Why You Shouldn’t Store Money in Payment Apps

Nowadays, there are many applications that are widely used, with the Financial Technology Association stating in a statement that “tens of millions of Americans use payment apps every day to transfer money to family and friends, pay for daily expenses, and manage finances.”

According to the Associated Press, Penny Lee, CEO and President of the FTA, said, “Consumers choose these apps because they are secure, convenient, and transparent.”

Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB), stated in a bulletin in 2023 that “popular digital payment apps are increasingly being used as alternatives to traditional bank or credit union accounts, but lack the same protective measures to ensure fund security.”

Based on CFPB data, transactions on these apps were estimated at $893 billion in 2022, projected to reach $1.6 trillion by 2027. According to a 2022 survey by the Pew Research Center, over three-quarters of American adults stated they had used one of the four popular payment apps. A study in March 2022 by Consumer Reports found that among consumers aged 18 to 29, 85% had used services like PayPal, Venmo, Apple Cash, Google Pay, and Zelle.

CFPB found that funds stored in payment apps often lack deposit insurance. While FDIC-insured banks protect depositors from losses in the event of bank failure, up to $250,000, deposits in credit unions receive similar protection. Although funds stored in payment apps are similar to those in deposit accounts, they are not typically protected until transferred back to FDIC-insured banks or credit unions.

In some cases, deposit insurance does cover payment apps. With Cash App, if a consumer links their account to a Cash App debit card, the funds qualify for insurance. Using Venmo, only funds added to the account through direct deposit or check cashing are insured.

Nevertheless, CFPB found that funds stored in payment apps “may pose a significantly higher risk of loss to consumers compared to funds placed in bank or credit union accounts.” CFPB advises consumers to “transfer balances” back to bank or federally insured accounts.

CFPB found that some payment app companies are able to invest users’ funds in loans and bonds, making money from investments and typically not paying interest on user balances. To maximize the use of their funds, it is recommended to transfer all deposits to interest-bearing accounts.

Tomako, a 31-year-old software consultant from Chicago, always opts for the “1-3 business days” transfer option when using Venmo to avoid fees. Cash App offers a setting where users can choose to automatically transfer money back to their bank account.