Shot of young woman managing bank account on smartphone at cafe.


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When a bank fails, up to $250,000 of your money is insured by the FDIC. But that isn’t true for cash that’s stored on payment apps like Venmo, Cash App, and PayPal, according to government regulators.

Last week, the Consumer Finance Protection Bureau (CFPB) published a report on digital payment apps, warning that they aren’t regulated and insured like traditional banks and credit unions.

"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,” said CFPB Director Rohit Chopra.

Why It Matters

Billions of dollars is stored on digital payment apps like Venmo, Cash App, and PayPal — and yet many of these funds aren’t backed by institutions like the FDIC and NCUA. These “nonbanks” also invest your money without having to adhere to the regulations that normal banks face, the CFPB reports.

Without regulations or deposit insurance, there’s a good chance that you could lose your money if a company fails. For instance: Investments could drop in value, triggering a bank run that leaves some account holders without a dime.

"Even if consumers do not ultimately lose any funds, they may face significant delays in accessing their funds while the bankruptcy process unfolds,” the CFPB explains.

The Financial Technology Association (FTA), a trade group that represents PayPal and other fintech companies, pushed back against some of the CFPB's claims in a statement.

“Tens of millions of American consumers and small businesses rely on payment apps to spend, manage, and send their money," said FTA President and CEO Penny Lee. "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."

On some level, Lee is correct. Some accounts do receive "pass-through" FDIC insurance, and some companies do specify this in their terms and conditions. But the operative word is some. The issue, as the CFPB notes in its report, is that many user agreements are "confusing, murky, or even silent on" how consumer funds are being used and under what conditions they're insured, if at all. PayPal, for example, is unclear about where funds are held when a user sends money to someone without an account, the CFPB says. And Venmo's nearly 30,000-word user agreement is hardly easy to read.

PayPal and Venmo Accepted HerePhoto credit: hapabapa/istockphoto

What You Can Do

If you’re concerned about storing your money with digital payment companies, you have a few options:

  • Use Zelle: With Zelle, you can pay someone instantly by electronically transferring money between bank accounts. But because Zelle transfers are from bank to bank, your cash will always be insured.

  • Transfer Your Money: It might be hard to avoid digital payment apps if your friend group regularly uses apps like Venmo to split bills. That said, you can still use these services without storing lots of money in your digital wallet. Simply transfer cash directly to your bank account as soon as you receive it to minimize risk.

  • Avoid Apps: Finally, you could skip digital payment services altogether.

The Bottom Line

While Venmo, Cash App, and PayPal may act like banks, holding and investing consumers’ cash, they aren’t backed by the same institutions or beholden to the same regulations. In other words, these companies have all the risks of a bank without any of the safeguards. Does that mean you should boycott these financial services? Probably not. But you shouldn’t trust them with large sums of money either.

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