The CFPB has warned consumers and businesses that funds stored on popular digital payment apps may not be safe in the event of financial distress. Specifically, the funds may be held in accounts without federal deposit insurance coverage. The CFPB also advised consumers holding funds in these apps how they can make sure their funds remain safe.

“Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account. But they lack the same protections to ensure that funds are safe,” said CFPB Director Rohit Chopra.

“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.”

The rise and rise of non-bank payment apps

Use of non-bank payment apps such as PayPal, Venmo, and Cash App have rapidly grown in the past few years. These apps allow people to quickly pay retailers and others, while providing the option to store funds. Unlike traditional bank and credit union accounts which have deposit insurance, funds stored in these nonbank payment companies may be unprotected.

In recent months, many Americans were reminded that funds deposited with banks and credit unions enjoy the safety afforded by federal deposit insurance through the FDIC or NCUA. Americans witnessed the failure of large systemically important banks such as Silicon Valley Bank, Signature Bank, and First Republic Bank. These banks experienced a run, but insured depositors could have confidence their money was safe. However, similar protection would not be guaranteed to customers that store money on nonbank payment apps.

3 in 4 US adults have used a payment app: CFPB

According to the CFPB, more than three quarters of adults in the US have used a payment app. Younger consumers’ use of these payment apps is especially prevalent.

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Approximately 85% of consumers aged 18 to 29 have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893bn. This is projected to reach approximately $1.6trn by 2027.

The CFPB highlighted that when users of these digital apps receive payments, the funds are not usually swept automatically to the recipient’s linked bank or credit union account. Instead, companies hold and invest the funds. These activities are not typically subjected to the same oversight that an insured bank or credit union faces. Apps also earn money through fees on merchants and other ancillary services. This includes the selling of crypto-assets.

Moreover, funds sitting in payment app accounts often lack deposit insurance.

In addition, payment app companies do not necessarily store customer funds in an insured account through a business arrangement with a bank or credit union. The company’s investments carry risk and if it were to fail, customers could lose their funds.

The CFPB highlights impending legislation to regulate payment apps, including a new law recently enacted in Texas.

State laws, however, generally do not require that customer funds be stored in or automatically swept into insured accounts. The CFPB said it will continue coordinating with other state and federal regulators to monitor the payments ecosystem.

FTA President and CEO Penny Lee told EPI: “Tens of millions of American consumers and small businesses rely on payment apps to spend, manage, and send their money. These accounts are safe and transparent, with users receiving FDIC insurance on their accounts depending on the products they use. FTA members provide clear and easy-to-understand terms in all their products and consumer protection remains a top priority.”