Mobile payment apps such as Venmo, PayPal and Cash App have become increasingly popular in recent years. More than three-quarters of Americans have used these types of apps to send or receive money from individuals.
But despite the convenience and increasing use of P2P apps, there are also risks you should be aware of. The Consumer Financial Protection Bureau (CFPB) specifically warns consumers against storing cash in apps like PayPal, Cash App and Venmo. This is a habit you should avoid.
What are P2P payment apps and how do they work?
A peer-to-peer payment app is a type of digital payment platform that allows you to pay with another person using a mobile device or computer. When you register for a P2P service, you first connect your bank account, credit card or digital wallet. From there you can send or receive cash to other users registered on the same P2P service.
Depending on the P2P payment app, you may be able to send money. Other services may charge fees for transferring funds to your bank account – especially if it’s an international transfer. However, many P2P apps offer free payment options for sending cash between friends and family members. Depending on the app, non-expedited domestic transfers may also be free.
Is it safe to store money on P2P payment apps?
Despite their popularity and usefulness, P2P payment apps are not safe places to store money. Loading cash onto the apps or storing money there after receiving money from another user could put your money at risk.
Still, consumers are saving billions of dollars on peer-to-peer payment apps, according to the CFPB. However, this choice could be problematic for several reasons.
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Lack of federal deposit insurance: If you use a non-bank payment app, the money you store will not qualify for federal deposit insurance. On the other hand, if you transfer your money to an account at a member bank or member credit union, your funds should be protected up to the federal limit, even in the event of a .
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Unclear user agreements: Digital payment apps don’t always have clear user agreements that detail what would happen to customers and their money in the event of a company bankruptcy.
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P2P apps can invest funds with less supervision: Companies that own P2P apps often choose to invest customers’ funds stored in their accounts. However, as non-banks, these companies do not receive the same oversight as other financial institutions. Therefore, the investments that non-bank P2P companies make could, at least in theory, be at higher risk.
As mentioned earlier, storing money in apps like Venmo, PayPal, Cash App, and others could put your money at risk. However, there is another disadvantage that you should be aware of. When you invest money in such apps, you don’t have the option to do so.
If you’re looking for a safe place to store extra cash, consider one of the following alternatives instead.
High interest savings account
Whether you’re transferring money from a P2P app or looking for a way to save every month, a (HYSA) could be a good solution. This type of deposit account is available at both banks and . Therefore, it is easy to look for financial institutions that offer FDIC insurance or NCUA insurance to protect your deposits up to $250,000 (per depositor, per ownership category).
Additionally, HYSAs give you the flexibility to withdraw or deposit money from your account as needed. However, keep in mind that your financial institution may allow this per month.
If you shop around, it’s often possible to find competitive interest rates even on high-yield savings accounts. According to the Federal Deposit Insurance Corp. The average annual percentage yield () of a traditional savings account is 0.46% as of April 15, 2024. Still, APYs are well above the national average.
Current account with interest
Instead of keeping your money on a P2P app, it’s usually better to transfer excess cash to a bank account immediately. If you don’t already have a checking account, opening one might be worth considering.
In general, most people use checking accounts for spending and paying bills rather than for saving. Therefore, checking accounts are generally not known for their interest earning potential. However, there are certain types of checking accounts – so-called interest checking accounts or high-interest checking accounts – that often pay customers higher effective annual interest rates.
In addition to the higher APR, most interest checking accounts have the features of a regular checking account, such as: B. the authority to write checks and the ability to use a debit card. Note that some interest-bearing checking accounts may also incur higher monthly maintenance fees. So, depending on your priorities, you can also search or search for banks that offer fee waivers.
Certificate of deposit (CD)
If you want to set aside a specific amount of money for a short-term savings goal, another option that might work for you is. With a CD, you deposit a specific amount of money into a bank or credit union. These funds then remain with the financial institution for a certain period of time.
In exchange for not withdrawing your savings until the end of the CD term, your bank or credit union will give you a fixed interest rate that doesn’t fluctuate with the market. If you decide to withdraw money from your account early, you will usually have to pay a fee, which may cost you some or even all of your interest income, depending on the terms of the contract.
They are often (though not always) more attractive than interest rates on other types of deposit accounts. However, exact prices may vary depending on CD term and other factors. Therefore, it is always important to compare several offers. And again, you should make sure to choose a bank or credit union that offers government deposit insurance to protect your money.
Bottom line
No matter which banking alternative you choose, it is important to withdraw your money from P2P apps regularly. When you transfer your money from a P2P app to a government-insured deposit account, you can at least rest assured that your money is safe.
If you frequently use P2P apps, you should get into the habit of checking your balances a few times a month to ensure there are no forgotten balances left on your accounts. You can add this task to your monthly financial checklist, such as when you update your budget or review your credit card statements. Or set a reminder on your smartphone so you don’t forget.