The Consumer Financial Protection Bureau (CFPB) has issued a statement that “billions” of dollars held on payment Apps may not possess federal insurance. The CFPB said these funds may not be safe during times of “financial stress,” alluding to the recent banking crisis.
Rohit Chopra, CFPB Director, said the Apps are increasingly used as substitutes for regulated banks or credit unions but do not hold similar protections.
“As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to.”
The CFBP mentioned the following Apps: Venmo, PayPal (NASDAQ:PYPL), and Cash App (NASDAQ:SQ), specifically.
Apple (NASDAQ:AAPL), a top payments platform, was not mentioned, perhaps due to its relationship with Goldman Sachs (NYSE:GS) which holds a federal bank charter and offers insured accounts.
The CFPB said that the recent bank crisis saw several banks fail, but the accounts held at these banks benefitted from federal insurance.
The regulator stated:
- More than three-quarters of adults in the United States have used a payment app. Younger customers’ use of these payment app services is especially prevalent. Approximately 85 percent of consumers aged 18 to 29 have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893 billion and is projected to reach approximately $1.6 trillion by 2027.
- Nonbanks can earn money when users store funds on their platforms. When users of these digital apps receive payments, the funds are not usually swept automatically to the recipient’s linked bank or credit union account. Instead, companies hold and invest the funds. These activities are not typically subjected to the same oversight that an insured bank or credit union faces. Apps also earn money through fees on merchants and other ancillary services, like selling crypto-assets and offering affiliated financial products.
- Funds sitting in payment app accounts often lack deposit insurance. When users receive payments through these apps, these funds are not automatically swept into their linked bank or credit union account. In addition, payment app companies do not necessarily store customer funds in an insured account through a business arrangement with a bank or credit union. The company’s investments carry risk, and if it were to fail, customers could lose their funds.
- User agreements often lack specific information. 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.
The CFPB noted that some states are enacting rules addressing this issue. The announcement may foreshadow a policy requiring payment Apps to hold account insurance.