Do You Store Money in Your Venmo or PayPal? That’s a Bad Idea, the Feds Say

Mobile payment apps like PayPal, Venmo and Cash App are becoming more and more popular as more people go cashless. At this point, more than three-quarters of adults in the U.S. have used a payment app, according to a survey by the Pew Research Center.

These apps are certainly convenient, and lots of people keep money in them as if they’re banks — but they’re not really banks and they don’t offer the same protections for your money, according to a federal consumer watchdog.

The Consumer Financial Protection Bureau is warning people not to keep their money in payment apps. Instead, it’s recommending that people keep their money in a bank or credit union, where their deposits are automatically insured up to $250,000 in case the bank fails. Payment apps have no such insurance.

“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,” said CFPB Director Rohit Chopra.

Banks Offer More Protections Than Payment Apps Do

It’s true that there recently have been some high-profile bank collapses, like Silicon Valley Bank and Signature Bank. But unless you had more than a quarter-million dollars deposited in one of those banks, you wouldn’t have been in any danger of losing your money. (Actually, with those two banks the Federal Deposit Insurance Corp. went way past the $250,000 limit to insure customers’ deposits.)

The FDIC protects deposits in banks up to $250,000, and the National Credit Union Administration (NCUA) does the same for credit unions.

“If your bank or credit union fails, you still have quick access to your money,” the CFPB said. “If the nonbank payment app’s business fails, your money is likely lost or tied up in a long bankruptcy process.”

The Payment Apps Respond

As an individual consumer, you may feel free to ignore the federal government’s advice here. You may figure that popular payment apps like PayPal, Venmo and Cash App are extremely unlikely to fail. And you may be right.

The payment apps haven’t been publicly responding to the CFPB’s consumer warning. But the industry group they belong to, the Financial Technology Association, is defending the apps.

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

Be that as it may, the feds still have concerns. The Consumer Financial Protection Bureau wants to make sure you know that money kept in these apps is not insured by the federal government.

Billions Are Automatically Stored in Apps

How much cash is being stored in PayPal, Venmo and Cash App? It’s hard to say. The CFPB said in its report that billions of dollars could be at risk — partly because money automatically sits in the payment apps unless you move it out.

“Nonbank payment apps help you move money into and out of a linked bank account, credit union account, or card account. They also let you store money inside the app,” the CFPB said in a consumer advisory. “In fact, money you receive generally stays in your payment app account until you connect to the app and move the money to your linked account.”

The CFPB suggests that people move money from their payment app to their bank account (or credit union) as soon as they get an alert that there’s money in there.

Another problem is that payment apps have less oversight than banks and credit unions when it comes to how they store and invest your money, the agency said.

“Your user agreement might be confusing, murky, or even silent on exactly where your money is held or invested,” the CFPB said. “The company can earn money on these investments, while generally paying no interest to you.”

How to Protect Yourself on Payment Apps

Here are some tips on how to protect yourself when using a money transfer app. The Federal Trade Commission recommends the following:

• Don’t send a payment to claim a prize or collect sweepstakes winnings.
• Don’t give your account credentials to anyone who contacts you.
• Protect your account with multifactor authentication or a PIN.
• Before you submit payments, double-check the recipient’s information to make sure you’re sending money to the right person.
• If you get an unexpected request for money from someone you recognize, talk to them to make sure it’s really from them — and not a hacker who got access to their account.

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.