The Consumer Financial Protection Bureau warns Americans against keeping their money in a payment app.
Funds held in popular apps like Venmo, PayPal and CashApp are more vulnerable to financial insecurity because their accounts may not offer federal deposit insurance through the Federal Deposit Insurance Corporation or the National Credit Union Administration, according to consumer advice supporting them Week was published by the Federal Consumer Authority.
If one of those 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 increased after the bankruptcies of Silicon Valley Bank, Signature Bank and First Republic has become more important bank this year.
“Popular digital payment apps are increasingly being used as a replacement for a traditional bank or credit union account, but lack the same safeguards to ensure funds are safe,” CFPB director Rohit Chopra wrote in a press release.
In order not to put their money at risk, the CFPB demanded that consumers transfer any money stored in a payment app to a state-insured account.
Miranda Margowsky, a spokeswoman for the Financial Technology Association — which represents PayPal and other financial technology companies — said in a statement that the millions of Americans and businesses using payment app accounts are protected.
“These accounts are secure and transparent, with users receiving FDIC insurance on their accounts based on the products they use,” Margowsky said. “FTA members provide clear and easy-to-understand terms in all of their products, emphasizing consumer protection at every step.”
In its report, the CFPB outlined the scenarios in which funds transferred through payment apps can be insured federally.
For example, at Venmo — owned by PayPal — money can get pass-through insurance when added through direct deposit, the cash-a-check feature, or by buying or receiving cryptocurrency. Funds held in Venmo's program banks – Goldman Sachs, Wells Fargo and Bancorp Bank – may be protected by deposit insurance.
A spokesman for Zelle, another popular payment app, emphasized that the app doesn't “keep accounts, transfer funds or process transactions,” adding that all funds transferred through its network are through government-insured accounts .
“Money is typically sent from one bank account to another within minutes for registered users – money is never in a third-party application,” the spokesman said.
Zell was not listed among other payment platforms in the CFPB report on these apps and their deposit insurance offerings. A spokesman for CashApp did not respond to a request for comment via the publication.
In addition to noting that funds stored in payment apps are not federally insured, the CFPB said three out of four Americans use a payment app, and these companies often invest in the funds stored in their apps to make money from them earn users.
A recent Pew Research Center survey found that 34% of payment app users had little or no confidence in the security and privacy of those apps.
“As tech companies expand into banking and payments, the CFPB has a greater focus on those circumventing the protections that local banks and credit unions have long adhered to,” Chopra said.
Jared Mitovich is a writer at Yahoo Finance. Follow him on Twitter @jmitovich
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