Government regulators issued a warning on Thursday, stating that individuals who hold cash in payment apps such as Cash App, PayPal, and Venmo are at risk of losing their money during a crisis because these funds are not protected by federal deposit insurance.
This advisory comes after the recent collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, which occurred when worried depositors withdrew their funds.
The Consumer Financial Protection Bureau (CFPB) explained that while the Federal Deposit Insurance Corporation and National Credit Union Administration insure up to $250,000 in a bank account, funds stored in nonbank payment apps may not be held by a lender that offers such protection.
In essence, if a payment service were to suddenly fail, any consumer funds stored in the app could vanish.
“Popular digital payment apps are increasingly being used as alternatives to traditional bank or credit union accounts, but they lack the same safety measures to ensure that funds are secure,” stated CFPB Director Rohit Chopra.
The financial watchdog advised consumers to transfer any funds stored in a payment app to an insured bank or credit union. Some payment apps claim to offer “pass-through insurance” on customer funds by partnering with a bank or credit union. However, this coverage only protects the customer if the lender fails, not the app itself.
PayPal, the owner of Venmo, and Square, the owner of Cash App, have not yet responded to requests for comment.
Millions of Americans have embraced payment apps as a convenient method for purchasing goods and services, making payments, and transferring and storing funds. According to the CFPB, approximately 85% of consumers aged 18 to 29 have used these apps, resulting in $893 billion worth of transactions last year. Venmo alone boasts over 90 million customers and has recently announced plans to allow parents to create accounts for their teenage children.
“When users of these digital apps receive payments, the funds are not automatically transferred to the recipient’s linked bank or credit union account,” explained the agency. “Instead, the companies hold and invest the funds. These activities typically lack the oversight faced by insured banks or credit unions.”
The Associated Press contributed to this report.
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