If you've been keeping your money in payment apps like Venmo, you may want to reconsider.
These apps—which include PayPal, Apple Pay and Cash App—are not federally insured by the FDIC, so they don't have the same consumer protections as banks and credit unions, the Consumer Financial Protection Bureau (CFPB) recently warned.
Payment apps are extremely popular; more than three-quarters of adults in the U.S. have used them, according to the CFPB. And it's not just small change, either. Transaction volume across all payment app service providers was estimated at $893 billion in 2022, and projected to reach approximately $1.6 trillion by 2027.
Convenience—but not without risk
Over the past few years, more users of these apps have found them an easy way to make payments on the go. A typical scenario: You go out to dinner with a friend and want to split the bill, but you don't carry cash. You do the math, and with a few clicks on your phone, send your friend the money for half the bill, from your app account to theirs.
The problem comes when people store large amounts of money on these apps, some even sending paychecks straight to the app account via direct deposit, said Deana Dobbs, director of product management and payments at BOK Financial®.
"There may or may not be Federal Deposit Insurance Corporation (FDIC) coverage for the funds stored in an app, as they are not typically housed in a traditional bank account," said Dobbs. "Some activities on an app could make some funds eligible for FDIC pass-through insurance, so it's best to read the terms and conditions of use."
What this means is that if a payment app company goes under, customers could lose the money stored in the app. By contrast, banks and credit unions covered by the FDIC are insured financial institutions that guarantee backing up to $250,000 per depositor if the bank fails.
"User agreements for digital payment apps often lack information on where funds are being held or invested, whether and under what conditions they may be insured, and what would happen if the company or the entity holding the funds were to fail," says the CFPB's warning.
Users should know what they're agreeing to when placing money in these apps and be aware that funds stored in the accounts may not be protected, added Dobbs.
Take advantage of higher rates
In today's landscape of higher-interest rates, you're probably better off storing your money in your own interest-earning account than in a payment app account, Dobbs said.
She also suggests setting a limit on how much you keep in your app account, maybe $50 to $100 to cover a meal out or an impulse purchase. You can transfer money in after you've spent your limit to keep that amount on hand. That way, losing a small amount of money in an app crisis would not be a financial hardship.
Another option to limit risk is setting up your payment apps to pay with your debit or credit card by storing your card number in the app, said Dobbs. "Be aware that some apps charge nominal fees for transfers and payments outside of using the app's direct services. Fees vary depending on the app used."
If you want to avoid using payment apps completely, Dobbs said you could create a digital wallet by provisioning your debit card, "This enables a user to have full access to funds in their bank account, which is fully protected by FDIC insurance, via phone."
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