Millions of Americans use mobile payment apps to pay friends, family and retailers, but they know that money stored within apps often lacks federal insurance protection. may not know.
Unlike savings and checking accounts at banks covered by federal insurance, funds stored in many “peer-to-peer” apps are not automatically protected, and should the app’s parent company fail financially. , the Consumer Financial Protection Bureau warned that cash could be at risk. consumer advice this month.
as more people go cashless, Venmo, Cash App, and Apple Cash have become popular as an easy way to split dinners, shop at yard sales, or pay bills. Experts say the use of apps increased as people shifted to online shopping and contactless payment methods during the pandemic.
Transactions on these apps were estimated at $893 billion last year and are expected to reach $1.6 trillion by 2027, according to the agency. Three-quarters of According to the Pew Research Center, adults in the nation say they have used one of four popular payment apps.
“Popular digital payment apps are increasingly being used as alternatives to traditional bank and credit union accounts, but they lack similar protections to ensure the safety of your funds,” said the director of the consumer affairs department. said Rohit Chopra of statement.
States are offering protections to app users. The Department of Consumer Affairs noted the role of state regulators. the analysis, but said the rules vary. Some states allow companies to invest their clients’ funds in potentially risky securities, while others have “no restrictions at all.”
According to Judith Linearson, a partner at the law firm K&L Gates and a co-author who specializes in payments technology, most payment apps require states to hold reserves (usually low-risk accounts) equal to the amount of consumer funds they hold. ) is required to holdof blog post It criticizes the recommendations of the Department of Consumer Affairs.
“Suggesting that all balances held in payment apps should be automatically transferred to a bank account is often costly in fees, slow to pay, and potentially ‘cracking down’ on deposits by the banks themselves. Wrong because there is,” the blog post said. .
Following several high-profile bank failures, Americans are turning more attention to the details of federal deposit insurance. The Federal Deposit Insurance Corporation, a government agency funded by member banks, typically covers deposits of up to $2000. $250,000 In the event of a bank failure, per depositor, per member bank. (Credit unions receive similar protection through a separate agency, the National Credit Union Association.)
However, most payment apps are run by financial technology companies and allow free and near-instantaneous transfers. Users typically link traditional bank accounts or payment cards to transfer funds to the app or withdraw payments received from other users.
After receiving payment, for example after sharing a meal with a friend, the user receives the funds in their app account. The money remains there until the user transfers it to their bank account.
However, some users leave money in the app for future payments, treating it like a traditional bank. The Department of Consumer Affairs said this is a concern because funds in “stored value” accounts on apps may not have FDIC protections.
A March 2022 study by Consumer Reports found that 6% of app users pay from a balance they maintain within the app.magazine said in the report Given the growing number of people using payment apps this year and the “uncertainty” about how they get FDIC insurance, “the majority of these funds are uninsured. I suspect they are not.”
These apps partner with FDIC-insured banks to offer accounts with “pass-through” FDIC insurance protection. However, users may need to take additional steps or sign up for certain services to activate coverage, the agency found. For example, if a user successfully applies for a company debit card, her Cash App balance will be covered by her FDIC-insured bank partner. And if an adult sponsors a minor’s account, the balance in both accounts will be guaranteed by the FDIC, according to Cash App’s website.
Venmo balances are covered by partner bank deposit insurance when customers use the app’s direct deposit or check cashing options. Apple Cash users must register an account with our partner bank, Green Dot, to be covered.
It can be hard for users to keep track of all of this, said Amy Zarkle, senior program manager for payments and deposit markets at the Consumer Affairs Bureau. “Some user agreements are vague and not always understandable to consumers,” she said in an interview.
The Financial Technology Association, a lobbying group for companies such as Venmo’s parent company PayPal and Block, which owns Cash App, defended its members’ practices, saying that members should explain their policies in “clear and easy-to-understand” terms and prioritize them. said to be ranked. for consumer protection.
“These accounts are secure and transparent, and users have FDIC insurance on their accounts depending on the products they use,” Penny Lee, the association’s CEO, said in an email. .
A spokeswoman for Apple Cash declined to comment on the agency’s report.
Here are some questions and answers about payment apps:
How can I protect the funds stored in my payment app?
Consumer Reports recommends that it is wise to move money from payment apps to bank accounts as soon as possible.
The Federal Consumer Affairs Agency suggests setting automatic reminders to transfer funds. This advisory includes a link to email yourself or others a reminder. “Think about how much money you’re putting into apps,” Zirkur said.
The agency also said it was working with other federal and state regulators to monitor the growing payments industry and “take appropriate action.”
Are funds transferred through the Zelle service protected by Federal Deposit Insurance?
Zelle is a popular payment network operated by Early Warning Services, owned by seven major banks. Spokesperson Megan Fintland said in an email that Mr. Zell moves funds between accounts at participating banks rather than holding them. He added that “all consumer funds sent or received through financial institutions within the Zelle network” were moved through accounts insured by the FDIC or NCUA.
If I have a problem with my payment app, where do I file a complaint?
The Consumer Financial Protection Bureau says users can: submit a complaint on that website.What the State Bank Supervisors Conference Offers contact address For state regulators.
