The recommendation says that billions of dollars stored within apps such as Venmo and CashApp may lack federal insurance
TOLEDO, Ohio — The Consumer Financial Protection Bureau (CFPB) published an issue spotlight on June 1, 2023, regarding the topic of the heavy usage of digital payment apps by consumers and businesses.
Within this spotlight, the CFPB analyzes trends in the market, as well as the consumer. The reports find that based on current trends and behaviors, funds stored on digital payment apps such as Venmo and CashApp may not be safe in the event of financial distress, since the funds may not be held in accounts with federal deposit insurance coverage.
“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. “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 report spotlighted four key findings, which include:
– More than three quarters of adults in the United States have used a payment app
– Nonbanks can earn money when users store funds on their platforms
– Funds sitting in payment app accounts often lack deposit insurance
– User agreements often lack specific information
Now why does this matter? Because the future of stability of banks is uncertain at this moment. Recently, Americans have seen failure from large banks such as Silicon Valley Bank, Signature Bank, and First Republic Bank. These banks experienced an unexpected bankruptcy, but insured depositors were reassured that their money was safe.
However, the CFPB is attempting to inform users of these digital apps of the threats to their finances. While insured depositors into the pre-mentioned banks were financially protected, similar protection would not be guaranteed to customers that store money on nonbank payment apps.
Sure, the convenience of the apps are astounding; these apps allow people to quickly pay retailers and others, while providing the option to store funds. In fact, 85 percent of users are of the ages of 18-29 who have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893 billion, and is projected to reach approximately $1.6 trillion by 2027, according to research findings from the June 1 spotlight.
But the CFPB wants to make sure that people do not keep money very long in these apps, and are always transferring their cash into a safe, insured place.
Until payment apps are designed to automatically transfer balances into a person’s insured account, users are highly recommended to take action to move their balances stored in payment apps.
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