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CFPB Urges Caution: Avoid Storing Funds in Venmo, PayPal, and Other Payment Apps

The Consumer Financial Protection Bureau (CFPB) recently issued a cautionary advisory urging individuals to refrain from keeping their money in popular payment apps like Venmo, PayPal, and CashApp. The advisory highlights the vulnerability of funds held in these apps due to the potential lack of federal deposit insurance offered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

According to the CFPB, if any of these payment apps were to experience financial difficulties or declare bankruptcy, users could face the risk of losing their money. This warning comes in light of recent incidents involving the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank earlier this year, emphasizing the importance of being aware of deposit insurance coverage.

It is crucial for consumers to understand the potential risks associated with storing funds in payment apps and consider alternative methods for safeguarding their money. Seeking out financial institutions that offer FDIC or NCUA insurance coverage can provide an added layer of protection and peace of mind.

CFPB Director Rohit Chopra wrote in a press release, “Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe.”

Financial Technology Association Assures Safety of Payment App Accounts and Highlights Consumer Protection Measures

To mitigate the risk of financial loss, the Consumer Financial Protection Bureau (CFPB) recommends that consumers transfer any funds held in payment apps to accounts that are federally insured. The CFPB emphasizes the importance of safeguarding money in the event of unforeseen circumstances and highlights the potential vulnerabilities associated with payment app accounts.

CFPB Urges Caution: Avoid Storing Funds in Venmo, PayPal, and Other Payment Apps
Credits: Business Insider

Miranda Margowsky, a spokesperson for the Financial Technology Association, representing companies like PayPal and other financial technology firms, assured users in a statement that the millions of Americans and businesses utilizing payment app accounts are protected. However, the CFPB’s cautionary advisory underscores the need for individuals to evaluate their options and consider the additional security provided by federally-insured accounts.

By proactively transferring funds to accounts covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), consumers can enhance the safety and protection of their money. Taking such measures ensures that their funds are shielded against potential risks and provides peace of mind in an uncertain financial landscape.

Margowsky said, “These accounts are safe and transparent, with users receiving FDIC Insurance on their accounts depending on the products they use. “FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way.”

CFPB Report Highlights Federal Insurance Coverage for Funds Transferred via Payment Apps

The recently released report by the Consumer Financial Protection Bureau (CFPB) provides insights into the scenarios in which funds transferred through payment apps can be eligible for federal insurance coverage.

According to the report, Venmo, a payment app owned by PayPal, offers pass-through insurance for funds added via direct deposit, the cash-a-check feature, or through the purchase or receipt of cryptocurrency. Money held in Venmo’s partner banks, such as Goldman Sachs, Wells Fargo, and Bancorp Bank, may also be covered by deposit insurance.

In response, a spokesperson for Zelle, another popular payment app, clarified that the app does not hold accounts, transfer funds, or settle transactions. Instead, Zelle facilitates fund transfers through federally-insured accounts, ensuring that all funds transferred through its network are protected by federal insurance.

The CFPB’s report aims to educate consumers about the nuances of federal insurance coverage when utilizing payment apps. By understanding the specific scenarios in which funds are eligible for protection, users can make informed decisions about their preferred payment methods while prioritizing the security of their funds.

CFPB Report Raises Concerns Over Insurance Coverage and User Confidence in Payment Apps

Zelle was not included in the CFPB’s report regarding insurance offerings on deposits for payment apps. Furthermore, CashApp’s spokesperson did not respond to inquiries for comment.

The CFPB’s report not only highlights the absence of federal insurance for funds stored in payment apps but also reveals that 75% of Americans utilize these apps. It also exposes the practice of these companies investing users’ funds to generate profits.

A recent survey by Pew Research Center indicates that 34% of payment app users have limited confidence in the security and privacy measures implemented by these apps.

The CFPB is intensifying its scrutiny of tech companies entering the banking and payments sector, particularly those that bypass the safeguards adhered to by traditional banks and credit unions, as highlighted by Chopra, an official from the agency.