The advent of digital payment apps has changed the face of traditional finance. Once the domain of cash, checks, and credit and debit cards, a growing number of consumers are foregoing legacy payment methods in favor of these newer, digital counterparts.
In fact, many digital payment apps have evolved, becoming all-purpose financial technology (fintech) applications -- also called digital wallets -- which people use to store credit card information, process transactions, track payments, and even park cash, all from the convenience of your smartphone or other mobile devices.
However, a federal regulator is now warning consumers they should avoid storing cash in popular mobile wallets including PayPal (PYPL 0.34%), Venmo, or Block's (SQ -2.28%) Square Cash app, because those funds could ultimately be at risk. Here's why.
Image source: Getty Images.
Not a bank account
Last week, the Consumer Financial Protection Bureau (CFPB) warned mobile wallet users that if these platforms were to experience liquidity issues -- similar to those that forced three banks into federal receivership earlier this year -- the billions of dollars stored in these accounts are not insured by the government and subject to far more risk than bank deposits.
The CFPB -- the primary federal regulator responsible for administering consumer financial law -- noted these digital payment apps are "heavily used" by both businesses and consumers. Many people use these apps in much the same way they would a bank account. For example, some users have their paychecks deposited directly into a digital payment app and some simply store payments they receive there.
The agency noted that the use of payment apps was particularly widespread among younger users, as "approximately 85% of consumers aged 18 to 29 have used such a service." As a result of the popularity of these apps, the total value of the transactions across all apps topped roughly $893 billion last year and is expected to crest $1.6 trillion by 2027, according to the report.
Ensuring bank deposits are safe
The Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that supplies deposit insurance for the nation's banks. Its mission is to "promote confidence and stability in the nation's financial system." More specifically, in the event a bank runs into an issue with liquidity -- or doesn't have enough cash on hand to meet withdrawals -- the FDIC guarantees consumer deposits up to $250,000 per depositor, per bank, per ownership category.
The CFPB noted the importance of this consumer protection was highlighted during "the failure of large systemically important banks" in recent months, including Silicon Valley Bank, Signature Bank, and First Republic Bank, but "insured depositors could have confidence their money was safe," because the deposits were guaranteed by the FDIC.
However, because popular cash apps are not bank accounts, they aren't entitled to the same protection.
A bit of perspective is in order
What's more, not all digital wallets are created equal. Earlier this year, Apple (AAPL -1.22%) announced an expanded partnership with Goldman Sachs to offer users access to a high-yield savings account with an annual percentage yield of 4.15%. As a bank account, not simply a cash app, its deposits are insured by the FDIC.
That's not to say the funds stored in the most widely used fintech apps are at risk. PayPal and Block are both big and well-capitalized businesses with access to large amounts of cash. That said, PayPal had roughly $39 billion in amounts due to customers on its balance sheet in the first quarter, while Block held a total of $5.7 billion. This helps illustrate the magnitude of cash storage and why the CFPB believed the issue was worth highlighting. Digital payments apps are only going to get more popular -- and as three of the most popular providers, this bodes well for PayPal, Block, and Apple.
No one is suggesting that consumers shouldn't store any cash in these cash apps, but it isn't the appropriate place to store large sums of cash. It's not worth the risk.
