CFPB warns billions held in payment apps may not be federally insured

June 2 (UPI) -- Billions of dollars stored in digital payment apps have no guarantee of federal insurance, according to a warning from the Consumer Financial Protection Bureau.

FDIC insurance protects money in banks and credit unions, but the apps like PayPal, Venmo and Cash App lack that protection, meaning if a payment app business fails, your money may be gone. the agency warned in a statement Thursday.

"Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe," said CFPB Director Rohit Chopra. "As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to."

CFPB has issued a customer advisory for people holding money in the apps on how they can make sure their deposits are safe.

It warned the apps have different business models, using customer money in different ways to invest while generally paying no interest to customers. If that money is not held in FDIC or NCUA insured accounts, and the business fails federal deposit insurance does not apply.

According to the CFBP, more than three-quarters of U.S. adults use payment apps. Payment app use is 85% among 18-29 year-olds.

The money is not automatically swept into insured bank or credit union accounts. Instead, the app companies hold and invest the funds. That money is typically not subjected to the same oversight as insured bank and credit union deposits.

Some apps do offer pass-through insurance if customers take extra steps to get it like getting a company-branded card or choosing direct deposit.

But that kind of insurance protects customers from failure of the bank or credit union where the funds are deposited. It does not protect against the failure of the payment app business itself.

The CFBP report on the pay apps insurance issue includes a rundown of insurance eligibility for some of the most popular pay apps and how those apps use the money deposited.

The FDIC insures desposits in banks of up to at least $250,000 if the financial institution fails. The National Credit Union Administration provides similar insurance for credit union deposits.