Consumer Bureau Warns of Risks of Payment Apps

Funds may not be insured, consumers could lose deposits

The Consumer Financial Protection Bureau (CFPB) is warning that consumers who use popular payment apps such as PayPal, Venmo, CashApp and others could be putting funds as risk as these apps do not always contain bank-level deposit insurance. The CFPB notes that many consumers, especially younger consumers, utilize such apps as a primary source of storing and expending funds.

“Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe,” said CFPB Director Rohit Chopra. “As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to.”

Use of nonbank payment apps such as PayPal, Venmo, and Cash App have rapidly grown in the past few years. These apps allow people to quickly pay retailers and others, while providing the option to store funds. Unlike traditional bank and credit union accounts which have deposit insurance, funds stored in these nonbank payment companies may be unprotected.

A CFPB report finds significant funds at risk as a result of being used or stored in payment apps.

Specifically, the CFPB notes:

• More than three quarters of adults in the United States have used a payment app. Younger customers’ use of these payment app services is especially prevalent. Approximately 85 percent of consumers aged 18 to 29 have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893 billion, and is projected to reach approximately $1.6 trillion by 2027.

• Funds sitting in payment app accounts often lack deposit insurance.  When users receive payments, through these apps, these funds are not automatically swept into their linked bank or credit union account. In addition, payment app companies do not necessarily store customer funds in an insured account through a business arrangement with a bank or credit union. The company’s investments carry risk and if it were to fail, customers could lose their funds.

The CFPB advises customers to inquire as to the status of their funds and to take action to store funds in accounts backed by FDIC or NCUA insurance.

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