He added that his agency is closely scrutinizing app payment companies that “go beyond the safeguards” imposed on traditional banks and credit unions.
That scrutiny comes as a growing number of Americans prefer to pay cashless and using payment apps. According to a October 2022 Pew Research Center survey, 76 percent of US adults have used a payment app at least once, although 34 percent of users say they don’t feel confident that payment app companies can keep their personal information safe . One in 10 users said they have been the victim of a scam, according to the survey.
In its advisory, the CFPB recommends that users move money between their payment apps and their bank accounts.
But the growth in popularity has come without adequate measures to keep users’ money safe, the agency said. For one, funds stashed in app payment accounts are often uninsured — meaning that if the money is somehow stolen, or if the app’s payment company fails, customers may not be reimbursed.
Moreover, payment companies have less oversight than traditional banks over how they store and invest users’ funds, allowing payment companies to potentially invest in risky assets, the agency said. “The company can make money on these investments, while generally paying no interest to you,” the agency wrote. in a consumer advisoryadded that an unregulated company may be exposed to risk that is not clearly communicated to its 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 “safe 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 on all 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 on Cash App’s handling of customer complaints, though it’s unclear if Thursday’s report is directly related. The agency said Thursday that it would neither confirm nor deny “any ongoing investigation or oversight activity.”
The agency’s new report comes in the wake of several failures by traditional and non-traditional financial institutions, where consumers and businesses lost control of their assets or came close. In November, cryptocurrency exchange FTX filed for bankruptcy after investors rushed to empty their accounts, amounting to nearly 9 million. Those assets are not insured by the government, and many investors are still trying to get their money back in bankruptcy court. The fall of FTX follows the failure of other crypto institutions in 2022 where investors lost money.
But traditional financial institutions — like Silicon Valley Bank and First Republic Bank, which both failed this year — are also vulnerable to bank runs. The CFPB noted that these incidents highlighted the “importance of federal deposit insurance coverage,” although most of Silicon Valley Bank’s deposits were not insured because they exceeded the $250,000 Federal Deposit limit Insurance Corp. Bank depositors were covered only because the government took the extraordinary step of intervening.
However, the CFPB said, those “events have prompted renewed attention to the different types of financial institutions that consumers use and the extent to which consumers’ funds in financial institutions are protected from losses.”