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Money stored in Venmo and other payment apps could be vulnerable, financial watchdog warns

by Ryan Lee
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financial watchdog warning

Money stored in Venmo, PayPal, and CashApp may not be safe during a crisis, warns financial watchdog

Introduction

The Consumer Financial Protection Bureau (CFPB) has issued a warning to customers of popular payment apps like Venmo, PayPal, and CashApp. According to the CFPB, storing money with these apps for the long term could pose risks to the funds in the event of a crisis.

Lack of Deposit Insurance

Unlike traditional bank accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, funds stored in Venmo, CashApp, or Apple Cash do not benefit from such coverage. This means that if a crisis similar to a bank run were to occur with these payment apps, the funds stored within them may not be protected.

Limited Insurance Options

The CFPB acknowledges that some funds stored in these apps may be eligible for pass-through insurance coverage if certain activities are performed by the customers. However, by default, these apps do not offer deposit insurance. For instance, a customer opening a PayPal Savings account would have deposit insurance through PayPal’s partner bank, Synchrony Bank. On the other hand, the general PayPal account does not enjoy this protection. Apple Cash, which can be insured through Green Dot Bank, requires users to verify their identity to obtain deposit insurance.

Risks and Consumer Awareness

The CFPB report highlights that stored funds in nonbank payment platforms can be at risk of loss in the event of financial distress or failure of the platform’s operating entity. Additionally, these funds are often not held in a bank or credit union account and lack individual deposit insurance coverage. The agency warns that consumers may not fully understand the circumstances under which their funds would be protected by deposit insurance.

Popularity and Expansion

Peer-to-peer payment apps and non-banks providing bank-like services have experienced significant popularity in the past decade. Venmo, for example, boasts over 90 million customers and recently announced plans to allow parents to create accounts for their teenage children, potentially attracting tens of millions of new customers. Apple also launched a savings account tied to its Apple Card, operated by Goldman Sachs, which attracted billions of dollars in deposits shortly after its introduction.

Lack of Immediate Response

At the time of the report, PayPal (owner of Venmo), Apple Inc., and Square (owner of CashApp) had not provided immediate comments or responses regarding the CFPB’s warning.

Q: Why does the Consumer Financial Protection Bureau warn against storing money in Venmo, PayPal, and CashApp for the long term?

A: The Consumer Financial Protection Bureau (CFPB) warns against long-term storage of money in these payment apps because, unlike traditional bank accounts, the funds may not be protected during a crisis. If a situation similar to a bank run occurs, the funds stored in these apps may be at risk without the same level of deposit insurance.

Q: Are there any insurance options available for funds stored in Venmo, PayPal, or CashApp?

A: While some funds stored in these apps may be eligible for pass-through insurance coverage, it is not the default option. Certain activities with the apps, such as opening a PayPal Savings account or verifying identity for Apple Cash, may provide deposit insurance through partner banks. However, general accounts in these payment apps typically lack individual deposit insurance coverage.

Q: What risks are associated with storing funds in nonbank payment platforms?

A: The CFPB report highlights that stored funds in nonbank payment platforms can be at risk of loss during financial distress or failure of the platform’s operating entity. Additionally, these funds are not typically placed in a bank or credit union account, which means they may lack the individual deposit insurance coverage provided by traditional banks.

Q: How popular are these payment apps, and what recent developments have occurred?

A: Peer-to-peer payment apps like Venmo, PayPal, and CashApp have experienced significant popularity in the past decade. Venmo, for instance, has over 90 million customers and recently announced plans to allow parents to create accounts for their teenage children. Apple also launched a savings account tied to its Apple Card, operated by Goldman Sachs, which attracted billions of dollars in deposits shortly after its introduction.

Q: Have the companies behind these payment apps responded to the CFPB’s warning?

A: At the time of the report, PayPal (owner of Venmo), Apple Inc., and Square (owner of CashApp) had not immediately responded to requests for comment regarding the CFPB’s warning.

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