Originally published: June 9, 2023 (distributed by Andrews McMeel Syndication)
Do you use a payment app to transfer money or pay bills? Seventy-six percent of Americans do, according to one study. And, if you focus on young adults ages 18 to 29, the percentage is even higher at 85%, according to a 2022 survey by Consumer Reports (tinyurl.com/389xyr54).
PayPal, Venmo, Cash App, Apple Pay, Google Pay and Meta Pay are some of the big players in payment apps.
Those who don't use payment apps may be concerned about safety. Of those who did not use a payment app, 58% said a major reason was that they did not trust the apps with their money, according to a 2022 Pew Research Study (tinyurl.com/2yt6y8ek).
Before you reach any conclusions, I highly recommend you read "Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps" by the Consumer Financial Protection Bureau's CFPB Office of Competition and Innovation and Office of Markets (tinyurl.com/28zunfh4).
The report takes an in-depth look at the funds stored in payment apps and what insurance coverage applies to those funds.
The security of payment apps also was highlighted in a recent advisory by the CFPB.
Payment apps can facilitate moving money into and out of a bank account or credit union account that is linked to the app. Also, money can be stored in an app until it is moved into a linked account.
It's important to know that money in a nonbank app is not like money in a bank or credit union that has deposit insurance coverage. (If you missed my column on Federal Deposit Insurance Corporation insurance for banks, write to me at firstname.lastname@example.org, and I'll send you a copy.)
Nonbank apps are not covered by FDIC. That is, when a nonbank payment company goes out of business or fails, deposit insurance "does not apply," according to the CFPB (tinyurl.com/4nwsebdh). Money stored inside the app could be lost, or you could end up involved in a lengthy bankruptcy process.
"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," CFPB Director Rohit Chopra explained in a news release (tinyurl.com/2p9cre9n).
Some apps offer pass-through insurance, which means "you are insured against the failure of the bank or credit union where the app holds the money for you," according to the CFPB. "It doesn't insure you against the failure of a payment app company."
What does a payment app do with the money it is holding? It might be investing the funds in loans and bonds, according to the CFPB. By doing so, the app business could be at risk from investment losses and liquidity issues.
As an example, the PayPal Balance Terms and Conditions (tinyurl.com/4jyzuzu9) states: "If your Balance Account is not eligible for FDIC pass-through insurance, PayPal combines your Balance Account balance with the balances of other Balance Account holders and invests those funds in liquid investments in accordance with state money transmitter laws."
The example underlines an important point: Make sure to check the insurance coverage in your user agreement, as well as what the payment app is allowed to do with your funds. Be aware, however, that the CFPB points out that "Your user agreement might be confusing, murky, or even silent on exactly where your money is held or invested. It might not explain whether and under what conditions your money may be insured at a bank or credit union, and what happens in the case of the nonbank payment app's business failure or bankruptcy."
What should you do if you have funds residing in a payment app? "A straightforward way to make sure your money is insured is to move it right away from the payment app into an insured bank, credit union or card account," the CFPB stated in an answer to an Ask CFPB question (tinyurl.com/4trwpp24).
If you find yourself having problems moving your money out of an app, you can send a complaint to the CFPB at tinyurl.com/87j6n878. The website includes a guide that offers answers to commonly asked questions about filing a complaint.
Also, both the Federal Trade Commission (tinyurl.com/2p943x4v) and the Federal Communications Commission (tinyurl.com/mwufzc2c) offer tips on avoiding and reporting scams involving mobile payment apps.