CFPB Warns About Storing Funds In Payment Apps Like PayPal, Venmo | CNN business

 CFPB Warns About Storing Funds In Payment Apps Like PayPal, Venmo |  CNN business


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Payment apps like PayPal and Venmo might be convenient, but they’re not banks, and a federal financial services watchdog is concerned that too many consumers are treating them as such.

Some consumers use services like PayPal, Venmo, Cash App, and Apple Pay for direct payroll deposits or just to deposit lots of cash into them. But the Consumer Financial Protection Bureau wants people to know they don’t have the same protections as a bank or credit union.

CFPB director Rohit Chopra warned in a statement on Thursday that payment services such as PayPal, Venmo, Cash App and Apple Pay are increasingly being used as substitutes for a traditional bank account or credit union, but lack the same protections to ensure funds are safe.

More than three-quarters of US adults have used at least one payment app, the agency said.

The watchdog made the comments in the wake of high-profile bank failures like Silicon Valley Bank and Signature Bank. Their clients have been cured because account holders at federally insured financial institutions are guaranteed to recover up to $250,000 per account if the bank fails. (In the case of these two banks, the FDIC even abolished the limit, covering all deposits.)

Payment apps, however, are not federally insured at the institution level. If any of these companies go bankrupt, clients could lose their funds.

There are billions of dollars at risk for consumers from payment apps that encourage customers to keep funds rather than just transact, the CFPB said in its report. These apps are also not immune to the same kind of panic-based bank run that recently shut down Silicon Valley Bank and others, the agency added.

PayPal Holdings (PYPL), which owns both PayPal and Venmo, did not respond to a request for comment on Friday. Not even the rival Block (SQ), owner of the Cash app and the Square payment system.

But the industry trade group, the Financial Technology Association, which represents both firms, defended the safety of the funds.

Tens of millions of American consumers and small businesses rely on payment apps to better spend, manage, and send their money. These accounts are secure and transparent, the group said in the statement. FTA members provide clear, easy-to-understand terms in all of their products and prioritize consumer protection every step of the way.

Some money held in certain types of PayPal Savings payment app accounts, for example, is actually held in FDIC member banks and therefore would be protected. But much of the funds are held by the services themselves, without federal insurance.

The CFPB did not provide an estimate of the amount of money held in payment apps, although it did say that transaction volume across all US service providers was estimated at about $893 billion in all of 2022 and could reach nearly $1 .6 trillion by 2027.

The agency also noted that payment apps make money by investing the funds their customers store in the apps, similar to how banks invest their customers’ deposits. But unlike insured bank deposits, those stored funds would be at risk if investments in payment apps lose value, which in turn could trigger a run on deposits, the CFPB said.

The agency also referred to the bankruptcy of cryptocurrency platform FTX last year, which prevented customers from accessing hundreds of millions of dollars of their assets, leaving them to become creditors in bankruptcy cases.

If a non-bank payment app were to fail due to these risks, customers might not be the only creditors with claims on the company’s remaining assets, the CFPB said. Even if consumers don’t ultimately lose funds, they may face significant delays in accessing their funds while the bankruptcy process takes place.

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