The Truth About Payment Apps
Summary
Think your money is safe sitting in a payment app? Not necessarily. In this episode of Small Print Made Simple, Daynor shares a casual story about splitting a lunch bill—and accidentally leaves $20 sitting in a payment app. What follows is a crash course in how these apps really work, and the risks most users don’t know about.
We break down what happens behind the scenes: non-bank payment apps can invest your stored funds in securities or other risky products, which means your money could be vulnerable if the company fails. Unlike banks, these apps aren’t required to protect your funds with FDIC or NCUA insurance.
Just because you see the FDIC logo on a website doesn’t mean your money is protected. That’s why it’s important to move your balance back into a federally insured bank or credit union account—where your money has a government-backed safety net.
Transcript
[DAYNOR]
And by the way, that is how they make money off of you. So I went to lunch with a friend the other day and we split the check. She sent me $20 in a payment app and I left it sitting in there.
[JARGON WOMAN]
Funds stored in a payment app, maybe at significantly higher risk of loss for a consumer than if it is deposited in an insured bank or credit union account.
For instance, non-bank payment apps that invest customer funds in securities or other non-deposit products expose the company to the risk of insolvency if the investment value declines. The companies are also exposed to risk if customers demand their funds all at once. If a non-bank payment app was to go bankrupt as a result of these risks, customers may not be the only creditors with claims on the company's remaining assets.
[DAYNOR]
Wow. So what I'm hearing is I should not leave my $20 sitting in that payment app because these payment apps invest the money that's sitting there and it's unlikely, but they could go out of business. And that would mean it could take a really long time to get your money back, or you may not get it back at all.
And by the way, that is how they make money off of you.
[JARGON WOMAN]
The varying preconditions required by non-bank payment apps based on which types of products and services consumers opt for when storing funds, they amplify consumer confusion. Cognizant of this blurring in May, 2022, the CFPB issued a circular regarding deceptive representations involving the FBI's name or logo or deposit insurance.
Similarly, the FDIC has observed an increasing number of instances where financial services providers or other entities or individuals have misused the FDIC's name or logo or have made false or misleading representations about deposit insurance.
[DAYNOR]
So basically this means you need to do a little bit of extra work to make sure that your funds and a bank are FDIC insured.
This is a type of federal insurance where the government backs the funds and helps ensure that if the bank fails or goes under you will be covered. Just because you see the FDIC logo on a financial institution's website does not mean that your funds are secured. You can go to the FDIC bank finder at fda.gov to confirm that your bank is insured.
[JARGON WOMAN]
Consumers should be aware of these risks if they choose to leave a balance on these non-bank payment apps. To minimize these risks, consumers may choose to transfer their non-bank payment app balances back to their federally insured deposit accounts where they have a direct relationship with an FDIC insured bank, or NCUA insured Credit Union.
[DAYNOR]
Okay, CFPB, I hear you loud and clear. I'm gonna move my $20 out of the payment app and into my FDIC insured bank account, and I'm not giving you guys legal advice, but it sounds like a good idea to listen to the CFPB on this one and keep your money in an FDIC-insured deposit account instead of in a payment app.
