The Consumer Financial Protection Bureau (CFPB) is warning consumers not to store money in nonbank, peer-to-peer payment apps such as Venmo, Paypal, and CashApp, because that money is not automatically insured by the government.
A growing number of consumers prefer to make payments without cash and are adopting payment apps. More than three-quarters of U.S. adults have used at least one payment app, according to the agency.
CFPB director Rohit Chopra warned in a June 1 statement that payment services like PayPal, Venmo, Cash App, and Apple Pay “are increasingly used as substitutes for a traditional bank or credit union account, but lack the same protections to ensure that funds are safe.”
The CFPB highlighted the protection offered by deposit insurance following the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in March after customers with uninsured deposits pulled their money en masse.
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts up to $250,000. However, payment apps are not federally insured on the institutional level. Customers could lose their funds if one of those companies were to fail.
The CFPB recommended that users move money off their payment apps and into their bank accounts.
Funds held certain types of payment app accounts, such as PayPal Savings, are deposited in FDIC-member banks and would be protected. But much of the funds are held by the services themselves, without federal insurance.
“We find that stored funds can be at risk of loss in the event of financial distress or failure of the entity operating the nonbank payment platform, and often are not placed in an account at a bank or credit union and lack individual deposit insurance coverage,” the CFPB said in its report.
“Consumers may not fully appreciate when, or under what conditions, they would be protected by deposit insurance,” the agency added.
The agency also noted the payment apps make money by investing funds their customers store on the apps, similar to how banks invest their customers deposits. But unlike insured bank deposits, those stored funds would be at risk if the payment apps’ investments lose value, which itself could spark a run on the deposits, the CFPB said.
“If a nonbank payment app was to go bankrupt as a result of these risks, customers may not be the only creditors with claims on the company’s remaining assets,” said the CFPB. “Even if consumers do not ultimately lose any funds, they may face significant delays in accessing their funds while the bankruptcy process unfolds.”
The Financial Technology Association, an industry group that represents PayPal Holdings and Cash App’s owner Block Inc., defended the safety of the funds in a statement.
“Tens of millions of American consumers and small businesses rely on payment apps to better spend, manage, and send their money. These accounts are safe and transparent,” the association said.
“FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way.”
Peer-to-peer payment apps and non-banks offering bank-like services have exploded in popularity in the last decade. Venmo now has more than 90 million customers, and recently announced it was going to allow parents to create accounts for their teenage children, potentially bringing in tens of millions of new customers for the app.
Apple recently announced a savings account tied to its Apple Card that is operated by Goldman Sachs. The savings account took in billions of dollars in deposits within days of its launch.
