The Consumer Financial Protection Bureau on Thursday advised users of payment apps Venmo, PayPal, and CashApp not to keep their money in those services for an extended period of time because it’s possible that it won’t be secure in case of emergency.
The warning comes a few weeks after Silicon Valley Bank, Signature Bank, and First Republic Bank all experienced bank runs as a result of worried clients with uninsured deposits mass-withdrawing their funds.
The Federal Deposit Insurance Corporation insures bank accounts up to $250,000. Venmo, CashApp, or Apple Cash do not hold money in a traditional bank account. Therefore, in the event of a situation similar to a bank run with these payment apps, there may not be protection for those funds.
Some of the funds may be eligible for pass-through insurance coverage if customers do certain activities with the apps, the CFPB said, but generally by default the apps are not covered by deposit insurance. For example, if a customer opened a PayPal Savings account, it would have deposit insurance through PayPal’s partner bank, Synchrony Bank.Insurance does not cover the general PayPal account. However, users of Apple Cash can obtain deposit insurance through Green Dot Bank, but they must verify their identity to do so.
“The CFPB stated in its report that in the event of financial distress or failure of the entity operating the nonbank payment platform, stored funds can be at risk of loss. Furthermore, the entity operating the nonbank payment platform often does not place these funds in an account at a bank or credit union, and they lack individual deposit insurance coverage
The agency’s report mentioned that consumers may not fully appreciate when or under what conditions deposit insurance would protect them.
Peer-to-Peer payment apps and non-banks offering bank-like services have exploded in popularity in the last decade. Venmo now has more than 90 million customers and recently announced it was going to allow parents to create accounts for their teenage children, potentially bringing in tens of millions of new customers for the app.
Recently, Apple announced that it is operating a savings account tied to its Apple Card in partnership with Goldman Sachs.The savings account took in billions of dollars in deposits within days of its launch.
The Financial Technology Association, an industry group that represents PayPal as well as Cash App’s owner Block, emphasized in a statement that those products are safe.
“Tens of millions of American consumers and small businesses rely on payment apps to better spend, manage, and send their money. These accounts are safe and transparent, with users receiving FDIC Insurance on their accounts depending on the products they use,” the association said.