The Consumer Financial Protection Bureau (CFPB) has warned users of non-bank payment apps that their accounts are not protected by federal deposit insurance coverage.
Non-bank digital payment apps have become increasingly popular among users as alternatives to banking apps and credit union accounts, but the CFPB analysis found that these funds may not be protected if place in financial distress.
The CFPB stated that over 75% of American adults have used a payments app, and that during 2022 nearly $893 billion was transacted across such apps. The study found that when digital non-bank apps such as PayPal, CashApp, and Venmo collect payments they are held within the companies to invest the funds. This means that the money is not secured into the customer’s account and could be at risk. The lack of deposit insurance carries risk in case the companies were to fail, it might take the considerable consumer funds with it.
Banks and credit unions in the US are secured in case of financial trouble by federal deposit insurance offered by the Federal Deposit Insurance Corporation or National Credit Union Administration. The recent failures of banks such as Silicon Valley Bank and First Republic Bank has upset the financial market and led to regulators cracking down on bank security.
Rohit Chopra, director of the CFPB explained: "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. As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to."
States in the US are looking into setting policies on how digital payment apps operate in order to protect consumers.