With foreign trips, overseas education, and work gaining popularity these days, many people need an inexpensive way to exchange their native currency for their preferred foreign currency. Most people shy away from banks or foreign exchange agents because they tend to charge higher exchange rates and even processing fees. Peer-to-peer (P2P) currency exchange is another option; here, a P2P exchange platform will connect the buyers and sellers together. They then are free to trade directly amongst themselves with mutually agreed-upon rates minus all the big fees.
How Peer-to-Peer Currency Exchange Works
The P2P currency exchange is similar to an online marketplace where people go directly and trade currencies with each other, whereas banks impose a certain fixed exchange rate, allowing more negotiation so that you can get an even better currency exchange according to your needs.
A user must first sign up and get verified by the P2P platform using KYC procedures to use the service. After the verification process, they can either browse for available offers or post their own. For example, if a person wishes to exchange one currency for another, he will post an offer stating the amount, exchange rate, and the preferred payment method. Then, another user searching for that currency can accept the offer and begin the exchange process.
Most of the platforms provide security through an escrow system. Once a buyer agrees to buy currency, he makes payment directly to the seller through digital mode such as bank transfer or UPI. However, the platform holds the currency in an escrow system till the time the seller confirms his payment receipt. The platform will then release the value of the exchanged currency to the buyer upon fulfilling both sides' obligations. This process limits the risks of fraud since nobody can withdraw the money without doing their part.
Costs Of P2P Currency Exchange
Although P2P sites offer better exchange rates, they are not free. Mostly, they charge a small transaction fee. The transaction fee generally amounts to between 0.5 per cent and 2 per cent depending on the respective platform and the size of the transaction. Service fees may also be charged by the platforms for a safe holding of funds during the transaction. Additional processing charges ranging between 1 per cent to 3 per cent may occur if the users choose payment methods like credit cards. Banks may charge extra in case of international transfers.
P2P exchanges are typically less expensive compared to traditional services because users tend to have much control over the rate of exchange. Unlike the fixed markup the banks apply, the P2P users have a chance of negotiating and settling at a beneficial rate for the parties involved.
Why People Engage in P2P Currency Exchange
Flexibility is the greatest advantage in P2P exchange. Users can easily find competitive rates, prefer their own method of payment, and make a transaction within a very short time. Most of the systems support multiple options for payment, including even direct bank transfers and digital wallets; consequently, it is suitable for people with different banking preferences.
Another reason P2P exchanges are popular is speed. Since transactions happen directly between individuals, they can be completed within minutes if both parties use fast payment methods. Unlike banks, which often take days to process international transfers, P2P exchanges can be near-instantaneous, especially for domestic currency swaps.
Potential Risks And Precautions
While P2P exchanges offer better rates and faster transactions, they also come with risks. This is a significant problem because fraud exists because people are dealing with strangers. Thus, to overcome such problems, it is best to use an escrow facility, where payment will be transferred only after getting confirmation from both parties. Users should also find out the reputation and reviews of the person whom they are trading with, not enter into a deal that appears to be too good to be true, and make sure they opt for secure payment methods instead of direct cash transactions.
P2P currency exchange platforms are especially helpful for students paying tuition abroad, freelancers receiving international payments, and travellers looking for better forex rates. However, for those who are not familiar with currency exchange or are uncomfortable with direct transactions, traditional banks may still be a safer, albeit a costlier option.
