(FRASER).
Can it be that more than half
of US consumers store money in general-purpose payment apps like Venmo, PayPal, and CashApp? That's around 130 million people. One survey estimates that those who do store money in general-purpose payment apps have almost $300 in the apps. If these estimates are correct (reliable numbers are hard to come by), that works out to billions of dollars.
Although billions are a minuscule amount of money compared to the $18 trillion in US deposit accounts, it's still money. As onetime Illinois Senator Everett McKinley Dirksen famously and apocryphally said, "A billion here, a billion there, and pretty soon you're talking real money."
So it should come as no surprise that last month the CFPB deemed it necessary to remind consumers that money in payment apps is not necessarily a federally insured deposit. The CFPB points out that "as the market for financial services has evolved, it is not always clear to consumers when they are dealing directly with a bank or with a nonbank. As a result, consumers may not fully appreciate when, or under what conditions, they would be protected by deposit insurance."
Some money in payment apps is insured—for example, money held on app-branded cards. Some is eligible for pass-through insurance, depending on consumers' taking certain steps such as enrolling in direct deposit. In addition, different state laws offer more or less protection. The CFPB also points out that deposit insurance does not protect consumers in the event of the failure of the nonbank payment provider itself. So there is a lot of consumer-to-consumer, account-to-account variability in the protections offered.
Lack of consumer awareness is not unique to our country. A spring 2022 survey of Canadians shows they also assume that consumer protections limited to one type of product or services extend to all. The Financial Consumer Agency of Canada found that one-third of Canadians agreed with the statement, "As a consumer, my legal protections are the same when using a bank or a fintech." An additional third were unsure.
Based on Atlanta Fed data, the money sitting around in apps is not necessarily being used to make payments. That could be because, in context, it's not that much money. The Survey and Diary of Consumer Payment Choice find that only about half of 1 percent of all payments by number and about 1 percent by value were made with money stored in apps in October 2021. (App payments funded by a credit card or bank account are counted separately.)
The CFPB's warning on deposit insurance was treated as news. The Washington Post, CNET, the Associated Press, CNBC, Fox Business, Yahoo Finance, and more covered the story. Maybe it's not news to you payments experts out there, but it is news to your customers and even perhaps to some of your business partners. Just a reminder that it never hurts to clarify the terms of the deal.
By Claire Greene, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed