer of funds.Settlement is the actual transfer of funds from Bank A to Bank B. Bank A will debit your account and send instructions to the central bank to credit Bank B's account. For example, if Bank A had to transfer the entire amount of 300 to bank B for the day, and bank B had to transfer the 350 to bank A, bank B only sends the difference - 50 - to bank A.

2. Transfer confirmation. Once the central bank processes the instructions, the amount is credited to Bank A's account. Bank A then confirms receipt of the funds. Bank A then confirms receipt of the funds.

3. Account update. Both banks update their customers' accounts accordingly. Bank A will credit its customer's account and Bank B will debit its customer's account.

4. Completion of the transaction.The transaction is finalized once all the previous steps have been completed successfully. Both banks maintain records of transactions for reconciliation, auditing and regulatory compliance.

The exchange of information between banks and other financial entities is facilitated by advanced custom enterprise software development infrastructure. Many large organizations use SWIFT - Society for Worldwide Interbank Financial Telecommunications - to send transaction reports in a secure and standardized way.

However, several countries have developed their own systems for P2P transactions, reflecting the unique market demands and regulatory environments. For example, India's UPI system allows for instant P2P transfers via mobile platforms.

As we see, clearing and settlement include a lot of information flowing between actors. Many of the problems with P2P transactions arise from the complexity of these processes.

Addressing the challenges of international P2P transactions

International P2P transactions face numerous setbacks due to the complexity of global financial infrastructures. Differences in technology and security standards at financial institutions around the world contribute to transaction problems, increasing the time it takes for funds to reach the recipient's account and increasing the workload of transaction professionals. finance. Here's a more detailed breakdown of the main challenges of P2P transactions:

• Discrepancies in data format.Banks around the world store their data in different formats, which they have to reinterpret to communicate with other banks. Therefore, misinterpretations and delays often occur;

• Complexity of compliance.To protect citizens from fraud, national governments impose security standards that local banks must comply with. When transferring money from one country to another, banks have to perform compliance checks, which adds another layer of complexity to the entire effort;

• Time limitations.By definition, international banks process transactions from different time zones. Since they only process them during business hours, customers often have to wait longer for funds to reach the recipient;

• Tecnología heredada.Many banks still rely on outdated technology to manage their workflows. Serving thousands of customers, from individuals to large enterprises, they cannot tolerate the downtime required to update their systems;

• High cost of financing.To carry out a transaction, both parties involved need to have sufficient funds, which means that banks must have considerable liquidity;

• Inefficiency of intermediaries.Sometimes a transaction can involve multiple intermediaries in a transaction chain, and that can lead to errors and delays;

• Absent competition.There is not much competition in interbank communication compared to institutions such as SWIFT, Visa and MasterCard. That means they have little incentive to evolve at a faster pace.

Ensure security in peer-to-peer transactions

Custom business software development advances and the COVID-19 pandemic have made organizations and customers more accepting of all things digital. Companies have created online stores or stores on social media platforms to reach their customers beyond geographical barriers. At the same time, more customers are embracing the benefits of purchasing food, entertainment and products online.Thanks to that shift, digital transactions between businesses and consumers are now ubiquitous, which has many fraudsters jumping at an opportunity. The data also reflects this: after costing around $29 billion in 2019 and 2020, the value lost due to card fraud grew to 1 billion euros.$33,45 mil millones in 2022, 15% more.

PCI Security Standards Council

The Payment Card Industry Security Standards Council (PCI SSC) is a global organization that maintains, develops and promotes PCI standards for the security of cardholder data worldwide. The council was founded by major financial institutions such as Visa, Mastercard, American Express, Discover and JCB in 2006 in response to growing concerns about payment card security.The Council defines operational and technical requirements for organizations that handle branded credit cards, educates stakeholders on the importance of protecting cardholder data, provides security training, and works with the community to update standards. so they can respond to new threats effectively. Regarding software development, the PCI SSC also has a number of requirements that custom software developer must meet if they create applications that support online payments.

