Millions of Americans use mobile payment apps to pay friends, family and retailers, but they may not know that money stored in apps often lacks federal insurance protection.
Unlike deposits in savings and checking accounts at federally insured banks, funds stored in many “peer to peer” apps are not automatically protected, potentially putting the cash at risk if the app’s parent company stumbles financially. Consumer Financial Protection Bureau warns consumer advice this month.
as more people go cashlessApps like , Venmo, Cash App and Apple Cash have gained popularity as easy ways to split the dinner tab, buy stuff at yard sales, or pay bills. Experts say that the use of apps increased during the pandemic, as people shifted to online shopping and contactless payment methods.
The bureau said the transaction volume on such apps was an estimated $893 billion last year, and is projected to reach $1.6 trillion by 2027. three quarters According to the Pew Research Center, adults in the country say they have used one in four popular payment apps.
“Popular digital payment apps are increasingly being used as an alternative to a traditional bank or credit union account, but they lack the same security to ensure they’re accessible,” said Rohit Chopra, director of the consumer bureau. a statement,
The states provide security for the app users. Consumer Bureau highlights the role of state regulators in analyze it, But said the rules differ. Some states may allow companies to invest customer funds in potentially riskier securities, and some impose “no restrictions at all”.
Most payment apps are required by states to keep reserves — usually in low-risk accounts — equal to the amount of consumer funds, said Judith Rinearson, a partner at law firm K&L Gates, who specializes in payments technology and co-authored are experts in a blog post Which criticizes the advice of the Consumer Bureau.
“To suggest that all balances held in payment apps should automatically flow into bank accounts, where fees are often high, where payments are slow and where the bank itself may ‘run’ on deposits – Wrong,” the blog post said.
In the wake of several high-profile bank failures, the US is 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. $250,000 Per depositor, per member bank, in case of bank collapse. (Credit unions have comparable protection through a separate agency, the National Credit Union Association.)
But most payment apps are operated by financial technology companies that enable free, near-instant transfers of funds. Users typically link a traditional bank account or payment card to transfer funds to the app and withdraw payments received from other users.
After receiving a payment—say, after sharing a meal with a friend—users receive money in their app account. The money stays there until the users move the money to their bank accounts.
However, some users leave money in the app for future payments, treating them as traditional banks. That’s a concern, the consumer bureau said, because money in the apps’ “stored value” accounts may not carry FDIC protection.
A March 2022 survey by Consumer Reports found that 6 percent of app users make their payments with a balance maintained within the app. magazine said in a report Given the growing number of people using payment apps this year and the “lack of clarity” about how to obtain FDIC insurance for them, “we suspect a significant portion of these funds are uninsured.”
The apps partner with FDIC-insured banks to offer FDIC insured “pass through” accounts. But users may have to take additional steps or sign up for certain services to activate coverage, the bureau found. For example, if a user successfully applies for a company’s debit card, the Cash App balance may be covered by an FDIC-insured partner bank. Also, if an adult sponsors an account for a minor, the balances in both accounts are insured by the FDIC, according to Cash App’s website.
Venmo balances may be covered by deposit insurance at partner banks when customers use the app’s direct deposit or check-cashing options. Apple Cash users will need to register their account with Green Dot, its partner bank, in order to get insurance coverage.
Amy Zirkel, the consumer bureau’s senior program manager for payments and deposit markets, said it can be challenging for users to keep track. “Some of the user agreements are vague and not necessarily clear to consumers,” he said in an interview.
The Financial Technology Association, a lobbying group for companies including PayPal, Venmo’s parent, and Block, which owns Cash App, defended the practices of its members, saying they want their policies to be “clear and easy to understand.” Explain and prioritize in terms. for consumer protection.
“These accounts are secure and transparent, with users receiving FDIC insurance based on the products they use,” Penny Lee, the association’s chief executive, said in an email.
An Apple Cash spokeswoman declined to comment on the bureau’s report.
Here are some questions and answers about paid apps:
How can I protect the money stored in the payment app?
Consumer Reports recommends that it’s wise to transfer money from your payment app to your bank account as soon as possible.
The federal Consumer Bureau suggests setting up automatic reminders — it provides a link in the advisor to send email reminders to yourself and others — to transfer funds. “Think of how much money you keep on the app,” Ms. Zirkel said.
The bureau also said it was coordinating with other federal and state regulators to monitor the growing payments industry and “take appropriate steps.”
Are funds transferred through the Zelle service protected by Federal Deposit Insurance?
Zelle is a popular payment network operated by Early Warning Services, which is owned by seven major banks. Instead of holding the funds, Zelle moves them between accounts at participating banks, Meghan Fintland, a spokeswoman, said in an email. He added that “all consumer funds sent to and received through financial institutions in the Zell network” went through accounts insured by the FDIC or NCUA.