Why you shouldn’t store your money in payment apps

NEW YORK – Connor Tomasko grew up with credit cards. As she learned more about money management, she realized that many people also have bad habits when it comes to payment apps.

Tomasko, 31, a freelance software consultant in Chicago, understands why people like the ease of use of the apps, which typically only require you to know a person’s username to send money. However, she realized that keeping money in the apps could be risky and that she would have to forgo the interest of a high-interest savings account. She now transfers all payments from the apps immediately and encourages friends to do the same.

“I’m definitely the one who talks about high-interest savings accounts all the time,” Tomasko said. “But when you’re in an industry where there’s a lot of cash involved – like bartending – sometimes you’re just worried about finding a place to put it. It’s not always fun to talk about.”

As payment app usage has increased in recent years, the Consumer Financial Protection Bureau has issued guidance on best practices for avoiding pitfalls. For example, funds stored on Venmo or Cash App typically lack the deposit protection you would receive from a bank, except in certain cases.

“Popular digital payment apps are increasingly used as a replacement for a traditional bank or credit union account, but lack the same protections to ensure the safety of funds,” CFPB Director Rohit Chopra said in a bulletin last year.

According to the CFPB, the transaction volume of these apps was an estimated $893 billion in 2022 and is expected to grow to $1.6 trillion by 2027. More than three-quarters of U.S. adults say they have ever used one of four popular payment apps, according to a 2022 Pew Research Center survey. According to a March 2022 Consumer Reports study, 85% of consumers said aged 18 to 29 reported using a service such as PayPal, Venmo, Apple Cash, Google Pay or Zelle.

“The apps are popular because you don’t have to give out your personal information, like a phone number, if you’ve had drinks with someone once but never see them again – a date that didn’t go well,” Tomasko said. “In that sense, I have the advantages – being able to send money in this way.”

Here’s what you should know:

Funds stored in apps are often not insured

“It may be tempting to leave money sitting in peer-to-peer lending accounts so that you’re ready to pay your friends when they ask for money to cover your part of a dinner bill… (but) there are a few reasons why why we “I wouldn’t suggest that,” said Courtney Alev, consumer advocate at Credit Karma.

The CFPB has found that funds stored in payment apps often lack deposit insurance. FDIC-insured banks protect depositors from the loss of their insured deposits up to at least $250,000 if a bank fails, and a similar framework protects credit unions. While funds stored in payment apps are similar to funds stored in deposit accounts, these funds are typically not covered until they are transferred back to an FDIC-insured bank or insured credit union.

The Financial Technology Association, an industry group that includes many payment apps as members, noted that both Cash App and PayPal offer separate, high-yield, FDIC-insured savings products.

Do apps always lack deposit protection?

In certain circumstances, deposit insurance covers payment apps. With Cash App, funds are eligible for insurance when consumers link their account to a Cash App debit card. And Venmo covers funds deposited into an account via direct deposit or check cashing.

Still, the CFPB has found that funds stored in a payment app “may expose a consumer to significantly greater risk of loss than if they were deposited into an insured bank or credit union account.”

“Consumers should be aware of these risks when choosing to leave a balance on these non-bank payment apps,” the agency wrote in its report last year. To minimize risks, the CFPB required that consumers “transfer their balances back to government-insured accounts.”

Instead of storing money in apps, look for a high-yield savings account

Some payment app companies are able to invest users’ funds in loans and bonds and make money on the investments, while generally not paying interest on users’ balances, the CFPB noted. To maximize your equity, transfer all deposits immediately to an account where you can earn interest.

“Leaving money in these accounts leaves potential interest from a high-interest savings account on the table,” Alev said. “All that interest adds up over time, so your money could be growing somewhere else.”

Tomasko said that when using Venmo, she always uses the “1-3 business days” option to transfer funds to avoid incurring fees, while Cash App has a setting that allows users to automatically redirect the money back to their bank accounts can what you used.

“There is definitely room for improvement in the space,” she said. “With Venmo, every time I receive a payment, I actively transfer it.”

The Financial Technology Association said in a statement that “tens of millions of Americans use payment apps every day to send money to friends and family, cover routine expenses and manage their finances.”

“Consumers choose these apps because they are safe, convenient and transparent,” said Penny Lee, FTA CEO and president.