Lack of Federal Insurance Coverage for Funds Stored on Popular Payment Apps Raises Concerns, CFPB Warns

The Consumer Financial Protection Bureau (CFPB) has shed light on the potential risks associated with digital payment apps widely used by consumers and businesses. These apps, such as PayPal, Venmo, and Cash App, offer convenience but may lack the federal deposit insurance coverage typically found in traditional bank and credit union accounts. In response, the CFPB has issued a notice urging consumers to transfer their balances to insured banks and credit unions, ensuring the safety of their funds.

Highlighting the increasing popularity of nonbank payment apps, the CFPB’s analysis reveals that over three-quarters of adults in the United States have utilized these services. The younger demographic, particularly those aged 18 to 29, has shown a significant inclination towards using these apps, with approximately 85 percent of them having done so. Transaction volume across all providers in 2022 reached an estimated $893 billion, and projections indicate that it will grow to about $1.6 trillion by 2027.

While nonbank payment apps generate revenue through various means, including fees on merchants and ancillary services like selling crypto-assets and offering affiliated financial products, they also earn money by holding and investing user funds. Unlike insured bank or credit union accounts, these apps do not automatically transfer received payments into linked accounts, leaving the funds vulnerable. Moreover, the companies may not store customer funds in insured accounts through partnerships with banks or credit unions, introducing additional risk to users’ funds.

Compounding the issue, user agreements for digital payment apps often lack specific information regarding fund storage, insurance coverage, and the consequences of company failure. This lack of transparency poses a challenge for consumers seeking assurance about the safety of their funds.

While some states have enacted policies to regulate these apps and ensure they meet their obligations, these regulations do not typically require that customer funds be automatically swept into insured accounts. The CFPB intends to collaborate with state and federal regulators to monitor the evolution of this payment app segment and take necessary steps.

To address the potential vulnerabilities associated with funds stored on payment apps, the CFPB has also released a consumer advisory. Until these apps are designed to automatically transfer balances into insured accounts, consumers are advised to proactively move their stored balances to insured financial institutions.

The CFPB’s warning comes in light of recent bank failures and serves as a reminder of the protection provided by federal deposit insurance. While the risk of collapse for the popular payment apps remains low, the CFPB emphasizes the importance of deposit insurance to safeguard consumers’ funds.

As the use of peer-to-peer payment apps continues to grow, the CFPB will monitor whether tech companies entering the banking and payments sector adhere to necessary safeguards. Ongoing coordination with regulators at both state and federal levels will help ensure the security and stability of the payment ecosystem.

While industry representatives contend that peer-to-peer accounts are safe and transparent, prioritizing consumer protection, the CFPB advises users to be proactive in managing their funds until automated funds sweeping into insured banking accounts becomes a standard practice.

Overall, the CFPB’s findings highlight the need for enhanced consumer awareness and regulatory measures to address the potential risks associated with funds stored on popular payment apps. By staying informed and taking necessary precautions, consumers can protect their finances in an evolving digital landscape.

At Global Legal Law Firm, our lawyers are familiar with the rapidly changing nature of electronic payments processing processors, and the ever changing regulations involved, with decades of expertise in ISOs, commercial collections, credit card brands, and other forms of electronic payment processing litigation. Let us guide you through this new and volatile environment, rather than attempting to navigate it on your own.