More and more people are using payment apps to send and receive money. However, keeping funds stored in these apps could be risky and means missing out on the interest a high-yield savings account can offer. Connor Tomasko, a freelance software consultant in Chicago, has learned to immediately transfer any payments from apps to her bank account.
“When I receive a payment, I immediately transfer it out to avoid any potential issues,” Tomasko said. As the use of payment apps has surged in recent years, the Consumer Financial Protection Bureau (CFPB) has provided guidance on how users can avoid pitfalls. Funds stored in apps like Venmo or Cash App typically aren’t protected by the same deposit insurance that banks provide, leaving them at a higher risk of loss.
“Popular digital payment apps are increasingly used as substitutes for traditional bank accounts but lack the same protections to ensure that funds are safe,” CFPB Director Rohit Chopra stated last year. This concern stems from the fact that, while FDIC-insured banks protect depositors’ accounts up to $250,000 in the event of a bank failure, funds in payment apps remain unprotected until transferred back into an FDIC-insured bank or credit union. Data from the CFPB indicates that in 2022, transaction volumes on these apps hit an estimated $893 billion, a figure projected to grow to $1.6 trillion by 2027.
More than three-quarters of U.S. adults have used popular payment apps. “Payment apps are convenient because you don’t have to share personal information such as a phone number to send money, which is useful, for example, if you’re sending money to someone you met briefly,” Tomasko explained.
Potential risks of payment apps
“It can be tempting to leave money sitting in peer-to-peer payment accounts so you’re ready to pay your friends or cover a bill, but there are a few reasons why that is not advisable,” said Courtney Alev, consumer advocate at Credit Karma. The major reason is that funds stored in these apps often lack deposit insurance. The Financial Technology Association, which includes many payment apps, has noted that some services, such as Cash App and PayPal, do offer separate high-yield, FDIC-insured products.
However, these circumstances are exceptions rather than the norm. To minimize risks, the CFPB recommends transferring balances back to federally insured accounts. Instead of storing money in payment apps, users might benefit more from transferring funds to high-yield savings accounts.
Companies behind payment apps often invest users’ funds in loans and bonds to earn money, while generally paying no interest to the users. “Leaving money in those accounts is missing out on potential interest from a high-yield savings account,” Alev pointed out. “All of that interest adds up over time, so your money could be growing elsewhere.”
Tomasko prefers using options like Venmo’s ‘1-3 business day’ transfer setting to avoid fees, and utilizes Cash App’s automatic routing of funds to a bank account.
“There’s definitely room for improvement in the space,” she remarked, explaining her routine of actively transferring funds out of payment apps. Despite these concerns, the Financial Technology Association asserts that millions of Americans use payment apps daily because they are safe, convenient, and transparent.
