Payment Apps 101

July 2, 2025 • 10 min

Payment apps are an easy, convenient way to pay for things. All you need is your phone.

What Are Payment Apps?

A payment app lets you send money — or receive it — using your smartphone. You simply open the app and swipe it over a screen at, for example, your local grocery store. As long as you have your phone, you don’t need to carry cash or a plastic credit card. Some payment apps let people send money to one another. You could use a payment app to pay your babysitter, or a friend could use an app to repay you for a movie ticket.
When you download a payment app, you link it to an existing account, such as your checking account or a credit card. Then, when you swipe your phone at the gas station or use the app to shop online, the funds move from your checking account directly to the merchant.
There are three main types of payment apps:

Closed loop

A closed-loop payment app is exclusive to a specific merchant. If you’ve used a coffee chain’s app to order coffee using money pre-loaded to that app, you’ve used a closed-loop payment app.
It works like this: you transfer some money from your checking account (or credit card) to use in the app on your smartphone. You can then use the app to order a cappuccino. When you do, money moves directly from your app to the company. There’s no intermediary, such as a bank or credit union. Because the app is closed loop, you can only use it at that coffee shop. You can’t use it at a clothing store, the drug store, or anywhere else.
Some merchants offer perks to customers who use their payment app. Your coffee shop app might offer reward points or a special deal on your favorite coffee drink.

Open loop

You can use an open-loop payment app — such as Apple Pay or Google Pay — at any retailer that accepts the app. Most payment terminals at physical stores now accept Apple Pay and Google Pay.
These apps give you more flexibility than closed-loop apps, but that convenience may come with higher transaction fees (which are often paid by the merchant).

Peer-to-peer (P2P)

You can use a peer-to-peer (P2P) app to send money to friends, family members, or the kid who mows your lawn. You can also receive money from others.
PayPal and Venmo are examples of peer-to-peer payment apps. Let’s say you meet a friend for lunch, she pays the bill, and you owe her $20 for your portion. You open the P2P app on your phone, choose your friend’s name from your contact list, and send her $20. Within moments, the app sends $20 from an account you currently have, such as your checking account or your balance at the P2P app, to your friend’s account. Your friend gets a notification that $20 has arrived from you. Keep in mind that both you and your friend need to have the same peer-to-peer app.
You can use some P2P apps to pay both retailers and individuals.

How Do They Work?

Payment apps transfer money from one of your existing accounts — such as your checking account or a credit card — to the person or merchant you’d like to pay.

Setup

To begin, download the payment app you’d like to use. (Some payment apps may be built in to your phone already.) Then open the app and follow the steps to register. The app will guide you in connecting to your credit union account or debit or credit card. You’ll receive a code or some other authentication to confirm your identity.

Using the app

There may be different ways to use an app.
If you’re visiting a shop that accepts your app, open the app and tap your phone over a tap-to-pay screen at checkout. (If the screen displays a symbol with four curved lines that look like radio waves, it’s a tap-to-pay screen.) When you tap, the app uses a specific radio frequency to transfer funds from your account to the merchant. If you’re using the app in other situations, such as for public transportation, there may be tap-to-pay screens.
You can use some payment apps to make purchases online. Once you’ve set up your payment app account, such as PayPal, look for the PayPal button at checkout. Select it, enter your username and password for the app, and that’s it. You don’t need to share your credit card number or manually type in your name and mailing address.
To pay a friend, family member, or other individual using a peer-to-peer app, both of you must have the same app. Log in to the app and search for the recipient’s name in your list of contacts. (If you’re sending money to someone who isn’t on your contact list, search for them within the app by name or phone number. Just make sure that you’ve entered their information accurately.) Then follow the steps to enter the dollar amount and send it. The funds will transfer from your account to the recipient’s.

Canceling a payment

When using a payment app, money transfers to the recipient’s account right away. So, if you want to cancel the payment, the best approach is to contact the recipient. If that doesn’t work, contact your payment app’s customer support to report the issue. Use caution when sending money with P2P apps and other payment apps – treat it like a cash transaction.

Are Payment Apps Secure?

