According to the Atlanta Federal Reserve, nearly three-quarters of U.S. consumers will be using payment accounts such as Cash App, PayPal, and Venmo in 2023, up from 68% in 2022.
AP file
After seeing a $99 fraudulent charge on her PayPal account last month, Robin DesCamp encountered one frustrating problem after another as she navigated the world of digital payment app policies.
She reported the strange charges to PayPal and her bank, then spent hours dealing with dropped customer service calls and unclear user agreements. After a month of back and forth, she got her money back. She advises her friends who currently use digital payment apps to become more diligent, or not use them at all.
“I’m just one person,” said DeCamp, a lawyer in Bend, Oregon. “When you put it into the millions of transactions that they do every month…a lot of people are too busy and in a hurry to say, ‘Wait a minute.’ I can’t say that,” he said. ”
According to the Atlanta Federal Reserve, nearly three-quarters of U.S. consumers will be using payment accounts like PayPal, Venmo, and Cash App in 2023, up from 68% in 2022. In its 2023 report, the Consumer Financial Protection Bureau estimates that payments in 2023 will be: These apps quadrupled between 2018 and 2022, with usage particularly concentrated among younger Americans.
And these apps are no longer just for simple payments between friends. These days, they are “increasingly being used as an alternative to traditional bank and credit union accounts,” according to a 2023 CFPB report. For example, some app users receive their paychecks via Cash App or PayPal, while others leave funds on the app for future payments, effectively treating it like a bank account.
The CFPB and other watchdog agencies say it’s often unclear whether such funds are insured against risky investments or fraud. State laws governing how payment apps protect stored funds vary, creating confusion that is further compounded by customer service challenges. And millions of Americans are in the dark over how payment apps use or invest those funds.
Here’s what you need to know:
Should I leave money in a payment app?
While fewer app users do this, at just 6%, according to a March 2022 Consumer Reports study, consumer groups warn that it’s a particularly dangerous practice. .
If your traditional bank checking or savings account goes bankrupt, the Federal Deposit Insurance Corporation will cover you up to $250,000 per account.
However, digital payment apps don’t have similar protection for the funds you leave there. That leaves the funds vulnerable if the parent company struggles or fails. Many apps partner with FDIC-insured banks to offer “pass-through” coverage that protects against the failure of the financial institution connected to your account, but this coverage does not apply to the app itself.
Most funds on Venmo, Cash App, and PayPal must meet certain requirements to be eligible for pass-through insurance. Consumers can secure coverage with Venmo by signing up for direct deposit or using the app to cash checks or buy and sell cryptocurrencies. PayPal provides insurance to customers who use direct deposit, cryptocurrencies, or open app-sponsored debit or credit cards. Cash App customers must link their account to a prepaid card offered by the app. Additionally, some digital payment apps, including PayPal, have begun offering FDIC-insured savings accounts.
These companies “want to give people the peace of mind that they have deposit insurance by using something that doesn’t have deposit insurance, and they’re willing to do things that they wouldn’t do if they had that protection.” ” said Peter Conti-Brown. Associate Professor of Law and Business Ethics at the Wharton School of the University of Pennsylvania.
Conti-Brown warned that the confusion over deposit insurance was taking advantage of consumer carelessness.
“The answer is not that they’re lying to you,” Conti-Brown says. “The real answer is, what does the fine print say?”
The Financial Technology Association, a lobbying group that represents many major digital payments apps, defended the transparency of these services. Penny Lee, the group’s president and chief executive officer, said in a statement to The Washington Post that digital payment apps are transparent, secure and regulated.
How do app companies spend your money?
Payment apps make most of their revenue by charging fees from consumers who use credit cards or make instant transfer payments. Apps that offer credit cards also receive swipe fees charged to businesses and interest charged to cardholders.
The app then makes money by investing the remaining user funds in the app.
This is another example of how these payment app companies are different from banks. Banks must have enough cash on hand to cover daily withdrawals in order to use remaining assets for lending. Additionally, regulations prevent commercial banks from using depositors’ funds for riskier investments such as securities, commodity futures, and options.
This federal oversight does not exist for payment apps. In some states, app companies are free to invest in speculative ventures. Additionally, many apps have unclear user agreements that don’t specify where users’ funds are kept or what happens to them if the payment app fails.
For example, Venmo and its parent company PayPal say they invest money in “liquid investments pursuant to state money transmitter laws.” These liquid investments (any assets that can be converted into cash) range from low-risk government bonds to more volatile stocks and cryptocurrencies. Other payment apps, such as Google Pay, do not specify where consumers’ funds are kept.
User contracts for digital payment apps need to be addressed more appropriately, such as clarifying where funds are stored, what conditions are covered by insurance, and what will happen if the parent company goes bankrupt. The groups point out.
Joanna Stubbins, senior economist and policy advisor at the Boston Fed, said: “I strongly urge full disclosure of all risks, especially financial risks, but also privacy risks and all kinds of losses that consumers may suffer.” Argue and advocate.” “As long as people are aware of the trade-offs, they can make educated decisions.”
How do states regulate payment apps?
Payment apps aren’t subject to strong federal regulation, but more than a dozen states have passed laws in recent years regulating the “net assets, deposits and permissible investments” of money transmitters, including digital payment companies.
But experts warn that this oversight remains too fragmented. Even in states that are tightening regulations, “permissible investments” range from risky securities to stable bonds. Previous legislative efforts have omitted deposit insurance protection and requirements for payment apps to automatically transfer balances to insured accounts.
David Birch, a UK-based digital financial services advisor, said the decentralized nature of payment app regulation makes it difficult for consumers to understand how it works, adding: “The regulatory landscape in the US remains unnecessarily confusing, overly expensive and complex.”
In a push for stricter rules at the federal level, the CFPB will require non-bank financial companies with more than 5 million transactions annually, including many digital payment apps, to be subject to the same rules as traditional banks and banks in 2023. proposed a regulation requiring Credit unions, including capital requirements and investment restrictions. Public comment on the rule ended in January, and the agency plans to finalize the proposal later this year.
Lee, of the Financial Technology Association, argued that the CFPB’s proposal would stifle innovation in the financial technology sector, saying that digital payment companies should “not add more regulation just to provide more services. It should be more fully and directly integrated into the national payment system,” he added. It is called “Regulation” and is lumped in with traditional banks.
What are the other risks?
The same Consumer Reports study found that 6% of users have sent money to the wrong person, a scammer, or someone who didn’t receive it. Whether these people were caught up in a fraudulent scheme or simply mistyped their lunch date’s Venmo username, these issues can be difficult to reverse, Stubbins said.
Traditional financial institutions have a duty to protect consumers, so risk is reduced if consumers have a good relationship with their bank, he said. But with apps, “it’s the consumer’s responsibility to make sure they’re not sending money to the wrong person,” Stubbins said.
Payment issues can also lead to customer service nightmares like the one DesCamp experienced. According to Consumer Reports, approximately 77% of people who contacted a payment app to resolve an issue faced at least one issue in the process, and 1 in 5 were unable to resolve the most recent issue. I am reporting.
Payment apps like PayPal’s Venmo are no longer just for simple transactions between friends. These days, they are “increasingly being used as an alternative to traditional bank and credit union accounts,” according to a 2023 Consumer Financial Protection Bureau report.
AP file photo
