(Yahoo!Finance) - The Consumer Financial Protection Bureau is warning Americans against keeping their money in a payment app.
Funds held in popular apps like Venmo, PayPal, and CashApp are more susceptible to financial uncertainty because their accounts may not provide federal deposit insurance through the Federal Deposit Insurance Corporation or the National Credit Union Administration, according to a consumer advisory published this week by the federal consumer watchdog.
If one of those payment apps failed or went bankrupt, consumers could risk losing their money, the federal agency said, noting that awareness of this kind of deposit insurance had become more important after the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank this year.
"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 Director Rohit Chopra wrote in a press release.
In order to avoid risking their money, the CFPB said that consumers should move any money that is held in a payment app to a federally-insured account.
Miranda Margowsky, a spokesperson for the Financial Technology Association — which represents PayPal and other financial technology companies — said in a statement that the millions of Americans and businesses that use payment app accounts are protected.
"These accounts are safe and transparent, with users receiving FDIC Insurance on their accounts depending on the products they use," Margowsky said. "FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way."
In its report, the CFPB outlined the scenarios in which funds transferred through payment apps can be federally insured.
For example, Venmo — which is owned by PayPal — money can receive pass-through insurance if it is added by direct deposit, its cash-a-check feature, or by purchasing or receiving cryptocurrency. Money held in Venmo's program banks — Goldman Sachs, Wells Fargo, and Bancorp Bank — may be covered by deposit insurance.
A spokesperson for Zelle, another popular payment app, emphasized that the app does not “hold accounts, transfer funds, or settle transactions,” adding that all funds that are transferred through its network are through federally-insured accounts.
"Money is typically sent in minutes from one bank account to another for enrolled users — money is never in a third-party application," the spokesperson said.
Zelle was not listed among other payment platforms in the CFPB’s report on these apps and their insurance offerings on deposits. A spokesperson for CashApp did not respond to a request for comment by publication.
In addition to finding that funds kept in payment apps lack federal insurance, the CFPB said that 3 in 4 Americans use a payment app, and these companies often invest in the funds that are kept on their apps, allowing them to make money off of their users.
A recent Pew Research Center survey found that 34% of payment app users had little or no confidence in the security and privacy provided by those apps.
"As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to," Chopra said.
Jared Mitovich · Writer