They’re designed to be secure, but you should still be careful.
When you use a payment app, it typically doesn’t share your card number or other financial information with the merchant or individual. Some apps “tokenize” your sensitive data, substituting your debit card or credit card number with a unique “token” made of random numbers. Or they use sophisticated encryption to hide your account information.
Still, you shouldn’t store money in a payment app account. While the NCUA or FDIC insures the money in accounts at a credit union or bank (typically up to $250,000), money in your payment app account isn’t protected. If your payment app’s business fails, you may lose the money in that app account, unless you can somehow get it back from the failed company.
Also, if your phone falls into the wrong hands, that person might access your app and make fraudulent payments. If you use public wifi, your phone — and your financial information — could also get hacked. In 2024, consumers lost $347 million to payment app scams, according to Consumer Reports. The average loss was a hefty $4,627.
If someone uses your payment app without permission, report it to your payment app company immediately. Some will cover your lost money if you report it in a timely manner.
Tips & Facts

Digital Wallets

A digital wallet is an app or other software that stores all your digital payment options. Apple Wallet and Google Wallet are examples.
It’s much like a physical wallet. It stores your payment apps as well as digital gift cards, concert tickets, loyalty cards, boarding passes, and more — all in one place on your smartphone.

How Can I Protect My Payments?

Here are some steps you can take to safeguard your money while enjoying the convenience of payment apps:
Don’t keep money in your (uninsured) payment apps.
If someone sends money via a payment app, don’t let it linger in that app. Transfer it into your insured account at your credit union or bank.
Avoid using public wifi.
Accessing your payment apps on unsecured wifi makes it easier for hackers to steal your financial information.
Keep your phone’s operating system up to date.
Updates often include new security features. For the best protection, set your phone to update automatically.
When sending someone money via a peer-to-peer app, double check before sending.
When searching for a friend by name or phone number, make sure that you’ve selected the right person from your app’s search results. Otherwise, instead of paying your friend Sandra Nelson for that concert ticket, you might accidentally pay a stranger named Sandra Neilson. And take care to enter the correct dollar amount. One slip of the finger can turn $50 into $500.
Don’t send money to anyone you don’t know.
Some scammers may ask you to send money to collect sweepstakes winnings. Others may claim to be a representative of your bank, hoping to trick you. If someone from an organization you know requests money, take a pause. Contact the company directly to confirm that they sent you a request for money.
Turn on notifications.
Set your app to send you a notification every time you make a transaction, so you’ll be alerted to suspicious activity right away.
Store your digital payment apps and cards in a digital wallet and lock the wallet.
To access your wallet, you’ll need to identify yourself using a code, your thumbprint, or facial recognition.
Set up each payment app to require authentication for purchases.
That way, you’ll need to identify yourself (using a passcode, your fingerprint, or facial recognition) every time you use the app to make a purchase.
If your phone gets lost or stolen, secure your payment apps.
Use your laptop or other device to log in to each payment app account. Change your password and follow the payment app company’s guidelines for securing your data, such as changing your security settings. If you’re unable to log in to your account, contact the company for help.

Differences in P2P Payment Apps

Trying to decide which peer-to-peer payment app to use? Here’s how the most popular apps stack up.

Apple Pay

  • Accepted by 85% of retailers in the US.
  • Built into Apple devices such as iPhone, Apple Watch, iPad, Mac, and Apple Vision Pro.
  • Pay for your purchase all at once or split it into payments when linking to any eligible pay later card. (This feature may not be available depending what accounts you have.)
  • Easily link your debit or credit card. Depending on your card and the type of phone you have, you may simply be able to tap the card against the back of your phone to link it using your Apple Wallet. (Follow the instructions in Apple Wallet.)
  • Face ID, touch ID, or your passcode provide security. Apple doesn’t share your card number with merchants, and when you fund Apple Pay with a debit or credit card, it doesn’t store account information that ties back to you.
  • Real-time transaction notifications.
  • No spending limits for purchases are set by Apple, although your financial institution or the merchant might have limits.
  • No fees when using in stores, online, or in apps.
  • Owned by Apple.

Google Pay

  • Accepted by millions of shops and apps around the world.
  • Preinstalled on most Android phones.
  • Special offers from merchants near you.
  • Uses a virtual account number to keep your money safe.
  • Real-time transaction alerts.
  • A limited number of withdrawals and maximum $ transfer limits may apply.
  • Higher balance limits for users who verify their identity. Unverified accounts can maintain lower balances, while verified users typically can hold higher balances.
  • No fees, although your financial institution may charge a fee for international transactions.
  • Owned by Google.

