The Consumer Finance Protection Bureau warned consumers this week that using cash applications like Venmo or PayPal puts their money at risk.
If consumers don’t take action, the CFPB warned that billions could be lost if one of these apps were to ever fail.
The federal agency said that unlike money stored at traditional banks, funds in these accounts do not carry federal deposit insurance coverage. Most banks are Federal Deposit Insurance Corporation (FDIC) members, which protects up to $250,000 per depositor.
In cases of bank failures, the federal government ensures depositors access to their funds.
"If the nonbank payment app's business fails, your money is likely lost or tied up in a long bankruptcy process," the CFPB said. "You might be standing in line with other lenders to the failed app, waiting to see if you can get any of your money back after the business is unwound."
SEE MORE: Teens can soon send money through Venmo
The CFPB said 85% of people ages 18 to 29 use such apps. The agency added that in 2022, cash apps processed $893 billion in transactions, an amount that is expected to increase to $1.6 trillion by 2027.
"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."
While the CFPB is not outright discouraging the use of these apps, it is encouraging users to immediately transfer any funds into an insured account, like one at a traditional bank.
Trending stories at Scrippsnews.com