Payment App Data Security Standard

The Payment Application Data Security Standard (PA-DSS) is a set of requirements that helps software providers develop secure payment applications. The standards define the types of data that developers can and cannot store and allow them to comply with the Payment Card Industry Data Security Standard (PCI DSS).The rule prohibits developers from storing sensitive cardholder data, such as the entire magnetic stripe, CVV2 or PIN. It also requires software development consulting firms to regularly update software to protect it from emerging vulnerabilities, encrypt cardholder data, limit business access to such data, monitor access to system components, and respond to suspicious activity.

End-to-end encryption

Point-to-point encryption, or P2PE, helps protect data from unauthorized access as it travels across data points. When cardholders make purchases, they transmit their information across bank and merchant networks, making it vulnerable to interception by third parties. Encryption makes data unreadable while it travels to a secure decryption environment.Here's a brief breakdown of how the P2PE process works:

1. Encryption at the point of sale. As soon as the cardholder swipes or taps their card at a payment terminal, P2PE technology encrypts their data. Sensitive data becomes a complex code that is not easy to decipher;

2. Secure transmission. The encrypted data travels to the payment processor through the merchant's network. Encryption ensures that data will not be compromised even if it is intercepted during this transmission;

3. Controlled access to decryption keys. Encrypted data requires decryption keys. Keys are stored in a highly secure controlled environment, often managed by a third-party service provider. Thus, if a merchant's system is compromised, the attacker will not have access to the keys and will not be able to read the data;

4. Decrypted in a secure environment.Just as the decryption keys are kept separately, the data is also decrypted only in a separate and secure environment. Typically, this occurs within the payment processor or a similar security entity. 

5. Use and storage of data.After decryption, payment processors can use the data to manage the payment. Its routine processing and storage of cardholder data is also controlled by the PCI DSS.

Overall, one of the main advantages of P2PE for merchants is that it significantly reduces the scope of their PCI DSS compliance. Since cardholder data is encrypted and never exposed in their systems, they have fewer requirements to meet for a secure payment environment.

The abundance of P2P transaction methods

The evolution of P2P transactions has provided users with various ways to transmit funds. Each method can boast its own set of features, use cases, and conveniences, but it also comes with different security considerations.

Card transactions

Cards are one of the most convenient cashless payment methods. As they have evolved, the ways of storing and transmitting cardholder data across merchant networks have also changed, with the intention of strengthening payment security. Payment cards store data on three media: magnetic stripe, EMV chip and RFID chip.

• Cards with magnetic stripe.The card stores data on a magnetic strip next to it and transmits the information when you swipe the card at a point-of-sale terminal. They are less secure due to the ease with which data is cloned;

• Tarjetas con chip EMV.The data is stored on a much more secure chip, which includes a cryptogram key that protects the cardholder's data. The cryptogram key makes it easier to verify the identity of the card and approve it by the card issuer. Only the card issuer has access to the cryptogram key, making fraud considerably more difficult;

• Cards with RFID chip.RFID chips allow contactless payments, that is, transmitting data throughout the transaction without direct physical contact with a point-of-sale terminal. Data travels from the card to the merchant's network when the card is close (up to 4 cm or 1.5 inches) to the terminal. Systems like PayWave and PayPass use RFID or NFC technology to make secure and fast transactions.

Tokenized transactions

Now that smartphones have become the primary computing devices for a significant portion of the world, FinTech providers are looking for ways to make managing one's finances even more seamless. Online banking is already a given for many people, but with certain technologies becoming more accessible, the world of P2P transactions is also catching up.

Modern smartphones and wearables of almost any budget come with an NFC (Near Field Communication) chip integrated into the motherboard. It allows data transmission in close proximity between devices, just like the RFID chips found in debit and credit cards. Hardware paved the way for the adoption of tokenized transactions, and now users can dispense with their cards entirely and pay by simply tapping the point-of-sale terminal with their smartphone or watch.