PayPal

  • Accepted at more than 2 million retailers in the US, as well as apps and shops around the world.
  • Link multiple cards to your PayPal app and choose which account you’d use with each payment.
  • Use your fingerprint, face, or PIN to log in with Passkey, a technology more secure than passwords.
  • Connects your device to the PayPal server via a secure TLS connection, which helps prevent imposters from accessing your financial information.
  • Higher spending limits for users with a verified PayPal account. Without a verified account, you can send payments in lower amounts. Users who have a verified PayPal account can send higher amounts via a single transaction.
  • No fees when you send money from your PayPal balance, credit union account, or bank account. When using PayPal to send money drawn from a credit card, you may pay a fee.
  • Owned by PayPal.

Venmo

  • Use wherever PayPal is accepted.
  • Schedule payments, such as monthly bills (if your biller or landlord accepts Venmo).
  • Send digital gift cards from your favorite retailers or add animated gift wrap to a payment you send.
  • Use the in-app calculator to split expenses. Create a group (such as your dinner companions), then split the restaurant bill among them.
  • Scan your recipient’s personal QR code so you’ll know you’re sending money to the right person. (Be very cautious when scanning QR codes that have been posted in a public place.)
  • Encryption and account monitoring to protect your financial information.
  • Higher spending limits when you verify your identity. Spending limits are higher for users who have verified their identity.
  • Owned by PayPal.

Sources:
Britannica Money, “Peer-to-peer payments: How and when to use Venmo, Zelle, and others,” accessed June 13, 2025.
Stripe, “Mobile payment apps: What they are, how they work, and how to create your own,” November 14, 2023.
Modern Treasury, “The Difference Between Closed-Loop Payment Systems and Digital Wallets,” August 17, 2023.
Zelle, “I’ve Heard There Is a Change to the Zelle App. What Is Happening?” accessed June 17, 2025.
PayPal, “I want my money back. Can I cancel a payment?” accessed June 16, 2025.
Venmo, “Cancel Payment,” accessed June 16, 2025.
Zelle, “Can I cancel a payment?” accessed June 16, 2025.
Consumer Financial Protection Bureau, “Consumer advisory: Your money is at greater risk when you hold it in a payment app, instead of moving it to an account with deposit insurance,” June 1, 2023.
Consumer Financial Protection Bureau, “CFPB Fines that Billions of Dollars Stored on Popular Payments Apps May Lack Federal Insurance,” June 1, 2023.
Corporate Finance Institute, “Digital Wallet,” accessed June 16, 2025.
Consumer Reports, “Using Contactless Payments on Your Phone? Take These Smart Steps,” April 30, 2025.
Federal Trade Commission, “Mobile Payment Apps: How to Avoid a Scam When You Use One,” accessed June 17, 2025.
Venmo, “Lost or Stolen Phone,” accessed June 17, 2025.
Department of Financial Protection & Innovation, “What’s in Your Wallet? Tips for Keeping Your Digital Assets Safe?” accessed June 17, 2025.
Federal Trade Commission, “Three ways to protect the personal info on your phone,” accessed June 17, 2025.
Apple, Pay the Apple Way, accessed June 17, 2025.
Wise, “Apple Pay transfer limits [2025],” accessed June 17, 2025.
Cash App, Cash App and Transit, accessed June 18, 2025.
VISA, VISA Fact Sheet, accessed June 18, 2025.
Cash App, Account Limits, accessed June 18, 2025.
Block, accessed June 18, 2025.
Google, “Fees, charges & authorizations,” accessed June 18, 2025.
Google, “A safer way to pay, every day,” accessed June 18, 2025.
Google, “Choose which offers to get,” accessed June 18, 2025.
PayPal, “By the way, PayPal can do some really great things,” accessed June 18, 2025.
PayPal, “Enjoy Now, Pay Later,” accessed June 18, 2025.
PayPal, “What’s the maximum amount I can send with my PayPal account?” accessed June 18, 2025.
PayPal, PayPal Fees, accessed June 18, 2025.
PayPal, “PayPal security technology,” accessed June 18, 2025.
Venmo, “Just say, ‘Venmo me,’” accessed June 18, 2025.
Venmo, “About Venmo Security,” accessed June 18, 2025.
Venmo, “Venmo like a pro,” accessed June 18, 2025.

Learn More About Banking

November 22, 2023

Credit Unions vs. Banks

Confused about the difference between credit unions and banks? Find out the key differences in fees, interest rates, customer service, and more.

July 19, 2023

Is My Money FDIC-insured?

Learn the ins and outs of the Federal Deposit Insurance Corporation (FDIC) and whether your CD, money market account, and other bank accounts are insured.

July 17, 2023

Types of Savings Accounts

Considering opening a savings account? Get answers to what is a savings account and the different types you have to choose from.