Digital payment apps, also called nonbank or peer-to-peer (P2P) apps, such as Venmo, PayPal, Cash App, and many others, are being used widely by U.S. consumers at an ever-increasing rate. With a few clicks on a computer or mobile device, the apps allow payment from a linked account to another party without writing a check, handing over cash, or giving a credit card number. Money can also be received and stored inside the app. The speed, simplicity, and convenience of transactions with payment apps have made these everyday tools for millions of Americans. However, these apps also come with some consumer risks.
In June, the Consumer Financial Protection Bureau (CFPB) issued an advisory to consumers regarding using payment app accounts. The advisory headlines read: Your money is at greater risk when you hold it in a payment app instead of moving it to an account with deposit insurance. Money stored in nonbank payment apps is likely not protected by federal deposit insurance groups such as a FDIC (Federal Deposit Insurance Corporation–a government agency that protects against loss on deposits of up to $250,000 per account if an insured bank fails) bank or NCUA (National Credit Union Administration–a federal government agency that is the equivalent of FDIC for credit unions) credit union, meaning there is no protection if the app company fails.
According to the CFPB, money held in digital accounts is not automatically swept into the user’s linked account. Instead, the funds are held in the app company’s account, which may or may not be an insured financial institution, OR funds may be invested by the payment app company for its own financial gain. Both situations should raise questions for app users should the app company, the financial holding institution, or the investment organization fail.
The Consumer Financial Protection Bureau’s consumer advisory article provides more information on what may be missing in the user agreements in case of failure.
To eliminate worry, the CFPB recommends that app users set a reminder to regularly transfer their P2P funds into a linked FDIC-insured bank account or NCUA-insured credit union account.
Consumer Reports (CR) also evaluated four P2P payment apps and identified potential consumer concerns. The evaluation examined fund protection and security practices. Fund protection looked at ways consumers can lose money using the apps, with the most common being through user-error authorized transactions and unauthorized (fraud or scam) transactions. In either case, it is not common practice for P2P apps to reimburse users or intervene for fraudulent use. CR offers an imperfect solution for loss due to error or fraud: “Connect your P2P service to a credit card instead of your bank account. In this way, your payments are as protected as they would be with any credit card transaction. Credit cards are subject to the Electronic Fund Transfers rule, which requires that users be held liable for no more than $50 in the event of fraud or a payment made in error.” The downside of linking to a credit card is that some apps do not allow payment this way, and those that do allow it require a 3 percent fee. Also, look for payment protection for non-personal transactions. Experian also offers tips for protecting P2P payments.
Like CFPB, CR found that most payment app companies provide little information to consumers regarding protection for stored funds or how users may be able to obtain FDIC coverage through some apps by various means. And, like CFPB, CR confirms that many P2P users should be concerned.
Digital payment apps can be a secure, fast, and easy way to send and receive payments, but consumers should be aware of the risks and take appropriate precautions.
- CFPB Finds that Billions of Dollars Stored on Popular Payment Apps May Lack Federal Insurance, Consumer Financial Protection Bureau.
- CR Finds Potential Consumer Risks for Users of Apple Cash, Cash App, Venmo, and Zelle, Consumer Reports
- Do This One Thing to Protect Your Peer-to-Peer Payments, Consumer Reports
Blog reviewed by Barb Wollan, Human Science Specialist, Family Wellbeing, Iowa State University Extension and Outreach.