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On June 1, the CFPB published an issue spotlight and a consumer advisory detailing the risks associated with storing funds on digital payment apps, particularly in the event of a platform’s financial distress. Specifically, the issue spotlight presented the following findings with respect to consumer funds stored on payment apps:

  • More than three quarters of adults in the United States have used a digital payment app, with use being especially prevalent for younger adults. Approximately 85 percent of consumers aged 18 to 29 have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893 billion, and is projected to reach approximately $1.6 trillion by 2027.
  • When users receive payments via digital apps, the funds are typically not swept into the recipient’s bank account. Instead, companies hold and invest the funds. These activities are not typically subjected to the same oversight that an insured bank or credit union faces.
  • Digital payment app companies do not necessarily store customer funds in an insured account through a business arrangement with a bank or credit union. The company’s investments carry risk and if it were to fail, customers could lose their funds.
  • User agreements for digital payment apps often lack 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 the entity holding the funds were to fail.

Putting it into Practice: The CFPB and other regulators continue to focus their attention on digital payment apps, which are becoming increasingly popular as substitutes for traditional banking services. In a statement released concurrently with the issue spotlight and consumer advisory, CFPB Director Rohit Chopra cautioned that tech companies expanding into the banking and payments sector will be expected to abide by the same safeguards that local banks and credit unions have long adhered to. Given the growing scrutiny from regulators, tech companies considering expansions into the banking and payment sector, as well as traditional financial services companies considering expansions into the tech space, should review relevant agency guidance in order to ensure that any new product and/or service offerings are compliant.