In today’s digital world, everyone has at least heard of or interacted with non-bank payment apps like Paypal, Venmo, and CashApp. While some merchants prefer payment using these methods, you can also use these to pay back a friend or coworker. Although it might be easy to leave your funds in these apps, the Consumer Finance Protection Bureau (CFPB) says it can be risky since most of these are not protected by federal deposit insurance (FDIC). “The difference is that the money in your app might not be held in an account at an FDIC member bank or NCUA member credit union. This means it might not offer federal deposit insurance,” according to the CFPB.
Considering the number of large banks that’s failed so far this year, it’s not inconceivable that one of the big payment apps could fail, too. If your payment app of choice files for bankruptcy, you’ll have to rely on the terms and conditions to determine your level of protection. Some may specify a list the banks your funds are held at but others may not provide any information regarding where your funds are held. Likely, your funds will be tied up in a long bankruptcy process.
Some payment apps provide “pass-through insurance” through an arrangement with a bank or credit union. These will usually require additional paperwork and services when signing up, like owning a company-branded debit card or requiring direct deposit. Even with this, though, it doesn’t provide protection if the company fails.
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