CFPB Warns Consumers of Risk in Popular Digital Payment Apps
The Consumer Financial Protection Bureau (CFPB) has issued a warning to consumers that funds stored in popular digital payment apps like PayPal or Venmo may not be covered by federal deposit insurance and are at greater risk during a financial crisis than money held in a bank or credit union account.
The CFPB advisory notes that transaction volume across all peer-to-peer payment apps totaled an estimated $893 billion last year and is expected to reach roughly $1.6 trillion by 2027.
However, funds received by users on these platforms are not typically sent automatically to recipients' linked bank or credit union accounts, meaning the funds can be held or invested by the app companies.
The CFPB warned that activities on these platforms are not subject to the same oversight as traditional lenders, and as such, the funds may not be covered by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA).
The agency noted that many Americans were reminded of the safety afforded by federal deposit insurance after witnessing the failure of "large systemically important banks such as Silicon Valley Bank, Signature Bank, and First Republic Bank" in recent months.
The agency added that "similar protection would not be guaranteed to customers that store money on nonbank payment apps." More than 90% of the deposits held in Silicon Valley Bank (SVB) were not covered by FDIC insurance at the time it was seized by regulators because they were above the agency's $250,000 limit.
This drove panicked customers to withdraw their funds, but federal bank regulators scrambled to cover all deposits of SVB customers in an effort to restore confidence in the banking system and prevent further contagion.
The CFPB said it will be working with state and federal regulators to keep an eye on the popular payment app sector.
As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to.