Views: 0
The Warning from the Consumer Financial Protection Bureau (CFPB)
The Consumer Financial Protection Bureau (CFPB), a U.S. government agency that ensures banks, lenders, and other financial companies treat consumers fairly, has issued a stern warning to consumers about the potential risks of storing money in payment apps like PayPal and Venmo. The CFPB’s concern stems from the fact that these popular payment apps are not banks and therefore do not offer the same protections that traditional banks do.
CFPB Director Rohit Chopra emphasized this point in a statement, noting that these services are increasingly being used as substitutes for traditional bank or credit union accounts but lack the same protections to ensure that funds are safe. This warning serves as a stark reminder to consumers that, while these apps offer convenience and ease of use, they do not provide the same level of security and protection as traditional banking institutions.
The Popularity of Payment Apps
Payment apps like PayPal, Venmo, Cash App, and Apple Pay have gained significant popularity in recent years. According to the CFPB, more than three-quarters of US adults have used at least one payment app. These apps have become particularly popular among younger demographics, with a staggering 85% of people aged 18–29 having used a payment app at least once.
The convenience and ease of use offered by these apps have made them a popular choice for digital transactions. However, the CFPB’s warning highlights the potential risks associated with their use, particularly when consumers use them as substitutes for traditional bank accounts.
The Risk of Uninsured Deposits
One of the key risks highlighted by the CFPB is that unlike deposits at federally insured financial institutions, funds stored in payment apps are not federally insured at the institution level. This means that if one of these companies were to go under, customers could lose their funds.
This is a significant risk, as many consumers may not be aware that the funds they store in these apps are not protected in the same way as they would be in a traditional bank account. The lack of federal insurance means that consumers could potentially lose all of the money they have stored in the app if the company were to fail.
The Potential for Financial Loss
The CFPB has highlighted that there are billions of dollars at risk for consumers as a result of payment apps encouraging customers to store funds rather than just make transactions. These apps are also not immune to the same type of panic-based bank run that closed down Silicon Valley Bank and others recently.
In the event of a financial crisis or a loss of confidence in the app, consumers could rush to withdraw their funds, potentially leading to a ‘bank run’ scenario. In such a situation, the company may not have enough liquid assets to cover all of the withdrawals, leading to significant financial losses for consumers.
The Response from the Industry
In response to the CFPB’s warning, the Financial Technology Association, an industry trade group that represents both firms, defended the safety of the funds stored in these apps. They stated that tens of millions of American consumers and small businesses rely on payment apps to better spend, manage, and send their money. These accounts, they claimed, are safe and transparent.
However, the CFPB’s warning serves as a reminder that, while these apps may be safe under normal circumstances, they do not offer the same level of protection as traditional banks in the event of a financial crisis.
The Case of Insured Funds
While the majority of funds stored in payment apps are not insured, there are some exceptions. Some money held in certain types of payment app accounts, like PayPal Savings, is indeed deposited in FDIC-member banks and thus would be protected. However, these are exceptions rather than the rule, and many consumers may not be aware of the specific conditions under which their funds would be insured.
References
- “Payment Apps Safety: CFPB Warns About Risks of PayPal, Venmo” – CNN. Link
- “Money in Your Venmo and PayPal Apps May Be at Risk, CFPB Says” – CNET. Link
- “Why a federal government agency is warning people not to keep a lot of money sitting in Venmo, PayPal, or Cash App” – Business Insider. Link
- “U.S. financial agency says if you have money in PayPal or Venmo, get it out now” – Phone Arena. Link