Millions of Americans use mobile payment apps to pay friends, family and retailers, but they may not know that money held in the apps often lacks federal insurance protection.
Unlike deposits in savings and checking accounts at federally insured banks, funds stored in many “peer to peer” apps aren’t automatically protected, potentially putting cash at risk if the app’s parent company stumbles financially, the Consumer Financial Protection Bureau warned in a consumer advisory this month.
As more people go cashless, apps like Venmo, Cash App and Apple Cash have gained popularity as an easy way to split a dinner tab, buy stuff at yard sales or pay bills. Use of the apps increased during the pandemic, experts say, as people shifted to online shopping and contactless payment methods.
Transaction volume on such apps was an estimated $893 billion last year, the bureau said, and is projected to reach $1.6 trillion by 2027. More than three-quarters of the nation’s adults say they have used one of four popular payment apps, according to the Pew Research Center.
“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,” Rohit Chopra, the consumer bureau’s director, said in a statement.
States do offer protections for app users. The consumer bureau noted the role of state regulators in its analysis, but said rules varied. Some states may allow companies to invest customer funds in potentially risky securities, and some impose “no restrictions at all.”
Most payment apps are required by states to hold reserves — typically in low-risk accounts — equal to the amount of consumer funds they are holding, said Judith Rinearson, a partner at the law firm K&L Gates who specializes in payments technology and co-author of a blog post that criticizes the consumer bureau’s advisory.
“To suggest that all balances held in payment apps should be automatically swept into bank accounts, where fees are often higher, where payments are slower and where the bank itself could have a ‘run’ on deposits — is wrongheaded,” the blog post said.
Americans are paying more attention to the details of federal deposit insurance in the wake of several high-profile bank failures. The Federal Deposit Insurance Corporation, a government agency funded by member banks, generally covers deposits of up to $250,000 per depositor, per member bank, in the event a bank collapses. (Credit unions have comparable protection through a separate agency, the National Credit Union Association.)
But most payment apps are operated by financial technology companies that enable the free, near-instant transfer of money. Users typically link a traditional bank account or payment card to move funds into the app and to withdraw payments they receive from other users.
After getting a payment — say, after sharing a meal with a friend — users receive funds in their app account. The money stays there until users move the money into their bank accounts.
Some users, however, leave money in the apps for a future payment, treating them as traditional banks. That is a concern, the consumer bureau said, because funds in the apps’ “stored value” accounts may not carry F.D.I.C. protection.
Consumer Reports found in a March 2022 survey that 6 percent of app users fund payments from a balance they maintain within the app. The magazine said in a report this year that given the growing number of people using payment apps and the “lack of clarity” around how to obtain F.D.I.C. insurance for them, “we suspect a large portion of these funds are uninsured.”
The apps do team up with F.D.I.C.-insured banks to offer accounts with “pass through” F.D.I.C. insurance protection. But users may have to take extra steps or sign up for certain services to activate the coverage, the bureau found. Cash App balances, for instance, can be covered by an F.D.I.C.-insured partner bank if a user successfully applies for the company’s debit card. Also, if an adult sponsors an account for a minor, balances in both accounts are insured by the F.D.I.C., according to Cash App’s website.
Venmo balances can be covered by deposit insurance at partner banks when customers use the app’s direct deposit or check-cashing options. Apple Cash users must register their account with its partner bank, Green Dot, to obtain insurance coverage.
All that may be challenging for users to keep track of, said Amy Zirkle, the consumer bureau’s senior program manager for payments and deposits markets. “Some user agreements are murky and not necessarily understandable for consumers,” she said in an interview.
The Financial Technology Association, a lobbying group for companies including PayPal, parent of Venmo, and Block, which owns Cash App, defended its members’ practices, saying they explain their policies in “clear and easy-to-understand” terms and give priority to consumer protection.
“These accounts are safe and transparent, with users receiving F.D.I.C. insurance on their accounts depending on the products they use,” Penny Lee, the association’s chief executive, said in an email.
An Apple Cash spokeswoman declined to comment on the bureau’s report.
Here are some questions and answers about payment apps:
How can I protect funds stored in a payment app?
It’s wise to move money from your payment app to your bank account as soon as possible, Consumer Reports recommends.
The federal consumer bureau suggests setting up automatic reminders — it offers a link in the advisory to send email reminders to yourself and others — to move funds. “Think about the amount of money you keep on the app,” Ms. Zirkle said.
The bureau also said it was coordinating with other federal and state regulators to monitor the growing payments industry and “take appropriate steps.”
Are funds transferred through the Zelle service protected by federal deposit insurance?
Zelle is a popular payment network operated by Early Warning Services, which is owned by seven big banks. Rather than hold funds, Zelle moves them between accounts at participating banks, Meghan Fintland, a spokeswoman, said in an email. She added that “all consumer funds sent and received through financial institutions in the Zelle network” moved through accounts insured by the F.D.I.C. or the N.C.U.A.
Where can I complain if I have a problem with a payment app?
The Consumer Financial Protection Bureau says users can submit complaints on its website. The Conference of State Bank Supervisors offers contact information for state regulators.
