Financial watchdog issues warning about the vulnerability of money in Venmo and other payment apps

Jun 2, 2023, 12:10 PM UTC
3 mins read
Financial watchdog issues warning about the vulnerability of money in Venmo and other payment apps

In a recent alert issued by the Consumer Financial Protection Bureau (CFPB), customers of popular payment apps such as Venmo, PayPal, and CashApp are being cautioned against storing their money with these platforms for extended periods. The warning stems from concerns that funds held within these apps may not be adequately protected during a financial crisis or similar events, unlike traditional bank accounts covered by the Federal Deposit Insurance Corporation (FDIC).

The CFPB’s alert follows the recent bank failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, which witnessed panicked customers with uninsured deposits withdrawing their funds en masse. While the FDIC insures bank accounts up to $250,000, funds stored in Venmo, CashApp, or Apple Cash do not benefit from the same protection. Consequently, if a scenario resembling a bank run were to occur within these payment apps, the deposited funds may be left vulnerable and exposed.

The CFPB clarifies that while certain activities within these apps might make funds eligible for pass-through insurance coverage, default settings do not provide deposit insurance. For instance, if a customer were to open a PayPal Savings account, deposit insurance would be provided through PayPal’s partner bank, Synchrony Bank. However, the general PayPal account does not benefit from such insurance coverage. Similarly, Apple Cash can be insured through Green Dot Bank, but this requires users to verify their identity to secure deposit insurance.

The CFPB’s report highlights the potential risks associated with storing funds in non-bank payment platforms, emphasizing that these funds may not be placed in traditional bank or credit union accounts and often lack individual deposit insurance coverage. The agency expresses concern that consumers may not fully comprehend the circumstances under which they would be protected by deposit insurance, emphasizing the need for increased awareness and understanding.

Over the past decade, peer-to-peer payment apps and non-banks providing bank-like services have experienced a tremendous surge in popularity. Venmo, for example, boasts a customer base of over 90 million and recently announced plans to allow parents to create accounts for their teenage children, potentially attracting tens of millions of new users. Similarly, Apple’s recent introduction of a savings account tied to its Apple Card, operated by Goldman Sachs, witnessed billions of dollars in deposits within days of its launch.

The Financial Technology Association, representing PayPal and Block, the owner of Cash App, has asserted that these products are safe and reliable. Stressing the importance of payment apps to millions of American consumers and small businesses, the association emphasizes the safety and transparency of these accounts. Furthermore, it highlights that users can receive FDIC Insurance on their accounts, depending on the specific products they utilize.

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