Among the most popular tokenized payment systems are Apple Pay and Google Pay. However, many FinTech companies and regional banks offer their solutions primarily on Android, as it does not restrict access to NFC for third-party applications. With tokenized transactions, users create a clone of their credit card stored on their phone or wearable. Each transaction is assigned a unique, encrypted token, ensuring that actual card data is not shared with the merchant.

Innovations at points of sale

We must also talk about the other end of peer-to-peer transactions.Point of sale (POS) technology has seen significant technological innovations in recent years: hardware POS systems were developed to support an increasing variety of payment options, and contactless payments in COTS (Commercial Off-The-Shelf), also known as CPoC, emerged as an alternative. These innovations have transformed the way companies transact and interact with customers.

Hardware POS

Hardware POS are stand-alone devices intended to receive and validate transaction information. Over the years, they have acquired several hardware components that allow them to receive payments from multiple sources: stripe readers to interact with magnetic stripes, EMV readers to recognize EMV chips, and NFC chips to receive tokenized transactions from smartphones and wearables. The downside to hardware POS is the cost of the entire system: it ranges from $20 to $1,000 for an individual device and $260 to $3,400 for a kit of devices. In addition, you also have to purchase the software that runs everything, for a price of over $400.

CPoC solutions

CPoC solutions are software-based point-of-sale systems that offer cost-effectiveness, but vary in security and compliance needs. The concept includes the use of a standalone device, such as a tablet or phone, with specific software installed that processes transactions. An NFC chip is used to read token transactions, while credit card payments require a separate card reader that connects to the device.

Software-based POS are easily integrated, so retailers can build their payment ecosystem with contactless payment capabilities at a lower upfront cost. They can also benefit from extensive customization options and support for payments on the go.

Alternative payment technologies

FinTech providers have also developed alternative payment methods to meet diverse user needs and preferences. These methods offer innovative ways to transact, leveraging technology to make payments more convenient and accessible.

Mobile solutions

In some regions, mobile phones use SIM cards as virtual EMV chips for transactions. Users can load their payment card details onto the SIM card and make contactless payments by tapping their smartphones to compatible point-of-sale terminals.

Payments via USSD

USSD (Unstructured Supplementary Service Data) is a protocol that allows users to access services through text menus on their mobile phones. Users can initiate payments, check balances, and perform other financial operations by sending USSD codes. The method allows transactions without an Internet connection, which is crucial in less connected areas.

QR codes and 2D barcodes

QR and barcodes are widespread in many Asian countries. Customers scan the code displayed by the merchant using their mobile banking apps or other payment apps to initiate transactions. It is a more accessible alternative to tokenized transactions: while these require an NFC chip to initiate a transaction, which many smartphones may not have, a camera is enough to scan the QR code. Using QR codes and barcodes, payment software providers cover a broader user base.

Sound payments

Sound-based payment methods use ultrasonic or audible sounds emitted by devices to transmit payment information. Users can make payments by placing their smartphones near the issuing device. This emerging technology is useful in areas with low smartphone penetration.

Open source financial platforms

Open source platforms, such as the Mifos-based payment hub, are designed to enable organizations to quickly set up and manage their financial operations, providing customers with a streamlined P2P transaction experience. Unlike traditional financial systems, which often involve long and complex integration processes, open source platforms can be implemented quickly. By relying on community-developed software, organizations can avoid the high costs of proprietary systems.

Conclusion: towards a seamless financial future

Peer-to-peer transactions continue to evolve to stay relevant in the dynamic field of consumer finance. From SWIFT-based international transfers to innovative FinTech solutions, methods continue to adapt to offer customers convenient ways to pay and exchange money.

At the other extreme, the world of finance has made significant investments in its infrastructure to prevent fraud. Continuous training, the establishment of updated security standards and technologies such as encryption have made giant strides in protecting client funds. Still, staying aware of emerging vulnerabilities in this arms race is paramount to a secure financial environment. As technology advances, the continued evolution of financial systems will make P2P transactions and financial services more accessible, secure and efficient.