The Consumer Financial Protection Bureau (CFPB) has issued a notice to consumers, strongly advising against keeping funds in nonbank P2P apps, including Venmo, Cash App, and PayPal.
That’s because when P2P users receive money, the funds are not funneled into their bank or credit union account, but are instead held and invested. Because funds stored in payments apps don’t fall under the same protections as banks and credit unions, there’s a greater risk that consumers may lose their funds in the event the company’s investments fail.
Furthermore, very little to no information exists within the user agreements that indicate where the funds are held or invested, or what these implications would mean if things were to go south.
“The CFPB actions serve as a timely warning to consumers, who may feel a false sense of security with P2P balances,” said Jordan Hirschfield, Director of Prepaid Payments at Javelin Research & Strategy. “The service provided by the apps are fantastic and convenient, but consumers should be careful not to maintain large balances that can be at risk.”
“Each app has simple and efficient ways to transfer balances to secured bank accounts when consumers feel they need to protect their balance. I’d add that similar themes could apply to stored value accounts on retail and food and beverage apps as well, which operate slightly differently but also do not offer insured balances,” he said.
Funds that are deposited into a federally-insured bank and credit union are backed by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration
The Popularity of P2P Apps
We have covered why the P2P market continues to grow, and in short, consumers want the flexibility to make payments quickly and easily.
According to the CFPB, more than three-quarters of U.S. adults have used a payment app, with younger consumers more likely to leverage it than their older cohorts. In fact, close to 85% of consumers ages 18 to 29 have used a P2P app.
Given the growing popularity of P2P apps, with transaction volume among all of the P2P providers in 2022 reaching roughly $893 billion—and projected to surpass a trillion dollars by 2027—it’s important that consumers are more aware of where they store their money and the implications of storing it in nonbank payment apps.
