Payments 3.0: How Funds Are Really Protected

In June, the Consumer Financial Protection Bureau issued a Consumer Advisory and Issue Brief warning users of payment apps like PayPal, Venmo, and Cash App that their money might not be covered by FDIC deposit insurance.

The problem with this approach is that it might actually increase the risk for consumers.

In its “Issue Spotlight,” the Bureau writes, “companies are also exposed to risk if customers demand their funds all at once,” and warns that customers could lose money if this happens. Yet, in its Consumer Advisory issued on the same day, in a highlight box, the Bureau tells consumers: “Tip: Send yourself a reminder to move your money from the app to your insured account.” It even offers a link so consumers can send themselves an e-mail with the subject, “Your money is at greater risk when you hold it in a payment app, instead of moving it to an account with deposit insurance.”

Could the CFPB create the very condition that it thinks could put consumer funds at risk? While I certainly would like to think that the Bureau takes the “Protection” part of its name seriously, it seems its communication strategy needs some work. This juxtaposition of recognizing the risk and then calling for consumers to move their money feels tone deaf in the wake of the Silicon Valley Bank failure, which was precipitated by a similar run on deposits.

Even if the CFPB’s Advisory and Spotlight do not cause a run on deposits, they nonetheless present the facts about payment apps in a way that seems to muddy the waters on protection.

While the Advisory and Spotlight mention that deposit insurance only protects a depositor if a bank fails, the recommendation still is to move money into an insured account. But if that account is offered through the app provider, and that provider fails, depositors still face risks. If those funds are in a bank, the contract between the bank and the provider may protect those funds, or a bankruptcy court could treat any funds in accounts as belonging to the provider. Either way, Federal Deposit Insurance Corp. protection is not a panacea. The real risk depends on how much money consumers have in the app, and for how long.

Additionally, the Bureau says that, despite thousands of pages of disclosure rules, “it is not always clear to consumers when they are dealing directly with a bank or with a nonbank.” But FDIC pass-through insurance means dealing with a bank directly is not always necessary.

Although the Bureau acknowledges the existence of pass-through insurance, it writes that, in addition to the regulations governing such insurance, “some nonbank payment apps place pre-conditions on their products.” But in the event of a bank failure, the app provider does not decide who gets insured. That’s up to the FDIC, which laid out in 2008 that if the funds are 1) at an insured institution, 2) in a custodial account, and 3) attributable to specific individuals, they are insured.

Finally, funds held by companies with Money Transmitter Licenses are registered with the U.S. Treasury and regulated by the states. Most states have liquidity, net worth, and other requirements to safeguard individual funds.

In light of all of this, payments providers of all kinds should make sure that consumers know how their funds are protected. While it might seem redundant, given the disclosures required by the CFPB and other regulators, the Silicon Valley Bank failure taught us how fast negative messages, and panic, can spread among customers. Regular reminders about how deposits are protected can help prevent the spread of misinformation, regardless of the source.

—Ben Jackson bjackson@ipa.org