Why the CFPB Just Issued a Warning About Payment Apps

The risks of storing money in your Venmo account.

Payment apps like Venmo and Cash App have made splitting bills and paying your friends easier than ever in a world where fewer and fewer of us are carrying cash.

These peer-to-peer payment apps have proliferated in recent years. Venmo and Cash App are the most popular options, but Apple Cash and Google Pay also offer similar functions. And PayPal has existed for years as a way of sending and receiving money online. More than 80% of consumers aged 18 to 29 have used one of these apps.

But this convenience can come at a cost. Unlike traditional financial tools, these apps aren’t beholden to many banking regulations that protect consumers. While using these apps to pay friends and family is generally harmless, the issue arises when people start treating these apps as replacements for traditional banking and fail to take basic precautions against scammers.

The Consumer Financial Protection Bureau (CFPB) issued a warning last month about storing large amounts of money in payment apps. This is because balances are not typically FDIC-insured, so if a payment app like Venmo collapses, you could lose some of your funds. Venmo also offers features that make people more likely to treat them like banks, such as a debit card that links with your cash balance.

We most recently saw a series of bank collapses with Silicon Valley Bank and First Republic, among others. This highlighted the importance of keeping your funds in an FDIC-insured institution, even though ultimately the federal government stepped in to cover well beyond the limit of $250,000 per depositor. Apps like Venmo and Cash App aren’t banks at all, so it’s far less certain regulators would save users if something happened to them.

Payment app users have also become prime targets of scammers.

In one common scam, the scammer sends you money via a stolen credit or debit card and then requests that you return the money, claiming it was sent in error. After you send the money back, the bank or credit card company reverses the charge by taking the money from your account. Scammers may also impersonate someone you know by changing their name or profile picture and requesting money.

Venmo and similar apps offer little recourse if you fall for one of these scams. The anonymous nature of these apps makes them particularly tricky to navigate safely. If you send money to a stranger, you likely won’t get your money back.

The convenience of these payment apps makes it easier to let your guard down. But should you choose to use them anyway, there are things you can do to ensure you don’t become a victim of fraud.

How to Protect Yourself on Payment Apps

None of this means you should never use Venmo or other apps. It just means you need to be extra careful.

First, you should move the money you receive into your bank account as soon as you get paid. Some people choose to maintain a balance on a payment app for the next time they owe someone money, but you’re taking a risk when you do this. Use an FDIC-insured bank account instead.

Second, don’t send money to people you don’t know, and make sure you enable notifications and alerts for every transaction. This way you know the moment fraudulent activity happens.

You can also take basic security measures, like creating a strong password and enabling two-factor authentication when possible so your account is less likely to get broken into.

Why I Don’t Like Payment Apps

I’ve only used Venmo a handful of times, and for the longest time, I refused to download it. My biggest complaint about it is the social function. Venmo lets you use text and emojis to describe payments and allows you to add friends like a social media app. One of Venmo’s most unique features when it was released was the global social feed. This made transactions public across the globe. After some criticism, Venmo reversed course, and now you can only see the transactions of people you’re friends with on the app. You can also make your transactions private if you want.

The fusion of money and social media is still what makes Venmo appealing to many users. But I can’t say I see this as a selling point. That’s not to say that we shouldn’t talk about money or that it should always be private. I’m on the record as saying we should be talking about money more. But money and social media just don’t make a good mix, and anything that connects to a bank account or credit card should probably be private for your own security.

As long as you understand that Venmo is no replacement for banking and that it does come with greater risks than traditional finance, it can be a great tool for quickly paying someone for your share of a bill.

Even in the year 2023, we still use 1970s technology for most payments. Fintech apps offer critical innovation in this area, but the lack of protections leaves much to be desired. For now, you should understand their limits and tread carefully.