NEW YORK – Connor Tomasko was raised with a cautious approach toward credit cards. As she delved deeper into personal finance, she recognized similar trends among many users of payment applications.
At 31 years old, Tomasko, who works as a freelance software consultant based in Chicago, appreciates the convenience these apps offer, where sending money might require just the recipient’s username. However, she has become aware of the risks involved, particularly when money sits idle in these platforms, which could otherwise be earning interest in a high-yield savings account. She now makes it a point to transfer any received payments out of these apps promptly and advises her friends to adopt the same practice.
“I’m definitely the one that is always reminding others about high-yield savings accounts,” Tomasko shared. “But for those working in cash-heavy industries, such as bartending, the concern often lies in figuring out where to deposit their earnings, which can be an uncomfortable topic.”
The increasing popularity of payment applications has prompted the Consumer Financial Protection Bureau (CFPB) to provide guidance on how to use them wisely and avoid potential pitfalls. One major piece of advice is that funds held in apps like Venmo and Cash App usually do not have the same level of deposit insurance that a bank account would offer, barring certain exceptions.
“While digital payment applications are becoming more common as replacements for traditional banking, they lack the protections needed to keep funds secure,” stated Rohit Chopra, the director of the CFPB, in a previous announcement.
According to the CFPB, transaction volumes via these applications reached about $893 billion in 2022 and are projected to skyrocket to $1.6 trillion by 2027. A Pew Research Center survey in 2022 revealed that over three-quarters of adults in the US had utilized at least one of four major payment services. Additionally, a Consumer Reports study indicated that 85% of consumers aged 18 to 29 have used platforms such as PayPal, Venmo, Apple Pay, Google Pay, or Zelle.
Tomasko noted, “These applications are appealing as they allow users to avoid sharing sensitive personal information, like a phone number, with someone you may only have socialized with once—like a date that didn’t go as planned. I can appreciate that benefit.”
Here are a few critical details to consider regarding these payment apps:
Funds held in these applications often do not have deposit insurance. “While it might seem convenient to keep money in peer-to-peer payment accounts to manage shared expenses, there are compelling reasons to avoid doing so,” advised Courtney Alev, a consumer advocate at Credit Karma.
The CFPB emphasizes that funds stored in these apps do not usually enjoy the same protections that apply to deposits in an FDIC-insured bank, which safeguards customers against losses up to $250,000 in the event of a bank failure, along with similar protections for credit unions. Payments app funds resemble traditional deposit accounts, but they typically lack coverage until those funds are transferred to an insured bank or credit union.
The Financial Technology Association, representing various payment services, indicated that both Cash App and PayPal offer distinct high-yield, FDIC-insured savings options.
In some instances, payment apps do offer coverage for deposits. For instance, with Cash App, deposits can be insured if users link a debit card to their account. Similarly, Venmo offers insurance for funds added via direct deposit or through check cashing methods.
Nevertheless, the CFPB has pointed out that funds kept in payment apps are at a significantly higher risk for loss compared to funds deposited in insured institutions. “Consumers should be informed of these risks if they opt to maintain any balance within these non-bank payment services,” the agency noted in its annual report. To reduce these risks, consumers are advised to transfer their account balances back to federally insured banks.
Opting for a high-yield savings account is recommended rather than leaving money in these applications. Many finance companies can invest users’ funds in a range of loans and bonds, generating revenue from those investments but generally providing no interest for their users’ account balances, according to the CFPB. Thus, it is wise to shift any incoming funds swiftly to interest-bearing accounts.
“Leaving money stagnant in these accounts translates to missing out on potential interest from a high-yield savings account, which can accumulate significantly over time,” Alev cautioned. Tomasko specified that she always selects the ‘1-3 business day’ transfer option on Venmo to avoid extra fees, while she also utilizes a feature on Cash App that automatically redistributes money back to her bank account. “There’s certainly room for improvement in this area,” she stated, adding, “Every time I receive a payment via Venmo, I actively transfer that amount out.”
The Financial Technology Association reiterated that millions of Americans use payment apps daily for various financial transactions, including sending money to friends, covering recurring expenses, and managing personal finances. “Consumers prefer these applications due to their safety, convenience, and transparency,” said Penny Lee, the Association’s CEO and president.
