The Consumer Financial Protection Bureau warns Americans not to keep their money on a payment app.
Money held in popular apps like Venmo, PayPal and CashApp are more vulnerable to financial uncertainty because their accounts may not offer federal deposit insurance through the Federal Deposit Insurance Corporation or the National Credit Union Administration, according to a consumer advisory published this week by the federal consumer watchdog.
If one of these payment apps fails or goes bankrupt, consumers could risk losing their money, the federal agency said, noting that awareness of this type of deposit insurance became more important after the failures of Silicon Valley Bank, Signature Bank, and First Republic. bank this year.
“Popular digital payment apps are increasingly being used as alternatives to a traditional bank or credit union account but lack the same protections to ensure funds are safe,” CFPB Director Rohit Chopra wrote in a press release.
In order to avoid risking their money, the CFPB said consumers should move any funds held on the payment app into a federally insured account.
Millions of Americans and businesses that use payment app accounts are protected, Miranda Margoski, a spokeswoman for the Financial Technology Association — which represents PayPal and other financial technology companies — said in a statement.
“These accounts are secure and transparent, with users receiving FDIC insurance on their accounts depending on the products they use,” Margowsky said. “FTA members provide clear, easy-to-understand terms across all of their products and prioritize consumer protection every step of the way.”
In its report, the CFPB outlined scenarios in which transferred funds could be secured through federal payment applications.
For example, Venmo — which is owned by PayPal — can get pass-through insurance if added via direct deposit, a cash-out feature, or by buying or receiving cryptocurrency. Funds held in Venmo program banks — Goldman Sachs, Wells Fargo, and Bancorp Bank — may be covered by deposit insurance.
A spokesperson for Zelle, another popular payment app, confirmed that the app does not “maintain accounts, transfer funds, or settle transactions,” adding that all money transferred through its network is done through federally insured accounts.
“Money is usually sent in minutes from one bank account to another for registered users – money is never sent in a third party app,” said the spokesperson.
Zelle is not listed among other payment platforms in the CFPB’s report on these apps and their deposit insurance offerings. A CashApp spokesperson did not respond to a request for comment by post.
In addition to finding that money saved on payment apps lacks federal insurance, the CFPB said that 3 out of 4 Americans use a payment app, and these companies often invest in money kept in their apps, allowing them to make money from users.
A recent survey by the Pew Research Center found that 34% of payment app users have little or no confidence in the security and privacy offered by those apps.
“As technology companies expand into banking and payments, the CFPB is increasing its focus on those that avoid the guarantees that local banks and credit unions have long committed to,” Chopra said.
Jared Mitovich is a writer for Yahoo Finance. Follow him on Twitter @employee
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