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

by Ryan Lee
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financial watchdog warning

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

The Consumer Financial Protection Bureau (CFPB) has issued a warning to customers of Venmo, PayPal, and CashApp, advising against storing their money with these apps for the long term. The reason behind this caution is that funds held in these payment apps may not be secure during a financial crisis.

Lack of Traditional Bank Account Protection

Unlike traditional bank accounts, where the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000, money stored in Venmo, CashApp, or Apple Cash does not enjoy the same level of protection. If a situation similar to a bank run were to occur with these payment apps, the funds may not be safeguarded.

Limited Eligibility for Insurance Coverage

The CFPB explains that while some funds may be eligible for pass-through insurance coverage, specific actions need to be taken by customers on these apps. By default, these apps are not covered by deposit insurance. For instance, a PayPal Savings account opened by a customer would have deposit insurance through PayPal’s partner bank, Synchrony Bank. However, the general PayPal account does not have insurance coverage. Apple Cash, on the other hand, can be insured through Green Dot Bank, but the user must verify their identity to obtain deposit insurance.

Lack of Awareness among Consumers

The CFPB emphasizes that consumers may not fully comprehend the circumstances under which their funds would be protected by deposit insurance. It warns that stored funds are at risk of loss in the event of financial distress or failure of the nonbank payment platform. Moreover, these funds are often not placed in a bank or credit union account and lack individual deposit insurance coverage.

Rise of Peer-to-Peer Payment Apps and Non-Bank Services

Over the past decade, peer-to-peer payment apps and non-banks offering bank-like services have gained tremendous popularity. Venmo, with its 90 million customers, has recently announced its decision to allow parents to create accounts for their teenage children, potentially attracting tens of millions of new customers. Apple, in collaboration with Goldman Sachs, launched a savings account tied to its Apple Card, which quickly accumulated billions of dollars in deposits.

Lack of Immediate Response from App Owners

PayPal, the owner of Venmo, as well as Apple Inc. and Square, the owner of CashApp, have not yet responded to requests for comment regarding the CFPB’s warning.

Can I safely store my money in payment apps like Venmo, PayPal, and CashApp for the long term?

The Consumer Financial Protection Bureau (CFPB) warns against storing money in these payment apps for the long term. During a crisis, the funds may not be secure, as they lack the same level of protection as traditional bank accounts.

Are funds stored in Venmo, CashApp, or Apple Cash protected by deposit insurance?

By default, funds stored in these payment apps are not covered by deposit insurance. However, some funds may be eligible for pass-through insurance coverage if certain activities are performed on the apps. It’s important to review the specific terms and conditions of each app regarding deposit insurance.

How does deposit insurance work for payment apps?

Deposit insurance coverage for payment apps varies depending on the app and the actions taken by the user. For example, opening a PayPal Savings account may provide deposit insurance through PayPal’s partner bank. Other apps, like Apple Cash, require users to verify their identity to obtain deposit insurance. It’s crucial to understand the requirements and limitations of each app’s deposit insurance.

What risks are associated with storing funds in payment apps?

Storing funds in payment apps can expose them to risks during financial distress or the failure of the nonbank payment platform. Unlike traditional bank accounts, payment apps may not have the same level of regulatory protection and deposit insurance coverage, making the funds vulnerable in certain circumstances.

Should I be concerned about the security of payment apps?

Yes, it is essential to be aware of the potential vulnerabilities of payment apps. While they offer convenience and ease of use, it’s crucial to understand the limitations and risks involved. Stay informed about the security measures implemented by these apps and consider alternative options for storing funds if long-term security is a concern.

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