Connor Tomasko grew up wary of credit cards. As I taught myself how to manage my money, I realized that many people have bad habits when it comes to payment apps.
Tomasko, 31, a freelance software consultant in Chicago, understands why people appreciate the ease of apps, where you typically only need to know someone’s username to send money. But she realized that keeping money in the app was risky and meant losing out on interest from her high-yield savings account. She now sends money through the app as soon as she gets paid and encourages her friends to do the same.
“I’m definitely the one who always harps about high-yield savings accounts,” Tomasko said. “But if you’re in an industry that handles a lot of cash, like bartending, sometimes all you have to worry about is finding a place to leave your cash. It’s not always fun to talk about.”
As the use of payment apps has increased in recent years, the Consumer Financial Protection Bureau has issued guidance on best practices to avoid pitfalls. For example, funds stored in Venmo or Cash App typically don’t have the deposit insurance you get from banks, except in certain cases.
“Popular digital payment apps are increasingly being used as an alternative to traditional bank and credit union accounts, but they lack similar protections to ensure the safety of your funds,” said Rohit of the CFPB. Director Chopra said in a preliminary report last year.
According to the CFPB, the transaction value of these apps in 2022 was estimated at $893 billion, and is projected to reach $1.6 trillion by 2027. More than three-quarters of U.S. adults say they have used one of four popular payment apps. 2022 Survey by Pew Research Center. According to Consumer Reports’ March 2022 survey, 85% of consumers ages 18 to 29 said they have used services such as PayPal, Venmo, Apple Cash, Google Pay, and Zelle. .
“The app is popular because if you’ve had drinks with someone once and never see them again, meaning the date doesn’t go well, you don’t have to give out personal information like your phone number,” Tomasko said. . “In that sense, I feel there is an advantage in being able to send money in that way.”
Here’s what you need to know:
Funds stored in apps are often not guaranteed
“You may want to leave money in a peer-to-peer lending account so that you can pay it right away when a friend asks for money to cover your portion of the dinner bill… [but] There are several reasons why we don’t offer it,” said Courtney Alleb, Consumer Advocate at Credit Karma.
Funds held in payment apps are often not covered by deposit insurance, a CFPB investigation found. FDIC-insured banks protect depositors from the loss of insured deposits of at least $250,000 in the event of a bank failure, and a similar framework protects credit unions. Funds stored in payment apps are similar to funds stored in savings accounts, but these funds are typically not covered until they are transferred to an FDIC-insured bank or insured credit union.
The Financial Technology Assn., an industry group that includes many payment apps as members, noted that Cash App and PayPal both offer separate, high-yield, FDIC-insured savings products.
Does the app always have deposit insurance?
In certain circumstances, deposit insurance covers payment apps. With Cash App, when a consumer links their account to a Cash App debit card, their funds are insured. Venmo also covers funds added to your account through direct deposit or check cashing.
Still, the CFPB found that funds held in payment apps “may pose a significantly higher risk of loss to consumers than if they were held in an insured bank or credit union account.” .
“Consumers need to be aware of these risks if they choose to keep balances on these non-bank payment apps,” the agency said in a report last year. The CFPB said consumers should “transfer their balances” to federally insured accounts to minimize risk.
Look for a high-yield savings account instead of saving money in an app
According to the CFPB’s research, some payment app companies invest users’ funds in loans and bonds and earn money on those investments, while typically not paying interest on users’ balances. To get the most out of your funds, move your savings to an account that earns interest quickly.
“By leaving your money in these accounts, you are leaving potential interest from high-yield savings accounts on the table,” Alev said. “That interest adds up over time, so your money could grow elsewhere.”
Tomasko said he always uses the “1-3 business day” option to transfer funds when using Venmo to avoid fees, but Cash App does not allow users to automatically transfer funds to their bank. He said there is a setting where he can choose to have money transferred to his account, which he uses.
“There is definitely room for improvement in this area,” she said. “Venmo makes you proactively send money every time you receive a payment.”
“Tens of millions of Americans use payment apps every day to send money to friends and family, cover everyday expenses, and manage their household finances,” the Financial Technology Association said in a statement. Ta.
“Consumers choose these apps because they are safe, convenient and transparent,” said Penny Lee, FTA CEO and Chairman.
Lewis writes for The Associated Press.
