August 1, 2023—According to 2022 surveys by Consumer Reports and the Pew Research Center, more than three quarters of Americans have used a payment app such as Venmo, PayPal, CashApp, or Zelle® in the past year. Payment apps are now one of the most commonly used financial apps, second only to a consumer’s primary financial institution’s own digital banking app. In fact, payment app transaction volume quadrupled between 2018 and 2022, and, if this growth trend continues, is expected to reach or exceed $1.6 trillion by 2027.
The Consumer Financial Protection Bureau (CFPB) is monitoring fast-growing, non-bank payment apps which they believe may “sidestep the safeguards that local banks and credit unions have long adhered to.” They released a consumer advisory in June 2023 focused specifically on the security of peer-to-peer (P2P) nonbank payment apps. While these apps are convenient, the agency warns that these closed loop solutions—operated by tech companies with or without a business relationship with banks or credit unions— are not suitable substitutes for traditional bank accounts. Unlike credit union or bank accounts with deposit insurance through the NCUA or FDIC, funds held in nonbank payment apps may be unprotected. In the event there is a financial crisis, a bank run, or a company failure, the CFPB warns, consumer funds stored in these apps could be at risk.
As the report explains, digital payment applications emerged in the late 1990s, and are regulated as money services businesses (MSBs), but are not subject to the regulatory scrutiny of traditional depository institutions or to those regulations regarding account sweeps, data storage and privacy, and insured funds, all designed to protect consumers. Non-bank apps generate revenue by charging merchants to accept payments on their platform or by charging customers for basic or ancillary services, including expedited account transfer. Most non-bank apps allow customers to store the value of their transactions on the app itself, transferring out of the closed loop system to a bank account only upon request, and then invest those funds in loans or bonds without paying interest on customer balances. These apps are under no obligation under federal law to report on the status of their total deposits and value of stored funds, but it is estimated that billions of dollars are stored on platforms annually. On the consumer level, user agreements often do not disclose the details of these transactions, and it is clearly in the vendor’s best interest to hold the funds. Even those non-bank apps that advertise deposit insurance in partnership with a bank or credit union may be misleading consumers; this insurance only protects against the failure of the depository institution, not of non-bank company.
The full CFPB Issue Spotlight (Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps, June 1, 2023) and the related Consumer Advisory are available online at www.consumerfinance.gov.In the former, financial institutions will find valuable information for educating their members on risks of non-bank payments apps as well as supporting data on the benefits of products developed by traditional depository institutions themselves.