Mobile payment apps such as PayPal, Venmo, and Cash App have exploded in popularity over the last few years. Convenience, transaction speed and flexibility across multiple smartphones make it easy for consumers to pay for services and split bills with friends and family. The pandemic has further accelerated the ongoing transition towards a cashless future.
However, recent bank and cryptocurrency exchange failures have highlighted the risks of storing funds in accounts that exceed or simply lack FDIC insurance coverage. A recent report from the Consumer Financial Protection Bureau (CFPB) highlights deposit risk in popular mobile payment apps and explains how consumers can hedge against bankruptcy.
PayPal, Venmo and CashApp funds are not insured
Earlier this year, the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank highlighted the importance of federal deposit insurance offered through the FDIC or NCUA. These banks experienced devastating bankruptcies, but insured depositors with account balances up to $250,000 could be confident their funds were safe. But customers who store their money in non-bank payment apps are not guaranteed the same protection, as evidenced by the near-total extinction of FTX users after the collapse of the cryptocurrency giant last year.
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new CFPB report Billions of dollars stored in top payment apps may not have the same coverage as federal insurance that protects users of standard U.S. banks and credit unions from total destruction during a crisis. It has been found.
The CFPB report analyzes: deposit insurance agency of each major payment app provider. The table below shows the unevenness or non-existence of insurance coverage across payment apps.
provider | account type | deposit insurance eligibility |
---|---|---|
PayPal | PayPal account | none |
PayPal | PayPal balance account | “If a customer engages in certain activities using an account, such as opening a PayPal debit card account, enrolling in direct deposit, or using the account to purchase or receive cryptocurrency, funds are covered by pass-through insurance. increase.” |
Venmo | Venmo account | “Funds are covered by pass-through insurance when a customer engages in certain activities using their account. includes the purchase or receipt of |
cash app | Cash App balance account | “If the account is linked to a Cash App prepaid card or if the account is a sponsor/sponsored account, funds are covered by pass-through insurance.” |
Apple Pay | Apple Cash account | “If a customer registers an account with Green Dot Bank, the funds are covered by pass-through insurance.” |
Google Pay | Google Pay account | none |
Google Pay | Google Pay balance account | none |
of CFPB calculated that more than three-quarters of US adults have used a payment app. In 2022, the value of user transactions across all payment apps will be approximately $893 billion, and by 2027, transaction value is expected to grow to $1.6 trillion. As a result, the risk to users of disrupted access to funds and bankruptcy will only continue to increase.
Next steps for payment app users
of CFPB Here are some tips for payment app users to protect their funds from deposit risk.
Read User Agreement
Your user agreement, no matter how vague, should describe your app’s basic business model, investment strategy, and risk profile. Check if the payment app company keeps your money in bank or credit union accounts or invests it in loans and bonds. You may be surprised to learn that they earn interest without giving you the money, just like a regular bank. Also, find out if your money is insured by a bank or credit union, and what happens if your payment app fails or goes bankrupt.
Consider the “pass-through” insurance offered
Certain apps offer certain pass-through insurance that protects you against the bankruptcy of the bank or credit union where the company holds your funds. Following insurance standards can provide an additional layer of protection for app users. However, passthrough coverage does not protect against failures of PayPal or another app. Even if the funds were safely held in his FDIC-backed external bank during the payment app collapse, there could be significant delays in accessing the funds.
Transfer money regularly
Regularly transfer existing balances from your payment app holdings to your FDIC-insured linked funding account. Check your balance at least once a month so you don’t miss an outstanding balance for group dinners or grocery shopping. Set up regular nudges using apps like Apple Reminders and Google Calendar.