Storing money in apps exposes some users to possible loss if the company fails, the Consumer Financial Protection Bureau (CFPB) has warned.
Funds stored in apps “often are not placed in an account at a bank or credit union and lack individual deposit insurance coverage,” the CFPB said in a June 1 report. “Stored funds can be at risk of loss in the event of financial distress or failure of the entity operating the mobile payment platform.”
Users who transfer their funds to a traditional bank or credit union will be insured for that deposit—up to $250,000 per individual, per account category. A payment app that partners with a traditional bank may offer “pass-through coverage” that extends the bank’s insurance to the app user. But the CFPB cautions that even that coverage can be tricky to understand.
CFPB Warning Comes as Apple Account Users Claim Difficulties
The same day the CFPB made the announcement, Apple’s new high-yielding savings account—backed by Goldman Sachs—came under fire in the media. Some consumers claimed that they could not transfer their funds from their Apple account to another financial institution, or that during the transfer process, their funds disappeared for weeks, as first reported by The Wall Street Journal.
Goldman responded to these claims by pointing to its extensive security measures that can delay money transfers. To comply with federal anti-money laundering laws, financial institutions must carefully vet large transactions before processing the funds.
Storing Money in Apps Allows for Quick Access
The convenience of quick access leads many users to store cash in an app rather than in their bank, as transfers from app to account can take days. Most of these apps do offer instant transfer as well, but for a fee.
“It’s an additional point of friction to have to move the dollars from the app into the bank, and then get it back,” says Arijit Roy, head of consumer segment and solutions at U.S. Bank. “The average client leaves hundreds of dollars, on average” in money apps.
App Options Can Activate Deposit Insurance
Given recent high-profile bank failures, the CFPB wants to make sure consumers know whether the funds in their money apps are federally insured, and if so, how much coverage they have.
The agency warns that not every app provider has made these details clear.
To figure that out, users may need to make a careful study of their apps’ terms and conditions.
Some apps have no federal deposit insurance. Examples include Google Pay and Google Pay Balance accounts, according to the CFPB’s list of money apps’ insurance provisions.
Most other apps have mixed deposit insurance offerings, depending on the account options. For example, a typical PayPal account is not insured, but a PayPal Balance account has pass-through deposit insurance under certain conditions. To get that coverage, the customer must use the account for specific activities such as setting up a PayPal debit card, enabling direct deposit or buying and selling crypto assets.
Venmo, Cash App and Apple Pay also have pass-through deposit insurance for customers who take certain steps within the app. This may involve linking the app to a debit or prepaid card backed by a traditional financial institution.
Apple, for example, has a partnership with Green Dot Bank, which like most U.S. banks has insurance coverage through the Federal Deposit Insurance Corp. (FDIC). However, as the CFPB notes, Apple Cash users only get this pass-through insurance if they register the Apple Cash account with Green Dot Bank.
Overall, the larger fintechs backing these money apps “actually meet the needs of clients really well,” says Roy, who focuses on consumer deposit products at U.S. Bank.
CFPB Identifies Other Risks
Details of how app companies invest users’ funds behind the scenes may be opaque, too, said the CFPB in its report: “Nonbank payment apps that invest customer funds in securities or other non-deposit products expose the company to the risk of insolvency if the investments’ value declines.”
“The companies are also exposed to risk if customers demand their funds all at once…Even if consumers do not ultimately lose any funds, they may face significant delays in accessing their funds” if the company goes bankrupt, the bureau said.
Insuring Your App Cash
The clearest way to maximize your deposit insurance protection is to consistently transfer funds from your money app to an account at a traditional bank or credit union.
But if you want to keep cash in your payment app, you’ll want to confirm that you qualify for pass-through insurance from an affiliated bank. An app will typically disclose its banking partner (if there is one) in its terms and conditions for opening an account.