The convenience of payment apps like PayPal and Venmo cannot be denied, but a federal financial services watchdog is expressing concerns over consumers treating these apps as banks, despite the fact that they lack the same protections.
Services such as PayPal, Venmo, Cash App, and Apple Pay are being used by some individuals for purposes like direct deposit of paychecks or storing significant amounts of cash. However, the Consumer Financial Protection Bureau (CFPB) wants to remind people that these apps do not offer the same safeguards as traditional banks or credit unions.
In a statement issued by CFPB Director Rohit Chopra, he cautioned that while payment services are increasingly being used as alternatives to traditional financial accounts, they do not provide the necessary protections to ensure the safety of funds.
According to the agency, more than three-quarters of US adults have utilized at least one payment app.
The CFPB released these remarks in light of recent prominent bank failures, such as Silicon Valley Bank and Signature Bank. The customers of these banks were protected because federal insurance guarantees individuals will receive up to $250,000 per account if the bank fails. In the cases of these two banks, the Federal Deposit Insurance Corporation (FDIC) even removed the limit and covered all deposits.
On the other hand, payment apps are not insured on an institutional level. Consequently, if one of these companies were to collapse, customers could potentially lose their funds.
The CFPB's report highlights that billions of consumer dollars are at risk due to payment apps encouraging users to store funds rather than solely facilitating transactions.