PayPal, Venmo and other payment platforms don't provide insurance coverage, US government...

[Alfonso Maruccia]

The big picture: Payment apps have become one of the most popular ways people spend and move their money around these days. But customers are likely using those apps wrong, the US government warns, and they could face a total loss in case of corporation failure or new financial crises.

The Consumer Financial Protection Bureau (CFPB) recently released a report on payment apps, a means to transfer funds which is being increasingly used also to store money. In the US alone, over three-quarters of adults and 85% of younger consumers (18-29) have used at least one payment app, leading to a transaction volume of approximately $893 billion in 2022 alone.

The so-called "P2P payment" apps such as Venmo, Paypal and Cash App are "nonbank" organizations that offer payment services tailored for the digital market. In the end, the CFPB warns, their inability to offer proper, bank-like insurance could lead to economic instability issues. The US government watchdog for consumer protection mentions the collapse of crypto platforms FTX and Voyager in 2022, which led to significant harms to crypto consumers who lost hundreds of millions of dollars.

The CFPB warning comes after the recent string of high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank. In these cases, the Federal Deposit Insurance Corporation was able to partially cover funds stored in bank accounts while worried customers were running to their local ATMs to withdraw their money en masse.

If PayPal (which also owns Venmo), Cash App or other P2P payment platforms were to go down, the CFPB warns, the Federal Deposit Insurance Corporation would likely have no saying on the matter. By default, the federal agency has found, these payment services are not covered by proper deposit insurances, and users are likely unaware that their monthly salary or long-time savings could literally vanish in thin air if the corresponding companies went down.

A "simple" PayPal account, the CFPB says, doesn't have any deposit insurance eligibility if a user doesn't engage in "certain activities" such as opening a PayPal debit card account. The same goes for Venmo, while Apple Pay users would have to register their account with Green Dot Bank to get pass-through deposit insurance. Meanwhile, Google Pay doesn't offer any deposit guarantees the CFPB has knowledge of.

Funds stored on P2P payment platforms can be at risk of loss "in the event of financial distress or failure of the entity" operating the nonbank organization, the CFPB warns, and consumers may not fully appreciate "when, or under what conditions, they would be protected by deposit insurance."

According to a statement by the Financial Technology Association, which represents PayPal, Cash App owner Block and other companies in the industry, payment apps are "safe and transparent" for the tens of millions of American consumers and small businesses relying on them to better spend and manage their money. FDIC insurance still depends on the product they choose to use, though.

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https://www.techspot.com/news/98942-venmo-other-payment-apps-dont-provide-insurance-coverage.html

 

[okie11]

I still use good old reliable cash, still accepted everywhere I shop, if it's not then I stop shopping there.

 

[Neatfeatguy]

I still use good old reliable cash, still accepted everywhere I shop, if it's not then I stop shopping there.

I've seen a couple of places around me that isn't accepting cash anymore. Digital payments only (credit card/debit card).

 

[mailpup]

I've seen a couple of places around me that isn't accepting cash anymore. Digital payments only (credit card/debit card).

I have too. For example the 2023 Los Angeles County Fair only accepted credit/debit cards for admission and parking, no cash. Generally inside the venue as well although some individual vendors could accept cash. That said, I know of some local businesses that still only accept cash. It's not common but they exist.

 

[human7]

While true, the solution here isn't for the government to engage in fear-mongering by warning people not to use these apps. Instead, they should simply extend FDIC protection to cash app providers (since they aren't going to make it so that banks are more convenient to use for transferring money).

 

[hwertz]

I use Paypal frequently -- but I wouldn't leave the money sitting in there! It costs $0 to have it deposited in an account within 2 days (and something like 1-2% fee if you screwed up your finances enough you may overdraft and want it deposited within 1-2 hours.)

Of course, if banks wanted to encourage putting deposits in the bank rather than paypal, they could pay interest. I don't think I've ever had a single bank account that even paid some nominal 0.1% interest rate. At least I've avoided the banks that decide they should charge "account maintenance fees" and junk like that though (if I had the misfortune of being in some part of the country where the bank branches all decided they could charge account fees and such, I would probably just hold onto my cash at home, or physical gold if I had enough cash to justify that.)

 

[sorten]

First of all, it's really difficult to imagine PayPal going bankrupt. Secondly, are people really leaving real balances there? You can make 4% or more on a regular savings account these days. Why leave it parked in limbo?

 

[hwertz]

First of all, it's really difficult to imagine PayPal going bankrupt. Secondly, are people really leaving real balances there? You can make 4% or more on a regular savings account these days. Why leave it parked in limbo?

'fraid so. They've got those Paypal debit and credit cards now so I am sure some people are just leaving the whole nut in there and treating it like a bank account.

I agree, though, I see it hard for them to go bankrupt; they don't ship anything larger than a credit card or the optional paper check; they charge a fee for various services and I'm sure they get interest on the cash they have sitting in all those accounts. That said, these companies would be getting that interest largely by having the money on deposit at a bank; many tech firms did have their money deposited at Silicon Valley Bank, far in excess of the amount FDIC guarantees. In this case, they are getting their money back, it was a true bank run (the bank had enough assets, just too much in bonds that could be sold off in a matter of weeks rather than the days they would have needed to cover the mass withdrawls.)

In the nightmare scenario Paypal could have the money safely deposited with a bank only to have the bank collapse and not be able to recover a large portion of funds.