The CFPB, which polices the financial industry in the interest of keeping consumers from harm, has been watching the burgeoning fintech market closely, keeping an eye out for new business models that might abuse clients. In particular, it has followed the rise of buy now, pay later installment financing over the past two years.

Now, the recent failures this year of major banks, including Silicon Valley Bank, Signature Bank, First Republic and Silvergate Bank, plus cryptocurrency crises have also all called attention to how well protected consumer funds may, or may not be, the agency said.

“Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe,” CFPB Director Rohit Chopra said in a related Thursday release. “As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to.”

An “issue spotlight” document that the agency posted on its website in conjunction with the advisory said use of the P2P apps quadrupled, in terms of payment dollar volume, between 2018 and 2022, citing Insider Intelligence. 

While the advisory cited app providers PayPal, Venmo and Cash App, the agency’s “spotlight” report also noted app providers Apple Pay and Google Pay are offering similar financial services, such as debit and credit cards, BNPL loans and crypto transactions. All of them may be providing accounts to store funds that aren’t protected by insurance, the CFPB pointed out.

“While banks and credit unions are required to provide detailed information on their total deposits on a regular basis, these entities currently have no such requirement under federal law,” the post said.

Consumer deposits at banks are covered against losses by insurance from the Federal Deposit Insurance Corp., up to at least $250,000. For deposits at credit unions, there is similar insurance from the National Credit Union Administration.

The CFPB said consumers may be incorrectly expecting such protections from non-bank financial tools, but it stressed that that is not the case. The companies may simply be benefiting from investing users’ money and not paying them any interest, the agency noted.

“User agreements for these payment apps are often confusing, murky, or even silent on exactly where consumer funds are being held or invested, whether and under what conditions they are insured at a partner bank, and what would happen if the payment app company or the entity holding the funds were to fail,” the CFPB said.

Ultimately, the incentives of the app service providers may not be aligned with their users’ interests, and the CFPB underscored the threat associated with that reality.

“The companies offering many of these widely used services have a strong financial incentive to encourage users to keep their funds stored rather than automatically sweeping them back into linked bank or credit union accounts,” the agency said.

While some of the non-bank companies providing money transfer services may be registered with the U.S. Treasury Department, they’re not subject to the same sort of supervision imposed on banks and credit unions, according to the agency. And even though they may be licensed under state laws, that patchwork of regulation may also be less rigorous, the CFPB suggested.

The bottom line: “Funds stored in a payment app may be at significantly higher risk of loss for a consumer than if it is deposited in an insured bank or credit union account,” the CFPB said.

By Lynne Marek on June 2, 2023
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