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Payment Apps Are Convenient, But Storing Money There Poses Risks

Forming Money Habits Knowing Your Payment Options

According to a recent Motley Fool survey, about 75% of Americans trust digital payment apps more than, or as much as, traditional payment methods like cash or cards.

Two young people looking at phonesThe apps’ convenience and wide availability as payment options have made it increasingly easy to perform peer-to-peer (P2P) transactions like splitting a check, requesting funds, or checking out online in seconds; and making contactless, point-of-sale payments.

You probably are familiar with some of the most popular payment apps out there, but here’s a quick overview:

  • PayPal. The pioneer of P2P payment systems, PayPal today is used by individuals and businesses in more than 200 countries.
  • Venmo. Bought by PayPal in 2013, Venmo is popular for its social approach to making P2P payments. Both the sender and receiver of funds must live in the US.
  • Google Pay. Google Pay enables users to make in-app, online, and in-person payments with Android phones, tablets, or watches.
  • Apple Pay. Introduced in 2014 as a replacement for the magnetic stripes on the back of debit and credit cards for point-of-sale transactions.
  • Cash App. Cash App offers P2P transactions, direct deposits, a savings account, debit card, investing in stocks and Bitcoin, a tax-filing service, and personal loans.

Very convenient and efficient options in the digital age, right? However, a relatively new trend of storing money in these apps for future use has raised concerns. According to a 2023 NerdWallet survey, users keep an average of about $300 in their payment accounts, with some storing considerably more.

The reason for concern: Money held in these apps often lacks federal insurance protection.

Deposits stored in credit unions and banks are covered up to $250,000 by the National Credit Union Association (NCUA) and Federal Deposit Insurance Corp. (FDIC), respectively. When the 2023 collapse of First Republic, Silicon Valley, and Signature Banks sent shockwaves through the financial industry, people who kept funds there at least had peace of mind knowing their money was protected.

But what if an app like PayPal fell out of favor and closed its doors? Or Venmo suffered a major security breach? What happens to all of that stored money?

A few apps offer “pass-through insurance,” which protects against the collapse of the bank or credit union at which the app company holds the money for you. But if the app company itself fails, your money won’t be insured.

Check out a full breakdown of which apps offer a form of deposit insurance.

So where does this leave us?

It all comes down to how much of your money you’re willing to leave unprotected. Payment apps are a great option for quickly passing money back and forth to friends and family, as well as making digital payments to merchants. But there’s no substitute for a federally insured financial institution when it comes to keeping your money safe.

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