In a recent report by the Consumer Financial Protection Bureau (CFPB), the agency has highlighted the potential risks associated with funds stored in popular payment apps. The report, released on June 1, 2023, focuses on the extent to which these apps claim to provide federal deposit insurance coverage to users.
Historically, banks and credit unions have been the primary providers of banking services, including taking deposits, facilitating payments, and lending money. These institutions are publicly chartered and subject to a federal regulatory regime, which includes the FDIC deposit insurance system for banks and a similar system administered by the National Credit Union Administration for credit unions. This insurance protects depositors against the loss of their insured deposits up to at least $250,000 if their bank or credit union fails.
However, as the financial services market has evolved, it is not always clear to consumers when they are dealing directly with a bank or a nonbank. As a result, consumers may not fully appreciate when or under what conditions they would be protected by deposit insurance.
Payment apps now offer services traditionally provided by banks, including payment transfers and stored value services. However, deposit insurance coverage only applies to funds held on deposit at an FDIC-insured bank or NCUA-insured credit union. If the consumers’ funds have not been deposited into an account at the bank or credit union, then those funds would not be eligible for deposit insurance coverage.
The CFPB report reveals that some payment app companies invest users’ funds in loans and bonds, profiting from these investments and generally paying no interest on users’ balances. These companies have a strong financial incentive to keep customer funds on the platform and not automatically sweep them back to the customer’s linked bank or credit union account.
User agreements for these payment apps can be confusing about where consumer funds are being held or invested, whether and under what conditions they are insured at a partner bank, and what would happen if the payment app company or the entity holding the funds were to fail.
Some nonbank payment app firms do not offer accounts that may be eligible for deposit insurance. Even if a nonbank entity claims to hold its customers’ funds on deposit at an FDIC-insured bank or NCUA-insured credit union, such a claim is difficult to verify before a bank or credit union fails.
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