Consumers warned about the risks of storing money in payment apps

Tomasko, 31, a freelance software consultant in Chicago, understands why people like the convenience of the apps, which typically require only knowing someone’s username to send money. But she realized that keeping money on the apps could be risky and meant missing out on the interest on a high-yield savings account. She now immediately transfers all payments from the apps and encourages friends to do the same.

“I’m definitely the one always complaining about high-yield savings accounts,” Tomasko said. “But when you work in an industry that involves a lot of money, like bartending, you sometimes worry about finding a place to dump it. It’s not always fun to talk about it.”

As the use of payment apps has increased in recent years, the Consumer Financial Protection Bureau has issued guidance on best practices to avoid pitfalls. For example, money stored on Venmo or Cash App typically doesn’t have the deposit insurance you get from a bank, except in certain cases.

“Popular digital payment apps are increasingly being used as a replacement for a traditional bank or credit union account, but lack the same protections to ensure funds are safe,” CFPB Director Rohit Chopra said in a bulletin last year.

According to the CFPB, transaction volume on these apps was estimated at $893 billion in 2022, and is expected to reach $1.6 trillion by 2027. More than three-quarters of American adults say they have used one of the four popular payment apps. to a 2022 survey from the Pew Research Center. Among consumers ages 18 to 29, 85% say they’ve used a service like PayPal, Venmo, Apple Cash, Google Pay or Zelle, according to a March 2022 survey by Consumer Reports.

“The apps are popular because you don’t have to give out your personal information, like a phone number, if you just had drinks with someone once but you’ll never see them again — a date that didn’t go well,” Tomasko said. “I get the benefits in that sense: to be able to send money in that way.”

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“It may be tempting to leave money in peer-to-peer lending accounts so that you’re ready to pay your friends when they ask for money to cover your share of a dinner bill… (but) there are a few reasons why we wouldn’t recommend that,” said Courtney Alev, consumer attorney at Credit Karma.

The CFPB has found that funds stored in payment apps often do not have a deposit guarantee. FDIC-insured banks protect depositors against the loss of their insured deposits of up to at least $250,000 if a bank fails, and a similar framework protects credit unions. Although the funds stored on payment apps are similar to the funds stored in deposit accounts, these funds are typically not covered until they are deposited back to an FDIC-insured bank or insured credit union.

The Financial Technology Association, an industry group that includes many payment apps, noted that Cash App and PayPal both offer separate high-yield, FDIC-insured savings products.

In certain circumstances, deposit insurance also covers payment apps. With Cash App, funds are eligible for insurance when consumers link their account to a Cash App debit card. And with Venmo, funds added to an account through direct deposit or check cashing are covered.

Yet the CFPB has found that money stored in a payment app “may put a consumer at significantly greater risk of loss than if deposited in an insured bank or credit union account.”

“Consumers should be aware of these risks if they choose to leave a balance on these non-bank payment apps,” the agency wrote in its report last year. To minimize risks, the CFPB said consumers should “transfer their balances back” to federally insured accounts.

Some payment app companies may invest users’ money in loans and bonds, making money on the investments while generally not paying interest on users’ balances, the CFPB notes. To maximize your equity, you can immediately transfer any deposits to an account where you can earn interest.

“If you leave money in those accounts, you’re leaving potential interest on a high-yield savings account on the table,” Alev said. “All that interest adds up over time, so your money could be growing somewhere else.”

Tomasko said she always uses the ‘1-3 business day’ option to transfer money when using Venmo, to avoid fees, while Cash App has a setting users can select to automatically send money back to their bank accounts , which she uses.

“There is definitely room for improvement in the space,” she said. “With Venmo, every time I receive a payment, I go in and actively transfer it.”

The Financial Technology Association said in a statement that “tens of millions of Americans use payment apps every day to send money to friends and family, cover routine expenses and manage their finances.”

“Consumers choose these apps because they are secure, convenient and transparent,” said FTA CEO and President Penny Lee.

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