Recently, you may have seen in the news media, or in our blog posts, that the Federal Deposit Insurance Corporation (FDIC) bailed out several banks. Due to swift action, these appear to be isolated incidents; however, it has focused businesses on the need to ensure their funds are balanced and properly insured.
What hasn’t been discussed, until recently, is the storage of funds in cash or payment apps. These apps such as Venmo, PayPal and Cash App, according to the Consumer Financial Protection Bureau, are not safe storage places for your funds. These apps are typically not subject to the same banking rules and regulations, and they are also not supported by FDIC coverage. That means that funds stored in these apps will not be protected in the event of a run on the service (masses of users withdrawing funds at the same time) or in the event of failure of the service.
There are some services that may be eligible for pass-through insurance coverage such as a savings account opened through the app’s partner bank. You may also be required to verify your identity to be eligible for coverage. That would all be in the terms of service and fine print that most users simply accept because they are too long to read.
What can you do? Consider setting up a transfer or bill pay link to your cash application. Then you can add funds to your app at any time without storing the funds directly in the app. You can also connect your credit card to your app, such as PayPal or Apply Pay. The process looks the same at the store or online, but you are funding your transaction from your credit card to your app. This might make sense for security purposes as well so that your credit card information is not directly transmitted to an online or unknown seller. We highly recommend face id or dual-factor authentications (2FA) for any payment application you use. Never use these apps on public wi-fi. Even a password protected wi-fi can be mimicked and should not be used for banking transactions. Stick to your cellular data or your personal wi-fi for those actions. Also, make sure that your tab is closed when you are done. It is extremely easy to leave these open, especially on the newer Apple phones. Many non-profit groups and clubs use PayPal or Venmo for payments for meetings or donations. There is nothing wrong with this approach; however, make sure to transfer those funds to a protected and insured account once your event has concluded.
These apps are convenient and despite some of the misunderstandings of tax forms and transactions and the lack of FDIC insurance coverage, they are not going to disappear. They allow transfers of funds to friends and family members in a convenient and secure manner. Keep in mind that funds you store in these accounts may be at risk and should be transferred to your FDIC protected accounts on a regular basis.
