Thursday, June 15, 2023
Digital payment apps have gained a lot of converts in recent years, by allowing for quick exchanges of payments, and many consumers have taken to maintaining balances in these accounts. But the CFPB, in a public notice earlier this month, reminded consumers that these apps are not bank accounts, and money stashed in the accounts could be lost if the apps are forced to close-up shop.
Recent high-profile bank failures have been a stark reminder of the protections associated with funds on deposit at federally insured financial institutions. Federal deposit insurance, paid by federally regulated banks and credit unions, guarantees account balances up to a ceiling, which at present is $250,000.
"Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union accounts 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."
Digital payment apps were originally introduced as an easier way to exchange money between friends. But with time, many small merchants, particularly ecommerce merchants, began accepting payments through these apps as well.
The CFPB said more than three-quarters of adult Americans have used a payment app. (Morning Consult puts the number closer to 67 percent.) Younger Americans are the most prolific users; the CFPB estimates 85 percent of American between the ages of 18 and 29 have used one of the major nonbank payment apps. Based on the agency's analysis, transaction volumes across all digital payment apps exceeded $890 billion last year, and are expected to reach $1.6 trillion by 2027.
According to the recently released FIS Global Payments Report, 32 percent of ecommerce transactions (by value) and 12 percent of POS transactions (by value) last year involved digital payment apps.
"Until payment apps are designed to automatically sweep balances into a user's insured [deposit] account, consumers may need to take action to move their balances stored in payment apps," the CFPB wrote.
The consumer watchdog agency, in its public notice, said it isn't just the lack of deposit insurance that raises concerns about digital payment apps. The agency also took issue with the lack of specificity in user agreements, and the lack of regulatory oversight for nonbank payment companies generally.
"User agreements often lack specific information on where funds are being held or invested, whether and under what conditions they may be insured, and what would happen if the company or entity holding the funds were to fail," the agency wrote.
Also, there is no oversight of how funds left on deposit, or pending transfers, get invested. "Apps also earn money through fees on merchants and other ancillary services, like selling crypto-assets and offering affiliated financial products," the CFPB wrote.
The CFPB has regulatory authority over nonbank providers of consumer payment products, as well as a couple dozen very large banks that are active in consumer payments. It used that authority in 2022 to order six large tech companies to hand over information on how they harvest and profit from consumers' payment data.
Since before creation of the CFPB, nonbank payment companies have been subject to state laws and regulations. Those laws and regulations were written decades ago, however, with companies like Western Union and MoneyGram in mind. The Conference of State Bank Supervisors is said to be working on a prototype for a new digital money transmitter license to extend the reach of state regulatory agencies over digital payment platforms.
Meanwhile, attorneys general in several states have made clear they have eyes on these digital payment platforms. The AGs in six states and the District of Columbia, for example, previously issued warnings that consumers be vigilant against scammers when using P2P payment apps.
Plus, a bipartisan group of AGs representing 33 states responded to a CFPB request for comment on big tech in payments, listing common consumer complaints about such platforms, including complaints about customer service, account access and third-party scams. 
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