Don’t store money in Venmo, Cash App or PayPal, says the regulator

A federal consumer watchdog on Thursday warned consumers not to store money on payment apps like Venmo, Cash App or PayPal, because that money isn’t automatically insured by the government and could be completely lost if the companies go bankrupt.

Popular digital payment apps are increasingly being used as a replacement for a traditional bank account or credit union, but lack the same protections to ensure funds are safe, said the Director of the Financial Protection Bureau of consumers Rohit Chopra in a press release Thursday.

He added that his agency is looking closely at payment app companies that sidestep the safeguards imposed on traditional banks and credit unions.

That scrutiny comes as a growing number of Americans prefer making cashless payments and are adopting payment apps. According to an October 2022 Pew Research Center survey, 76% of US adults have used a payment app at least once, although 34% of users say they are unsure whether payment app companies can protect their own personal information. According to the survey, one in 10 users claimed to have been the victim of a scam.

In its advice, the CFPB recommended that users move money from their payment apps and into their bank accounts.

But that surge in popularity has come without enough measures to protect users’ money, the agency said. For one thing, funds held in payment app accounts are often uninsured, meaning that if the money is somehow stolen or if the payment app company goes bankrupt, customers may not get a refund.

In addition, payment companies have less control than traditional banks in how they store and invest user funds, allowing payment companies to eventually invest in risky assets, the agency said. The firm can earn money on these investments, while generally paying no interest, the agency wrote in a consumer advisory, adding that an unregulated firm could be exposed to risks that aren’t clearly communicated to its clients.

If one of these companies goes bankrupt, the CFPB wrote, your money is likely to be lost or stuck in a lengthy bankruptcy process.

But accounts with payment apps are safe and transparent, said Miranda Margowsky, a spokeswoman for the Financial Technology Association, whose members include PayPal and the parent company of Cash App Block.

FTA members provide clear, easy-to-understand terms in all of their products and prioritize consumer protection every step of the way, he said.

PayPal, which owns Venmo, did not immediately respond to a request for comment. Block also did not respond to a request for comment.

In August 2022, the CFPB wrote in federal court documents that it was investigating Block over Cash Apps’ handling of customer complaints, though it’s unclear whether Thursday’s report is directly related. The agency said Thursday it would neither confirm nor deny any ongoing investigative or oversight work.

The agency’s new report comes on the heels of several bankruptcies of traditional and non-traditional financial institutions, in which consumers and businesses either lost control of their assets or became very close. In November, cryptocurrency exchange FTX filed for bankruptcy after investors scrambled to empty their accounts, totaling about 9 million. Those assets weren’t government insured, and many investors are still trying to get their money back in bankruptcy court. The collapse of FTX followed the failure of other crypto institutions in 2022 in which investors lost money.

But traditional financial institutions like Silicon Valley Bank and First Republic Bank, both of which failed this year, are also vulnerable to bank runs. The CFPB noted that these incidents highlighted the importance of federal deposit insurance coverage, even though the vast majority of Silicon Valley banks’ deposits were uninsured because they exceeded the Federal Deposit Insurance Corp.’s $250,000 limit. Bank depositors they were only covered up because the government took the extraordinary step to intervene.

However, the CFPB noted, those events have spurred renewed attention to the various types of financial institutions used by consumers and the extent to which consumers’ funds at those financial institutions are protected against losses.

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