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FINANCING THE FUTURE

Think twice before you use a payment app for endlessly storing your money, CFPB warns

If you’re keeping an account balance on an app such as PayPal, Venmo, or Cash App, you should read a new report by the Consumer Financial Protection Bureau.

Think twice before you use a payment app for endlessly storing your money, CFPB warns

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BY Christopher Zara3 minute read

With the collapse of several regional banks this year—a list that includes Silicon Valley Bank, Signature Bank, and First Republic Bank—Americans may rightfully be concerned about the safety and security of their money. And a new report from the Consumer Finance Protection Bureau (CFPB) suggests that they may want to be concerned about the money they’re sending, saving, or storing in payment apps.

The report, published Thursday, highlights the fact that person-to-person (P2P) payment application usage has increased significantly in recent years—dollar volume quadrupled between 2018 and 2022, it says—and that such apps are often used not merely to transfer money or make payments, but also to store funds. That could be a problem for consumers because, even though some of those apps claim to offer or provide FDIC coverage via their arrangements with banks and credit unions (many of these apps or companies aren’t financial institutions themselves, but rather act as digital interfaces with a connection to a bank), they often do not actually insure the funds.

“Many U.S. consumers and businesses are not simply using these services to transfer funds. They are also storing billions of dollars through these services outside of their federally insured bank or credit union accounts,” the report reads. “Indeed, the companies offering many of these widely used services have a strong financial incentive to encourage users to keep their funds stored rather than automatically sweeping them back into linked bank or credit union accounts.”

And therein lies the issue: “We find that stored funds can be at risk of loss in the event of financial distress or failure of the entity operating the nonbank payment platform, and often are not placed in an account at a bank or credit union and lack individual deposit insurance coverage,” the report reads.

In effect, this means that account balances on payment apps, such as PayPal, Venmo, Cash App, Apple Pay, and Google Pay—the apps specifically listed in the report—may not be eligible for FDIC insurance. That’s because the accounts holding users’ funds are not, in some cases, bank accounts that are FDIC insured.

Each app may have one or more options for holding funds. For instance, PayPal users can hold funds in their PayPal account or their PayPal Balance account, according to the report, and each has different “representations regarding deposit insurance eligibility.”

In all, it’s something for users and consumers to be mindful of when using these tools and applications. Taking it all into consideration, it’s possible that if one of these platforms were to fail or collapse, and a user had funds in their account, their funds may not be accessible and could be lost.

“These accounts are safe and transparent, with users receiving FDIC insurance on their accounts depending on the products they use,” a spokesperson from the Financial Technology Association (FTA) tells Fast Company in response to the CFPB report. (The FTA is a trade group that represents companies such as Block, Cash App’s parent company, and PayPal, among others.) “FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way.”

There’s been an increased focus on the role of FDIC insurance in the wake of several bank collapses in recent months plus the collapse of cryptocurrency exchange FTX last year. Some fintech companies, such as Mercury, which offers banking services through its partners, have gone so far as to expand their FDIC coverage to users and customers. But for those worried about a lack of FDIC coverage regarding the money in P2P apps, the CFPB recommends transferring their balances elsewhere.

“To minimize these risks, consumers may choose to transfer their nonbank payment app balances back to their federally insured deposit accounts, where they have a direct relationship with an FDIC-insured bank or NCUA-insured credit union,” the report says.

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ABOUT THE AUTHOR

Christopher Zara is a senior editor for Fast Company, where he runs the news desk. His new memoir, UNEDUCATED (Little, Brown), tells a highly personal story about the education divide and his madcap efforts to navigate the professional world without a college degree. More


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