How to Keep Your Money Safe with Payment Apps

The Consumer Financial Protection Bureau recently issued a consumer advisory message regarding payment apps and the risky lack of deposit insurance on stored funds.

That may not sound like a big deal to you, but there are plenty of reasons why you should care about the safety and soundness of your hard-earned money. Let’s take a closer look.

What are payment apps?

Mobile payment apps let you make purchases and send/receive money using your smartphone as opposed to entering your credit or debit card or paying with cash. You can typically start using the app as soon as you’ve downloaded it and linked a funding method.

With some mobile payment apps, you can fund your new online account with your existing debit card or bank account. When you use the app to buy something or send money, the funds are deducted from the account balance on the app. When you receive money, the funds are added to your account balance.

Other mobile payment apps are linked to your existing bank account. When you use the app, money is taken straight from the account you’ve chosen and the app acts more as an intermediary.

These non-bank payment apps have seen a huge surge in popularity in the last few years, and for good reason. Apps like Cash App and Venmo allow users to send money back and forth for reimbursements or purchases quickly and easily, sometimes even instantly for a small fee.

In fact, a CFPB survey found that around 85% percent of consumers ages 18 - 29 have used a person-to-person payment app. So what’s the harm in storing funds here as opposed to a more traditional account at a bank or other financial institution?

The answer comes in the form of deposit insurance.

What is FDIC insurance?

The vast majority of banks and credit unions in the United States are protected by federal deposit insurance. At the time of this writing, FDIC protection comes standard with $250,000 in coverage – per depositor, per eligible account type or ownership category.

For the account holder, this means that your money is safe and protected up to the legal limits in the unlikely event of a bank collapse. OMB also offers additional products for eligible customers that can provide depository insurance beyond the FDIC limits.

What’s the risk in not having FDIC insurance?

On the other hand, non-banking person-to-person payments apps, like those previously mentioned, typically do not offer any sort of federal insurance because those funds are not held at a financial institution. If these apps were to ever experience a financial collapse, there is no guarantee any of the funds stored there would be safe or recoverable. Even if you could recover your funds, it’s typically after a complicated and lengthy bankruptcy process on behalf of the company housing your money.

Different apps also have different user agreements, so it’s important to read the fine print when establishing a financial relationship with a new app. This will allow you to see exactly how your money will be handled and what rights you have as the user.

Are payment apps safe?

Payment apps, sometimes called mobile wallets, are generally safe for individual transactions because they use tokenization and encryption for security. Tokenization creates a unique number that can’t be hacked, which renders ordinary hacking methods useless. Plus, it’s tough for someone to hack directly into your mobile payment app account. So, in general, you don’t have to worry about losing your bank account information. It’s also important to note that payment apps should only be used for small amounts of money and only for certain transactions.

However, it’s easy to make a mistake with mobile payment apps. Let’s say you have a group of friends paying for lunch at your favorite restaurant. They all use the same payment app. You pay for lunch at the restaurant, and your friends reimburse you through the app. Suppose your username in the app is “James1234”. But there is another username that’s similar in the payment app, and it’s “James1235”. If one of your friends chooses the wrong account to send the money to, it will be challenging to get that money back because there are little to no safeguards with payment apps. On the other hand, banks have transaction dispute departments that can specifically look into any issues with your transactions.

Also, payment apps offer easy targets for scammers and fraudsters to infiltrate. All it takes is a hacker getting your phone number, knowing you have a payment app on your phone, and then tricking you into verifying bank account information to steal your credentials. That hacker might be able to get your mobile payment account information (but not hack any transactions), just enough to make you believe they are a legitimate customer service provider from your bank.

We cannot stress enough that OMB Bank will never ask you for passwords or login credentials for your online banking. If you receive a message asking for that information, it is a scam and should be reported to us immediately.

Can Payment Apps Be Hacked?

Yes, they can. You could accidentally download malware to your smartphone that sends your personal information to a hacker by opening a phishing email or you could download an app that looks legitimate, but is actually a fake app that steals your phone’s information.

Forbes noted in 2022 how a Russian hacker could trick Apple Pay and Samsung Pay into sending money to hackers rather than to legitimate sources, like the New York City Transit system.

How Can I Use Payment Apps Wisely?

If you really want to use a payment app and enjoy the convenience while keeping yourself protected, there are some best practices to follow.

1. Create a second bank account with limited funds to connect to mobile payment applications. If there is a hack or you send too much money, your losses will be minimal.
2. Register a credit card rather than a bank account or a debit card because credit cards provide extra user protection. Also, credit cards have spending limits. You can also stop payments on credit cards very quickly.
3. Regularly review financial statements to check for signs of fraudulent transactions. You can set up alerts to send messages about too many transactions or suspicious activity.
4. Verify that the money being sent is going to the correct recipient. If you receive any messages through users on a payment app, make sure it is from someone you know.

4 Main Limitations of Payment Apps

1. Hidden Fees Payment apps may boast their “free payments” without any fees. However, you might pay fees when using a credit card and a payment app. Some payment apps will have a fee to speed up the transaction process. You might pay between 2 and 3 percent for “instant” payments rather than waiting the standard amount of time.
   
   
2. You May Not Know How or Where the Money Is Stored With a Payment App Just like mobile banking, you have access to electronic funds in a payment app. Do you know where these funds are stored? Do you know how payment apps use these funds when you’re not making payments? What happens if the payment app suddenly stops functioning or the company no longer exists?
   
   If you do choose a payment app, do your research and ask questions about where your money is stored when you’re not using it. Also, read the fine print of the terms of service and privacy policies before committing funds to a payment app. Sometimes, banks will partner with a payment app for easier access to your mobile banking tools. If so, talk to your financial institution regarding this partnership. OMB has a proud partnership with Zelle, which you can learn all about here.
   
   
3. No Interest Earned When Storing MoneyAnother limitation of payment apps is that you don’t get a return on your investment. When keeping your money in a savings account or interest-bearing checking account, your money earns interest until you need to use it. If you keep larger amounts of money in a payment app, it just sits there.
   
   
4. Delay in Accessing Money If There Is a Problem If there is a problem with the payment app, you may face delays in accessing your funds. Customer service with payment apps might not be consistent from service to service. Banks, including us, have specific processes in place to deal with wayward transactions.

Know when to use a bank account and when to use a payment app

It’s strongly recommended to only keep a balance in your payment apps that you would be comfortable losing and regularly transferring the bulk of your funds into an insured bank account, such as a checking or savings account. It may even be helpful to set a recurring reminder to transfer unused funds once a week, or whatever frequency makes sense for your situation, to help maintain the amount you need to cover any payments you plan to make through the app.

There is also an elevated risk of fraud when using an unmonitored payment app. OMB has a dedicated section for online shopping and payment app scams on our extensive fraud and security page.

All-in-all, payment apps certainly have their perks and they aren’t inherently bad. Just remember, when it comes to your savings, keeping your hard-earned money safe and secure should be top priority. To learn more about OMB’s different account offerings, check out our website or contact one of our bankers.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.