Is your cash safe in digital wallets? CFPB chief says more regulation needed

After high-profile bank collapses sent shockwaves through the banking system last month, regulators also hold some concerns about digital wallets and money transfer apps that consumers often use as bank accounts.

“I’m very worried,” said Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB), during a Tuesday event hosted by the Washington Post.

“A lot of people are storing money in peer-to-peer apps and online payment systems,” he continued.

“Apps like CashApp, Venmo, Paypal have become part of the digital wallets of so many Americans, but many may not know whether those funds are insured or not.”

Many of these apps are regulated as money transmitters — commonly used for international remittance payments — instead of banks, Chopra said. Banks are subject to stricter federal regulation and oversight. Banks overseen by the Federal Deposit Insurance Commission (FDIC) are also backed up by up to $250,000 in deposit insurance per account.

“Many people think of this as like a bank account, as a place I can store funds, but the reality is it’s not like a bank account and there are certain circumstances where those balances may not be fully insured,” he said.

Both Venmo and CashApp fall under FDIC insurance for their partner banks, according to their websites, but that insurance would not apply if the companies themselves were to fail.

Chopra recommended that people store very little money on these apps and rather keep money in traditional banks, especially low-income people. The growing popularity of the apps also brings an increased need for regulation, he argued.

Accounts with PayPal, which owns Venmo but also runs a separate money transfer app, are only insured by the FDIC if they are part of the PayPal Savings program, according to its site. Basic accounts are not covered.

Customers who use debit cards through these services — PayPal, Venmo and CashApp all offer similar debit programs — are covered through the apps’ partner banks’ FDIC insurance.

“We as the regulators have to stay ahead of the game because we want families and businesses to know that their money is secure from attacks, from runs and from instability,” Chopra said.

PayPal had over 429 million active accounts as of Q1 last year, totalling $323 billion in total payments.

Regulation is also key to ensure the prevalence of relationship banking instead of relying purely on digital services, Chopra said.

“I think it would be a big mistake for the United States to just copy how China’s financial system is dominated in many ways by WeChat Pay, AliPay when it comes to payments,” he said. “We need to make sure we have relationship banking even as digitization accelerates.”

The speed of the Silicon Valley Bank and Signature Bank runs last month are a symptom of digital banking, Chopra said, where customers can withdraw their funds from an institution nearly instantly on their phones.

“It’s a reality that we can’t fully stop,” he said. “I don’t think there’s a way to put the genie back in the bottle when it comes to 24/7 fast communication. It’s a reality we must accept and incorporate accordingly.”