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Understanding the Risks of Storing Money on Payment Apps

More than three-fourths of American adults have used a payment app, according to Pew Research. While these apps are touted as safe and transparent by their owners, there are potential hazards associated with using them to store your cash. Since money stored on payment apps is generally not insured, it can be risky to use them for this purpose.

Risks of Storing Money on Payment Apps

Payment apps, also known as peer-to-peer payment apps, allow users to send and receive money electronically. For example, you might transfer $30 to a friend to cover your share of dinner or receive a $100 cash gift from a relative. These apps connect directly to your bank account, debit card, or credit card, enabling instant money transfers between users. However, if you don’t transfer the money you receive to a bank account you control, it can sit in the app, potentially at risk.

Lack of Federal Insurance

Cash stored on some payment apps might not be federally insured by the Federal Deposit Insurance Corp. (FDIC). Unlike most accounts at banks and credit unions, money kept on an app might not be protected if the company behind the app shuts down. Some apps offer “pass-through” insurance from a bank or credit union if you sign up for additional services, but this is not always the case.

Unclear Storage Information

User agreements for payment apps often lack information about where money is being held or invested, whether it is insured, and what would happen if the app owner or an entity holding the money failed.

Limited Access to Funds

If you need to use the money stored in your payment app, it may take days to transfer it to your bank account. While some apps offer instant transfers, they often come with an extra fee. This delay could cause financial issues, such as late fees or missed payments.

No Returns on Deposits

Unlike many bank accounts that accrue interest, peer-to-peer payment apps typically do not offer this benefit. This means you miss out on growing your savings through compounding interest.

Should You Move Your Money or Leave It in the App?

Until payment apps are set up to automatically move cash into a user’s insured account, it is advisable to withdraw any balances kept on these apps and shift them to insured accounts. According to the Consumer Financial Protection Bureau (CFPB), popular digital payment apps are increasingly used as substitutes for traditional bank or credit union accounts but lack the same protections to ensure that funds are safe.

Are Peer-to-Peer Payment Apps Regulated?

Payment technology companies that don’t operate as banks aren’t federally insured and aren’t overseen by federal regulators. However, they face close scrutiny from the CFPB and the Federal Trade Commission (FTC). On the state level, attorneys general have investigated issues such as how app companies handle consumer complaints, and some states are creating policies and passing laws to further regulate payment apps.

How to Use Payment Apps Safely

To safely use payment apps, follow these tips:

• Quickly move cash balances to an insured account.
• Set up multifactor authentication to protect your account.
• Verify a recipient’s identity before sending money.
• Regularly check your accounts for unauthorized transactions.
• Be cautious if a payment app is the only payment option offered by a business.

Some common scams to watch out for include:

• Scammers posing as legitimate businesses.
• Fraudsters “accidentally” transferring money to you and asking for it back.
• Scammers claiming you were sent more money than owed and requesting the extra cash back.
• Phony emails directing you to enter your password on a fake webpage.

The Bottom Line

While payment apps offer convenience, they aren’t ideal for long-term cash storage. To avoid losing your money, consider moving any app balances to an insured account at a bank or credit union. Additionally, enable multifactor authentication on the app and verify a recipient’s identity before sending money.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you with confidence and expertise.

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