US regulators warn public not to keep money in PayPal, Venmo and other payment apps; here is why

The Consumer Financial Protection Bureau has issued a warning for its citizens highlighting the dangers of storing money in digital wallets like PayPal and Venmo.

Storing money in digital wallets could be dangerous if the company suddenly declares bankruptcy and folds. In such a case, users will lose all their money. (Pexels)

It is an undeniable fact that digital wallets and mobile payment services such as PayPal, Venmo, and others have changed how people transact financially on a daily basis. Credit and debit cards were said to be the technologies that declined cash transactions and now digital wallets are slowly replacing bank cards, as their popularity continues to grow. According to reports, the total transaction volume across mobile payment services in 2022 crossed $1 trillion for the first time and closed at $1.1 trillion. However, US regulators are now warning their citizens to not store large amounts of money in these apps or replace banks and credit unions with them because they do not offer security on users' money.

According to a report by CNN, the Consumer Financial Protection Bureau (CFPB) director Rohit Chopra issued a warning last week that payment services “are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe”. Highlighting the scope of the danger, the statement added that more than three-fourths of US adults have at least used one payment app.

What is the risk associated with payment apps?

The biggest issue with payment apps and digital wallets is that they do not have similar protections from the federal government that banks and credit unions do. These federal protections are important since if the bank makes bad financial decisions, loses all of its money, and has to shut shop, the account holders will still have a certain portion of their money insured and the US government will pay out the sum. However, payment apps offer no such protection.

Can banks go bankrupt?

While the probability is quite low, banks can and have declared bankruptcy. In 2023, Silicon Valley Bank and Signature Bank both failed after a series of bad investments. Such incidents are not very frequent but it is a possibility people should be prepared for.

How much of the money can the account holder get back?

In case a federally insured financial institution folds, account holders are guaranteed to get back up to $250,000 per account. For the account holders of Silicon Valley Bank and Signature Bank, the US government lifted the limit and decided to cover the entire amount of deposits for every account holder.

The PayPal Savings exception

There are some digital payment services that deposit their customers' money in Federal Deposit Insurance Corporation (FDIC) member banks and as a result, they are protected. PayPal Savings is an example of that.

How can payment apps lose customers' money?

Banks invest the money deposited to them and make money on the profits they earn from those investments. Payments apps also do the same. The only difference is that the money kept in deposit accounts at banks is insured, while these apps do not offer any such insurance, which makes keeping money in them unsafe.

Best way to use payments app

This does not mean that such apps should not be used at all. People who use payments apps and keep just a small amount of money in their digital wallet that they know they will spend in a day or a week are not likely to face any large losses. The threat of losing money exists mainly for those who keep large amounts of money in these digital wallets.