Millions of Americans use mobile payment apps to pay friends, family and retailers, but they may not know that the money held in the apps often lacks federal insurance coverage.
Unlike deposits into savings and checking accounts at federally insured banks, 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 report. advice this month.
As more people go cashless, apps like Venmo, Cash App, and Apple Cash have gained popularity as an easy way to split a dinner bill, buy things at yard sales, or pay bills. Use of the apps increased during the pandemic, experts say, as people turned to online shopping and contactless payment methods.
Transaction volume on such apps was estimated at $893 billion last year, the agency said, and is expected to reach $1.6 trillion by 2027. More than three-quarters of adults in the country say they have used one of four popular payment apps, according to the Pew research center.
“Popular digital payment apps are increasingly being used to replace a traditional bank or credit union account, but lack the same protections to ensure money is safe,” Rohit Chopra, the director of the consumer agency, said in a statement.
States do offer protections for app users. The consumer agency pointed to the role of state regulators in its analysis, but said the rules varied. Some states allow companies to invest customer money in potentially risky securities, and some impose “no restrictions at all.”
Most payment apps are required by states to maintain reserves — usually in low-risk accounts — equal to the amount of consumer funds they hold, said Judith Rinearson, a partner at the law firm K&L Gates who specializes in payments technology and co-authored a blog post criticizing the consumer agency’s advice.
“It is wrong to suggest that all funds in payment apps should be automatically swiped into bank accounts, where fees tend to be higher, where payments are slower, and where the bank itself could have a ‘run’ on deposits,” the blog post said. . .
Americans are paying more attention to the details of federal deposit insurance in the wake of several high-profile bank failures. 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 that a bank fails. (Credit unions have similar protections through a separate agency, the National Credit Union Association.)
But most payment apps are run by financial technology companies that enable the free, near-instantaneous transfer of money. Users usually link a traditional bank account or debit card to move money into the app and withdraw payments they receive from other users.
After receiving a payment, for example after sharing a meal with a friend, users receive money in their app account. The money stays there until users transfer the money to their bank accounts.
However, some users leave money in the apps for a future payment and treat them like traditional banks. That’s a concern, the consumer agency said, because funds in the apps’ “stored value” accounts may not carry FDIC protection.
Consumer Reports found in a March 2022 survey that 6 percent of app users fund payments with a balance they hold in the app. The magazine said in a report this year that given the growing number of people using payment apps and the “lack of clarity” about how to obtain FDIC insurance for them, “we suspect a large portion of these funds are uninsured. “
The apps partner with FDIC-insured banks to offer accounts with “pass through” FDIC insurance protection. But users may need to take extra steps or sign up for certain services to activate coverage, the agency found. For example, Cash App balances can be covered by an FDIC-insured partner bank if a user successfully applies for the company’s debit card. If an adult sponsors an account for a minor, the balances on both accounts will be insured by the FDIC, according to the Cash App website.
Venmo balances can be covered by deposit insurance with partner banks when customers use the app for direct deposit or check cashing. Apple Cash users must register their account with the partner bank, Green Dot, to get insurance coverage.
All of that can be a challenge for users to keep up with, said Amy Zirkle, the consumer agency’s senior program manager for payments and deposit markets. “Some user agreements are unclear and not necessarily understandable to consumers,” she said in an interview.
The Financial Technology Association, a lobbying group for the likes of PayPal, parent company of Venmo, and Block, owner of Cash App, defended its members’ practices, saying they explain and prioritize their policies in “clear and easy to understand” terms to consumer protection.
“These accounts are secure and transparent, with users getting FDIC insurance on their accounts depending on the products they use,” Penny Lee, the association’s CEO, said in an email.
An Apple Cash spokeswoman declined to comment on the agency’s report.
Here are some questions and answers about payment apps:
How can I protect money stored in a payment app?
It is wise to transfer money from your payment app to your bank account as soon as possible, advises Consumer Reports.
The Federal Consumer Bureau suggests setting up automatic reminders — it provides a link in the advice to send email reminders to yourself and others — to move money. “Think about the amount of money you keep in the app,” Ms Zirkle said.
The agency also said it was working 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 money, 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 in the Zelle network” have been moved through accounts insured by the FDIC or the NCUA.
Where can I make a complaint if I have a problem with a payment app?
The Consumer Financial Protection Bureau says users can file complaints on its website. The Conference of State Bank Supervisors provides contact information for state supervisors.
