Government regulators have issued a warning regarding the potential risks associated with keeping cash stored in payment apps such as Cash App, PayPal, and Venmo. Unlike bank accounts protected by federal deposit insurance, funds stored in nonbank payment apps may lack the same safeguards, leaving consumers vulnerable in times of crisis. Recent bank failures have highlighted the urgency of this issue, emphasizing the need for consumers to understand the potential pitfalls and take appropriate action.
1. Lack of Federal Deposit Insurance:
The Consumer Financial Protection Bureau (CFPB) has cautioned that funds stored with payment apps are not covered by federal deposit insurance, which typically insures up to $250,000 in a bank account. This means that if a payment service were to unexpectedly collapse, consumer funds stored within the app could vanish without recourse.
2. Recent Bank Failures and Consumer Vulnerability:
The collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank serves as a stark reminder of the potential consequences faced by panicked depositors who withdraw their funds in a crisis. These incidents underline the importance of having adequate protections in place for consumer funds.
3. Limited Protections and Risks of App Failure:
Popular digital payment apps are increasingly being used as alternatives to traditional bank or credit union accounts. However, they do not offer the same level of protections to ensure the safety of funds. While some payment apps claim to provide "pass-through insurance" through arrangements with banks or credit unions, this coverage only protects against lender failure and does not safeguard customers if the app itself were to fail.
4. Recommendations from the CFPB:
To mitigate the risks associated with keeping cash on payment apps, the CFPB advises consumers to transfer their funds to an insured bank or credit union. This ensures the protection provided by federal deposit insurance and adds an extra layer of security.
5. Oversight and Investment Practices:
Payment apps typically hold and invest customer funds instead of automatically sweeping them into linked bank or credit union accounts. Unlike insured banks or credit unions, these activities may not be subject to the same level of oversight, potentially exposing consumers to greater risks.
Final Thought:
As payment apps continue to gain popularity among millions of Americans for their convenience and functionality, it is crucial for consumers to be aware of the potential risks involved. The absence of federal deposit insurance for funds stored in payment apps leaves consumers vulnerable in the event of an app failure. Understanding these risks and taking proactive measures, such as transferring funds to insured bank or credit union accounts, can help protect consumers and their hard-earned money.
