Mobile payment services and digital wallets, such as PayPal and Venmo, have become increasingly popular, with reports stating that the total transaction volume across mobile payment services surpassed $1 trillion in 2022. However, US regulators have warned citizens against storing large amounts of money in these apps or replacing banks and credit unions with them due to the lack of government protections. The Consumer Financial Protection Bureau (CFPB) director, Rohit Chopra, highlighted that payment services “are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe”. While banks can go bankrupt, account holders are guaranteed up to $250,000 per account if a federally insured financial institution folds.
Quoting a recent report by CNN, US regulators are warning the public against storing large amounts of money in payment apps such as PayPal and Venmo. While these mobile payment services have become increasingly popular and have revolutionized the way people transact financially, they lack the same protections as traditional banks and credit unions, leaving users vulnerable to potential risks.
The Consumer Financial Protection Bureau (CFPB) director Rohit Chopra issued a statement last week, stating that payment services “are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe”. The statement also highlighted that more than three-fourths of US adults have at least used one payment app.
The biggest issue with payment apps and digital wallets is that they do not have the same federal protections as banks and credit unions. If a bank makes bad financial decisions and loses all of its money, the account holders will still have a certain portion of their money insured, and the US government will pay out the sum. However, payment apps offer no such protection.
While the probability is quite low, banks can and have declared bankruptcy in the past. In 2023, Silicon Valley Bank and Signature Bank both failed after a series of bad investments. Such incidents are not very frequent, but it is a possibility that people should be prepared for.
In case a federally insured financial institution folds, account holders are guaranteed to get back up to $250,000 per account. For the account holders of Silicon Valley Bank and Signature Bank, the US government lifted the limit and decided to cover the entire amount of deposits for every account holder.
It is important to note that while payment apps are convenient and offer a quick and easy way to transact financially, they should not be used as a substitute for traditional banks and credit unions. Users should be cautious and avoid storing large amounts of money in these apps. Instead, they should consider using multiple accounts to spread their money across different institutions to minimize their risk.
As the closing remark, while payment apps have changed the way people transact financially, they lack the same protections as traditional banks and credit unions. US regulators are warning the public against storing large amounts of money in these apps or replacing banks and credit unions with them. Users should be cautious and consider using multiple accounts to minimize their risk.
