A federal consumer watchdog on Thursday warned consumers not to store money on payment apps such as Venmo, Cash App or PayPal, because that money is not automatically insured by the government and could be completely lost if the companies fail.
“Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe,” Consumer Financial Protection Bureau Director Rohit Chopra said in a news release Thursday.
He added that his agency is closely examining payment app companies that “sidestep the safeguards” imposed on traditional banks and credit unions.
That scrutiny comes as a growing number of Americans prefer to make payments without cash and are adopting payment apps. According to an October 2022 Pew Research Center survey, 76 percent of U.S. adults have used a payment app at least once, although 34 percent of users say they’re not confident payment app companies can keep their personal information safe. One in 10 users said they had fallen victim to a scam, according to the survey.
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In its advisory, the CFPB recommended that users move money off their payment apps and into their bank accounts.
But that growth in popularity has come without sufficient measures to keep users’ money safe, the agency said. For one, funds kept in payment app accounts are often not insured — meaning that if the money is somehow stolen, or if the payment app company fails, customers may not be reimbursed.
Moreover, payment companies have less oversight than traditional banks in how they store and invest users’ funds, allowing payment companies to possibly invest in risky assets, the agency said. “The company can earn money on these investments, while generally paying no interest to you,” the agency wrote in a consumer advisory, adding that an unregulated company could be exposed to risk that is not clearly communicated to its customers.
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If one of these companies fails, the CFPB wrote, “your money is likely lost or tied up in a long bankruptcy process.”
Share this articleShareBut accounts with payment apps are “safe and transparent,” said Miranda Margowsky, a spokeswoman for the Financial Technology Association, whose members include PayPal and Cash App parent company Block.
“FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way,” she said.
PayPal, which owns Venmo, did not immediately respond to a request for comment. Block also did not respond to a request for comment.
In August 2022, the CFPB wrote in federal court documents that it was investigating Block over Cash App’s handling of customer complaints, although it’s unclear whether Thursday’s report is directly related. The agency said Thursday that it would not confirm or deny “any ongoing investigatory or supervisory work.”
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The agency’s new report comes in the wake of several failures of traditional and nontraditional financial institutions, in which consumers and businesses lost control of their assets or came very close. In November, cryptocurrency exchange FTX filed for bankruptcy after investors rushed to empty their accounts, which totaled some 9 million. Those assets were not insured by the government, and many investors are still attempting to claw back their money in bankruptcy court. The FTX collapse followed the failure of other crypto institutions in 2022 in which investors lost money.
But traditional financial institutions — such as Silicon Valley Bank and First Republic Bank, which both failed this year — are also vulnerable to bank runs. The CFPB noted that these incidents highlighted the “importance of federal deposit insurance coverage,” although the vast majority of Silicon Valley Bank’s deposits were uninsured because they exceeded the Federal Deposit Insurance Corp.’s $250,000 limit. The bank’s depositors were covered only because the government took the extraordinary step to intervene.
Still, the CFPB noted, those “events have spurred renewed attention on the varied types of financial institutions consumers use and the extent to which consumers’ funds at those financial institutions are protected from losses.”
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