The CFPB has issued an “Issue Spotlight” titled “Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps.”   The report was accompanied by a consumer advisory on payment apps. 

Issue Spotlight.  To explain its focus on deposit insurance coverage of funds stored on payment apps (or P2P platforms), the CFPB points to the recent crypto asset platform collapses and bank failures and the growth of non-traditional financial services platforms.  According to the CFPB, “[t]hese events have spurred renewed attention on the varied types of financial institutions consumers use and the extent to which consumers’ funds at those financial institutions are protected from losses.”  The CFPB reports that many payment apps offer stored value accounts that consumers can use as another payment method, and as a place to hold funds received from a payment or loaded into the account.  The CFPB estimates that U.S. consumers have billions of dollars stored on non-bank payment apps.

Key findings in the report include:

  • When users of payment apps receive payments, instead of automatically sweeping the funds to the recipient’s linked bank or credit union account, app companies will often hold and invest the funds.  As a result, such funds lack deposit insurance because they have not been deposited with an FDIC-insured bank or NCUA-insured credit union.  In addition, such investments expose the company to the risk of insolvency if the investments’ value declines and, if a non-bank payment app were to go bankrupt, consumers could lose their funds.  
  • Even when an app company claims that it holds customer funds on deposit at an FDIC-insured bank or NCUA-insured credit union in a manner that is consistent with FDIC or NCUA pass-through deposit regulations, such a claim is very difficult to verify before a bank or credit union fails. 
  • User agreements for payment apps often do not provide information on where funds are being held or invested, whether and under what conditions they may be insured, and what would happen if the payment app company or the entity holding the funds were to fail.
  • To the extent they qualify as money services businesses, non-bank payment app companies may be subject to state laws that restrict their investments.  However, state laws generally do not require that customer funds be stored in or automatically swept into insured accounts.

The CFPB concludes the report by stating that it will continue coordinating with other state and federal regulators to monitor the evolution of this segment of the payments ecosystem and consider whether further steps should be taken to protect consumers.

Consumer Advisory.  The advisory is intended to make consumers aware that funds stored on a payment app are at significantly higher risk of loss than if they were deposited in an insured bank or credit union.  In the advisory, the CFPB warns consumers that funds stored on a payment app are often not protected by deposit insurance and discusses the potential consequences for consumers when their funds are uninsured and the payment app’s business fails.  It also discusses the potential availability of pass-through insurance and what protection such insurance provides.  The CFPB provides a “tip” to consumers that they should send themselves reminders to move their balances from their payment apps to their linked insured accounts.