Billions stored on digital payment apps such as Venmo and PayPal (among others) used by consumers may lack federal savings insurance, the federal consumer financial protection agency warned Thursday; it urged those consumers to transfer their balances to federally insured banks and credit unions instead.
In an “issue spotlight” release, the Consumer Financial Protection Bureau (CFPB) said funds stored on the payments apps may not be safe during financial distress since they may not be held in accounts insured by the federal deposit insurance funds. The agency offered no details on the total amount held in the digital payment apps. The insurance funds are administered by the Federal Deposit Insurance Corp. (FDIC) for bank deposits, and the National Credit Union Administration (NCUA) for savings in credit unions.
In an advisory, the bureau warned that consumers’ money is at greater risk when held it in a payment app, instead of moving it to an account with deposit insurance.
The CFPB said use of nonbank payment apps such as PayPal, Venmo, and Cash App have rapidly grown in the past few years, with total person-to-person (P2P) payment dollar volume quadrupling between 2018 and 2022. The apps, the agency said, allow users to quickly pay retailers and others, while providing the option to store funds.
However, unlike traditional bank and credit union accounts which have federal deposit and savings insurance, CFPB said, funds stored in these nonbank payment companies may be unprotected.
“In recent months, many Americans were reminded that funds deposited with banks and credit unions enjoy the safety afforded by federal deposit insurance through the FDIC or NCUA,” CFPB said.
The bureau pointed to the failure of three, large regional banks in March and early May (Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank). CFPB acknowledged that the banks experienced a run, but insured depositors had confidence their money was safe.
“However, similar protection would not be guaranteed to customers that store money on nonbank payment apps,” the agency said.
The agency said it has found several characteristics among digital payment apps, including:
- More than three quarters of adults in the United States have used a payment app.
- Nonbanks can earn money when users store funds on their platforms.
- Funds sitting in payment app accounts often lack deposit insurance.
- User agreements often lack specific information.