Payment apps such as Venmo, Cash App and PayPal make it easy to send and receive money. However, if you’re on the receiving end of transfers, it’s not a good idea to leave cash sent to you sitting in your payment app account.
The Consumer Financial Protection Bureau recently released a warning that funds stored in nonbank payment apps might not have the same protections as bank and credit union accounts with federal deposit insurance coverage.
“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,” CFPB Former Director Rohit Chopra said in a news release.
If you use nonbank payment apps such as Cash App or Venmo, it’s important to understand the risks associated with storing funds in these apps and to take steps to protect your money.
How money is stored in payment apps
About $893 billion was transferred through payment apps in 2022, according to the CFPB. To send funds, users must open an account with a payment app provider then link the app to a payment method, such as a bank account, credit card or prepaid card. When users receive funds through a payment app, they typically are stored in the app platform until users request to transfer the funds to their linked bank or card account.
Many of these apps now offer their own debit and credit cards, as well as stored value accounts. These stored value accounts act like traditional bank deposit accounts because they can hold funds from payment app transfers and can be used as a payment method. However, they don’t offer the same protections that bank and credit union accounts offer.
The risks of storing money in payment apps
If you leave money sitting in a payment app account rather than transferring it to your bank or credit union account, those funds might not be covered by deposit insurance, according to the CFPB.
Both the Federal Deposit Insurance Corporation and the National Credit Union Share Insurance Fund insure deposits up to $250,000 per depositor, per institution, per ownership category. You don’t have to apply for deposit insurance. Coverage is automatic when you open an account with an FDIC-insured bank or NCUSIF-insured credit union. And your funds are protected if the bank or credit union fails.
Some nonbank payment apps claim to provide this coverage through partnerships with banks and credit unions. However, unless funds have actually been deposited in an insured bank or credit union, they aren’t protected, according to the CFPB.
User agreements for payment apps aren’t clear on where consumer funds are being held or invested, whether they are insured at a partner bank and what would happen if the payment app company were to fail, according to the CFPB. Some payment app companies put users’ funds in interest-generating investments, such as bonds and loans. These investments carry risks, and customers could lose their funds if the payment app companies were to fail, the CFPB reports.
How to reduce your risks
The CFPB and other regulators are monitoring this issue to determine whether more protections are needed for consumers. In the meantime, to keep your money safe, transfer any funds you receive through payment apps to a linked bank or credit union with deposit insurance. You can use the FDIC BankFind tool to find out if your bank is insured. You can find out if your credit union is insured by searching at Find a Credit Union.
Even if the payment app you use claims that your funds are eligible for what is called “pass-through” deposit insurance if you opt in to certain features such as getting a debit or prepaid card through the app, your funds might not be as protected as you think. Pass-through insurance provides coverage if the bank or credit union where an app holds funds fails. It doesn’t provide protections if the payment app company fails.
If there’s any ambiguity about where your funds are being held, transferring them to your linked bank or credit union account with deposit insurance would be the safer bet.
