People who store a few hundred dollars in Venmo, PayPal or CashApp could lose their hard-earned cash, a federal government watchdog has warned.
The Consumer Financial Protection Bureau (CFPB) says these funds may not be safe in a crisis.
The apps are hugely popular and billions of dollars are at risk, the bureau warns.
The alert comes in the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, when worried customers withdrew their money en masse in frantic bank runs.
CFPB Director Rohit Chopra said users of Venmo and other digital payment apps use them to store funds just like they would in a traditional bank or credit union account.
Venmo, PayPal, and CashApp have proven themselves to users, but aren’t a good place to store your money
It’s a bad idea, Chopra added, because they “don’t have the same protections to ensure funds are safe.”
“As technology companies expand into banking and payments, the CFPB is focusing more on those that circumvent safeguards that local banks and credit unions have long adhered to.”
The Federal Deposit Insurance Corporation insures bank accounts up to $250,000.
But money stored in Venmo, CashApp, or Apple Cash isn’t held in a traditional bank account.
Thus, if there is an event similar to a bank run with these payment apps, these funds may not be protected.
Some of the funds may be eligible for pass-through insurance coverage if customers perform certain activities with the apps, the CFPB said.
But generally, by default, applications are not covered by deposit insurance.
For example, if a customer opened a PayPal savings account, they would receive deposit insurance through PayPal’s partner bank, Synchrony Bank.
But the general PayPal account is not covered by insurance.
For Apple Cash, which can be insured through Green Dot Bank, the user must verify their identity to obtain deposit insurance.
“We find that stored funds may be at risk of loss in the event of financial difficulties or failure of the entity operating the non-bank payment platform, and are often not placed in an account at a bank or cooperative. and lack individual deposit insurance coverage,” the CFPB said in its report.
“Consumers may not fully appreciate when, or under what conditions, they would be protected by deposit insurance,” the agency added in its report.
Peer-to-peer payment apps and non-bank offering banking-like services have exploded in popularity over the past decade.
CFPB director Rohit Chopra says users of Venmo and other digital payment apps need to be careful with their money
The failures of Silicon Valley Bank, Signature Bank and First Republic Bank spooked the markets
Venmo now has over 90 million customers and recently announced that it will allow parents to create accounts for their teens.
This could attract tens of millions of new customers for the app.
Apple recently announced a savings account linked to its Apple Card, operated by Goldman Sachs and with an attractive interest rate of 4.15%.
The savings account received 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 owner Block, said in a statement that these products are safe.
“Tens of millions of American consumers and small businesses rely on payment apps to better spend, manage and send their money,” the group said in a statement.
“These accounts are safe and transparent, with users receiving FDIC assurance on their accounts based on the products they use.”
Agencies contributed to this report.