Understanding the Risks and Safety of Storing Money on Payment Apps

More than three-fourths of American adults have used a payment app, according to Pew Research. These apps, which allow for quick and easy money transfers, are touted as safe and transparent by their developers. However, there are potential hazards associated with using these apps as a place to park your cash. The Consumer Financial Protection Bureau (CFPB) issued a warning in June 2023 about the safety of these increasingly popular apps. Read on to learn about the risks of storing money on payment apps and how to use them safely.

Risks of Storing Money on Payment Apps

Payment apps, also known as peer-to-peer payment apps, enable people to send and receive money electronically and to store money. For example, someone might transfer $30 to a friend to cover their share of dinner, or a nephew might receive a $100 cash gift from his favorite aunt. These apps connect directly to your bank account, debit card, or credit card to allow instant money transfers between users of the app. However, if you don’t transfer money you receive to a bank account you control, the money can sit in the app collecting dust.

While payment apps offer convenience, they also come with several potential pitfalls:

Lack of Federal Insurance

Cash stored on some payment apps might not be federally insured by the Federal Deposit Insurance Corp. (FDIC). This is because payment apps aren’t operated by banks or credit unions. Unlike most accounts at banks and credit unions, money kept on an app might not be protected if the company behind the app shuts down. Companies that operate payment apps might not keep funds in their own federally insured account at a bank or credit union. If an app company invests this money, customers could lose money if the investments fail. Some apps offer “pass-through” insurance from a bank or credit union if a customer signs up for additional services, such as a credit card affiliated with the app.

You May Not Know How Your Money Is Stored

The CFPB notes that user agreements for payment apps often lack information about where money is being held or invested, whether the money is insured, and what would happen to the money if the app owner or an entity holding the money failed.

Limited Access to Your Funds

If you need to use the money you have stored in your payment app to cover an expense, it may take days to complete a transfer to your bank account. Apps may offer instant transfers to a bank account, but it could come with an extra fee. Being unable to pay a bill because your money is tied up in an app could cause a late fee or missed payment, which can have consequences for your financial health.

No Returns on Your Deposits

Many bank accounts accrue interest on balances stored within them. High-yield savings accounts and certificates of deposit accounts are reliable, low-risk ways to earn money on your cash balances. Because peer-to-peer payment apps don’t typically offer this benefit, you’ll be missing out on growing your savings through the power of compounding interest.

Should You Move Your Money or Leave It in the App?

Until payment apps are set up to automatically move cash into a user’s insured account, consumers should consider withdrawing any balances kept on these apps and shifting them to insured accounts, according to the CFPB. “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 funds are safe,” said Rohit Chopra, director of the CFPB, in a news release.

The Financial Technology Association, a trade group that represents operators of payment apps, defends the safety of money stored on these apps. “Tens of millions of American consumers and small businesses rely on payment apps to spend, manage, and send their money,” said Penny Lee, president and CEO of the association. “These accounts are safe and transparent, with users receiving FDIC insurance on their accounts depending on the products they use. [Association] members provide clear and easy-to-understand terms in all their products, and consumer protection remains a top priority.”

Are Peer-to-Peer Payment Apps Regulated?

Payment technology companies that don’t operate as banks aren’t federally insured and aren’t overseen by federal regulators, according to the Consumer Federation of America. However, while they aren’t officially regulated at the federal level, payment apps and their owners face close scrutiny from the CFPB and the Federal Trade Commission (FTC). On the state level, a number of attorneys general have investigated issues such as how the app companies have handled consumer complaints. Furthermore, some states are creating policies and passing laws designed to further regulate payment apps, according to the CFPB. However, states typically don’t require that a customer’s money stored on a payment app be kept in or transferred to an insured account, the agency says.

How to Use Payment Apps Safely

To safely use payment apps, follow these tips:

Quickly Move Cash Balances to an Insured Account

To prevent the loss of money, consider shifting money stored on a payment app to a federally insured account, such as your bank or credit union checking or savings account.

Set Up Multifactor Authentication

Using multifactor authentication, such as a password and login coupled with face ID or fingerprint verification, can further protect your payment account from being hacked.

Verify a Recipient’s Identity Before Sending Money

You can verify the identity by using a recipient’s phone number, email address, or QR code, for example.

Keep an Eye on Your Accounts

Check your accounts regularly to see whether any unauthorized transactions have popped up.

Don’t Send Money to a Business if a Payment App Is the Only Option

If an app is the only payment option, be suspicious. It could mean a fraudster is on the other end of the transaction. You should be given a few choices for making payments, not just one.

Some of the scams and fraudulent incidents to look out for when using payment apps are:

• A scammer masquerading as a legitimate business asks for payment of a product or service. But once they get your money, they’re nowhere to be found.
• A scammer “accidentally” transfers money to you and asks you to return it.
• A fraudster falsely insists that you were sent more money than you were owed for a product and requests that you send back the extra cash.
• A fraudster sends a phony email claiming that your app account is about to be suspended, and then directs you to enter your password on a fake webpage.

The Bottom Line

While payment apps offer convenience, they aren’t great places to store your cash on a long-term basis. For instance, the money you store on a payment app might not be federally insured. To avoid losing your money, consider moving any app balances to an insured account at a bank or credit union. And be sure to embrace other ways to protect your cash, such as enabling multifactor authentication on the app and verifying a recipient’s identity before you send money.

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