Why You Should Worry About Using Payment Apps

A brief run of bank failures recently spooked many savers. But it is your digital payment app that should really make you worry, according to the federal government.

Billions of dollars currently stored on well-known payment apps like Venmo, PayPal and Cash App may not be federally insured, according to a recent notice from the Consumer Financial Protection Bureau (CFPB).

That stands in sharp contrast to money in checking and savings accounts and certificates of deposit (CDs) at traditional banks, which is insured for up to $250,000 per person per bank by the Federal Deposit Insurance Corp. (FDIC).

How worried should you be? Plenty. In fact, the CFPB recommends you transfer the balances you keep in payment apps to insured banks and credit unions.

In the notice, Rohit Chopra, CFPB director, says:

“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. 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.”

The CFPB notes that payment apps have become increasingly popular in recent years, with around 75% of adults having used such an app at some point. Among consumers who are 18 to 29, 85% have used a payment app.

In 2022, transaction volume across payment apps was an estimated $893 billion. That total is expected to soar to $1.6 trillion by 2027.

Payment apps do not receive the same oversight that insured banks and credit unions do, the CFPB says. In addition, payment apps may keep the funds they hold outside of insured accounts, putting the money at greater risk.

User agreements that payment apps issue often are fuzzy on details such as what would happen to a saver’s funds if the company holding the money suddenly failed, the CFPB says.

Some states have passed laws to strengthen protections for people who use payment apps, according to the CFPB. But as a general rule, few states require apps to make sure your money is kept in insured accounts.

The CFPB offers this bottom-line verdict:

“Until payment apps are designed to automatically sweep balances into a user’s insured account, consumers may need to take action to move their balances stored in payment apps.”