Millions of Americans use mobile payment apps to pay friends, family, and retailers, but what they may not know is that the money stored in the apps often lacks federal insurance coverage.
Unlike deposits in savings and checking accounts at government-insured banks, the funds stored in many “peer-to-peer” apps are not automatically protected, potentially putting cash at risk if the app’s parent company stumbles financially, warned the Consumer Financial Protection Bureau in a consumer advice report this month.
With more and more people paying cashless, apps like Venmo, Cash App and Apple Cash are growing in popularity as they offer an easy way to split the dinner bill, shop for stuff at flea markets or pay bills. Experts say usage of the apps increased during the pandemic as people switched to online shopping and contactless payment methods.
The transaction volume of such apps was an estimated $893 billion last year, the bureau said, and is expected to reach $1.6 trillion by 2027. More than three-quarters of adults in the country say they’ve used one of four popular payment apps, according to the Pew Research Center.
“Popular digital payment apps are increasingly being used as a replacement for a traditional bank or credit union account, but lack the same safeguards to ensure funds are safe,” Rohit Chopra, the director of the Consumer Protection Agency, said in a statement.
States offer protections for app users. The Consumer Agency pointed to the role of state regulators in its analysis, but said the rules differ. Some states may allow companies to invest customer money in potentially risky securities, while others have “no restrictions at all.”
Most payment apps are required by states to hold reserves — typically in low-risk accounts — equal to the amount of consumer funds they hold, said Judith Rinearson, a partner at payments technology law firm K&L Gates and Co- Author of a blog post criticizing the Consumer Agency’s recommendation.
“To suggest that all balances held in payment apps should be automatically transferred to bank accounts where fees are often higher, payments are slower and where the bank itself could have a ‘run’ on deposits is wrong,” says the blog post.
After several high-profile bank failures, Americans are paying more attention to the details of federal deposit insurance. The Federal Deposit Insurance Corporation, a government agency funded by member banks, generally covers deposits of up to $250,000 per depositor per member bank in the event a bank fails. (Credit unions enjoy similar protection from a separate agency, the National Credit Union Association.)
However, most payment apps are powered by financial technology companies that allow for free, near-instantaneous money transfers. Users typically link a traditional bank account or payment card to transfer money into the app and withdraw payments they receive from other users.
After receiving a payment – for example after having dinner with a friend – users receive money on their app account. The money stays there until users transfer the money to their bank account.
However, some users leave money in the apps for a future payment, treating them like traditional banks. That’s concerning, the Consumer Agency said, because funds in the apps’ “stored value” accounts may not enjoy FDIC protection.
In a March 2022 survey, Consumer Reports found that 6 percent of app users fund payments from a balance they keep within the app. The magazine said in a report this year that with the growing number of people using payment apps and the “ambiguity” about how to get FDIC insurance, “we suspect a large portion of that money isn’t.” is insured.”
The apps work with FDIC-insured banks to offer accounts with FDIC “pass-through” insurance coverage. However, the bureau noted that users may need to take additional steps or sign up for certain services to activate insurance coverage. For example, Cash App balances may be covered by an FDIC-insured partner bank when a user successfully applies for the company’s debit card. Even if an adult sponsors an account for a minor, the funds in both accounts are insured by the FDIC, according to Cash App’s website.
Venmo balances can be backed by deposit insurance at partner banks when customers use the app’s direct deposit or check cashing options. Apple Cash users must register their account with partner bank Green Dot to receive insurance coverage.
All of that could be difficult for users to keep track of, said Amy Zirkle, the Consumer Agency’s senior program manager for payments and deposit markets. “Some user agreements are unclear and not necessarily understandable for consumers,” she said in an interview.
The Financial Technology Association, a lobby group for companies like PayPal, Venmo’s parent company, and Block, which owns Cash App, defended its members’ practices, saying they explain their policies in “clear and easy-to-understand” terms and prioritize consumer protection.
“These accounts are secure and transparent, with users receiving FDIC insurance on their accounts depending on the products they use,” said Penny Lee, executive director of the association, in an email.
A spokeswoman for Apple Cash declined to comment on the bureau’s report.
Here are some questions and answers about paid apps:
How can I protect funds stored in a payment app?
Consumer Reports recommends that you transfer money from your payment app to your bank account as soon as possible.
The Federal Consumer Agency suggests setting up automatic reminders — it provides a link in the recommendation to send email reminders to yourself and others — to transfer money. “Think of the amount of money you keep on the app,” Ms Zirkle said.
The bureau also said it is working with other federal and state regulators to monitor the growing payments industry and “take appropriate action.”
Are funds transferred through the cell service protected by federal deposit insurance?
zelle is a popular payment network operated by Early Warning Services and owned by seven major banks. Instead of holding funds,zelle moves them between accounts at participating banks, Meghan Fintland, a spokeswoman, said in an email. She added that “all consumer funds sent and received through financial institutions on the cell network” are processed through accounts insured by the FDIC or the NCUA
Where can I complain if I have a problem with a payment app?
The Consumer Financial Protection Bureau states that users can file complaints on its website. The Conference of State Bank Supervisors provides contact information for state regulators.