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Consumer advisory: Your money is at greater risk when you hold it in a payment app, instead of moving it to an account with deposit insurance

More than three quarters of adults in the United States have used a payment app , sometimes called a P2P (peer-to-peer or person-to-person) app. Widely used nonbank payment apps include PayPal, Venmo, and Cash App. The apps can be used on a computer or mobile device to send money to someone else without writing a check or handing over cash.

Young adults use payment apps even more frequently. According to a March 2022 survey by Consumer Reports , 85 percent of consumers aged 18 to 29 have used one of these apps.

Money stored in nonbank payment apps often is not protected by federal deposit insurance

Nonbank payment apps help you move money into and out of a linked bank account, credit union account, or card account. They also let you store money inside the app. In fact, money you receive generally stays in your payment app account until you connect to the app and move the money to your linked account.

Keeping money inside your nonbank payment app might feel the same as a keeping money in a traditional bank account with deposit insurance. You can check your balance and review transactions, just as you might do with online banking. However, the difference is that the money in your app might not be held in an account at an FDIC member bank or NCUA member credit union. This means it might not offer federal deposit insurance.

The difference is key because money you keep in your bank or credit union account is insured if the bank or credit union fails. However, deposit insurance does not apply when a nonbank payment company fails. When you consider the worst-case scenario, you might wonder: What if the payment company holding my money goes out of business or fails?

If a payment app’s business fails, what happens next is often unclear

Apps can be set up in different ways, with different business models, investment strategies, and risks. Your payment app company might invest your money in loans and bonds, instead of keeping the money in a bank or credit union account. The company can earn money on these investments, while generally paying no interest to you. The payment app’s business could be at risk from investment losses, interest rate changes, currency exchange rates, and liquidity problems.

Your user agreement might be confusing, murky, or even silent on exactly where your money is held or invested. It might not explain whether and under what conditions your money may be insured at a bank or credit union, and what happens in the case of the nonbank payment app’s business failure or bankruptcy.

In contrast, money you deposit in an account at an insured bank or credit union is protected up to the insurance limit if the firm fails. The Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) protect deposits up to $250,000 under the same owner or owners. If your bank or credit union fails, you still have quick access to your money.

If the nonbank payment app’s business fails, your money is likely lost or tied up in a long bankruptcy process. You might be standing in line with other lenders to the failed app, waiting to see if you can get any of your money back after the business is unwound.

Some apps offer “pass-through” insurance, if you take additional steps

Some apps may claim to provide pass-through insurance through business arrangements with a bank or credit union for customers who sign up for additional services. For example, you might have to get a company-branded card or choose direct deposit. To be eligible for pass-through insurance, the account must comply with certain rules and regulations set by the FDIC or NCUA.

Pass-through insurance means you are insured against the failure of the bank or credit union where the app holds the money for you. It doesn’t insure you against the failure of the payment app company. This means there could be a risk of losing your money in the event the company fails. If the payment app company followed all the relevant requirements, though, your money could be safe in the associated bank or credit union. Still, there could be risks, like delaying your ability to access your money.

Tip: Send yourself a reminder to move your money from the app to your insured account

Planning on moving your balance from your payment app into your linked account? Use this link to send yourself an e-mail reminder – or share it with a friend or family member.

What the CFPB is doing

We’re taking steps to help you spot the risks and help with problems related to leaving money in a payment app: