Don’t use Venmo, Cash App and PayPal to store money, CFPB says

A federal consumer watchdog on Thursday warned consumers against storing money on payment apps such as Venmo, Cash App or PayPal, because the money is not automatically insured by the government and could be lost entirely if the companies fail.

“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 money is safe,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a press release Thursday.

He added that his agency is investigating payment app companies that are “circumventing the safeguards” imposed on traditional banks and credit unions.

This scrutiny comes as a growing number of Americans prefer to make payments without cash and are adopting payment apps. According to an October 2022 Pew Research Center survey, 76 percent of American adults have used a payment app at least once, although 34 percent of users say they are not confident that payment app companies can keep their personal information safe. One in 10 users said they had fallen victim to a scam, according to the survey.

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

But that growth in popularity has come without adequate measures to keep users’ money safe, the agency said. First, funds held in payment app accounts are often not insured — meaning that if the money is somehow stolen, or if the payment app company fails, customers may not be refunded.

Also, payment companies have less oversight than traditional banks over how they store and invest users’ funds, allowing payment companies to invest in risky assets, the agency said. “The company may make money on these investments, while typically not paying you any interest,” the agency wrote in a consumer advisory, adding that an unregulated company may be exposed to risks that are not clearly communicated to customers.

If one of these companies fails, the CFPB wrote, “your money is likely lost or tied up in a lengthy bankruptcy process.”

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

“FTA members provide clear and easy-to-understand terms in all their products and prioritize consumer protection every step of the way,” she 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 App’s handling of customer complaints, though it’s unclear whether Thursday’s report is directly related. The agency said Thursday it would not confirm or deny “ongoing investigative or regulatory efforts.”

The agency’s new report comes in the wake of several failures in traditional and non-traditional financial institutions, where consumers and businesses lost control of their assets or came very close. In November, cryptocurrency exchange FTX filed for bankruptcy after investors rushed to empty their accounts, which totaled around 9 million. These assets were not insured by the government, and many investors are still trying to recover their money in bankruptcy court. The FTX collapse followed the failure of other crypto institutions in 2022 where investors lost money.

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

Still, the CFPB noted, these “incidents have spurred renewed attention to the different types of financial institutions consumers use and the extent to which consumers’ funds at those financial institutions are protected against loss.”

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