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After a fraudulent $99 charge hit her PayPal account last month, Robin DesCamp encountered one frustrating bump after another as she navigated the world of digital payment app policies.
She flagged the unfamiliar charge to PayPal and her bank, then sank hours into spotty customer service calls and unclear user agreements. After a month of back-and-forth, she got her money back. Now she is urging her friends who use digital payment apps to be more diligent - or avoid them altogether.
"I'm just one person," said DesCamp, a lawyer in Bend, Ore. "If you extrapolate that across millions of transactions they do every month … a lot of people are too busy and too harried to say: Wait a minute."
Almost three-quarters of U.S. consumers used payment accounts such as PayPal, Venmo and Cash App in 2023, according to the Atlanta Federal Reserve - up from 68 percent in 2022. In a 2023 report, the Consumer Financial Protection Bureau estimated that payment volume on these apps quadrupled between 2018 and 2022, with usage especially concentrated among younger Americans.
And these apps are no longer just for simple payments between friends. These days they're "increasingly used as substitutes for a traditional bank or credit union account," according to the 2023 CFPB report. For example, some app users receive their paychecks via Cash App or PayPal, while others leave their funds sitting on the apps for future payments, treating them effectively like bank accounts.
The CFPB and other watchdogs say it's often unclear if such money is insured against risky investments or fraud. State laws regulating how payment apps protect stored funds vary, creating a confusing patchwork that's compounded by customer service challenges. And millions of Americans operate in the dark about how payment apps use or invest those funds.
Here's what you need to know.
• Should you leave money on your payment app?
Not a large share of app users do this - only 6 percent, according to a March 2022 Consumer Reports survey - but consumer groups have flagged it as an especially risky move.
If you have a checking or savings account with a traditional bank that collapses, the Federal Deposit Insurance Corp. covers up to $250,000 per account.
A digital payment app, however, doesn't carry the same protections for the funds you leave on it - so if its parent company struggles or fails, that money is vulnerable. While many apps partner with FDIC-insured banks to offer "pass-through" coverage - which insures against the failure of the financial institution connected to your account - this coverage doesn't extend to the app itself.
To qualify for pass-through insurance, most funds on Venmo, Cash App and PayPal must meet specific requirements. Consumers can secure coverage on Venmo if they sign up for direct deposit, or use the app to cash checks or buy and sell cryptocurrency; PayPal offers insurance to customers who use direct deposit or crypto or who open an app-sponsored debit or credit card. Cash App's customers must link their account to an app-sponsored prepaid card. And some digital payment apps, including PayPal, have started to offer FDIC-insured savings accounts.
These companies "want people to feel confident that they have deposit insurance using something that doesn't have deposit insurance, and they're willing to do things that they wouldn't otherwise do because of that protection," said Peter Conti-Brown, an associate professor of legal studies and business ethics at the University of Pennsylvania's Wharton School.
This confusion around deposit insurance coverage takes advantage of consumer inattention, Conti-Brown warned.
"The answer is not that they're lying to you," Conti-Brown said. "The real answer is: What does the fine print say?"
The Financial Technology Association, a lobbying group that represents many of the largest digital payment apps, defended the transparency of these services. In a statement to The Washington Post, Penny Lee, the group's president and chief executive, said digital payment apps are transparent, safe and regulated.
• How do app companies use your money?
Payment apps make most of their money by charging fees from consumers who use a credit card or pay for instant money transfers. Apps that offer credit cards also receive swipe fees charged to businesses and interest charged to cardholders.
And they make money by investing the user funds left on apps.
It's another example of how these payment-app companies differ from banks, which are required to hold enough cash on hand to meet daily withdrawals as they use the rest of their assets for lending. Moreover, regulations prevent commercial banks from using depositors' money for riskier investments like securities, commodity futures and options.
This federal oversight doesn't exist for payment apps. In some states, app companies have free rein to invest in speculative ventures. Many apps also have unclear user agreements that don't specify where users' funds are stored - or what would happen to them if the payment app were to fail.
Venmo and its parent company PayPal, for example, say they invest funds in "liquid investments in accordance with state money transmitter laws." Those liquid investments - any assets that can be converted into cash - could range from less risky government bonds to more volatile stocks and cryptocurrencies. Other payment apps, such as Google Pay, don't specify where consumer funds are stored.
User agreements for digital payment apps need to do a better job of clarifying where funds are being held and explaining under what conditions they may be insured, and what would happen if the parent company fails, watchdogs say.
"I would very strongly argue and advocate for full disclosure of any risks, especially financial risk, but also privacy risk and any kind of losses that consumers may suffer," said Joanna Stavins, a senior economist and policy adviser at the Boston Federal Reserve. "As long as people are aware of the trade-offs, they can make educated decisions."
• How do states regulate payment apps?
Payment apps aren't subject to robust federal regulation, but more than a dozen states have passed laws in recent years regulating "net worth, bonding and permissible investments" for money transmitters, which include digital payment companies.
But this oversight is still too fragmented, experts warn. Even in states that have pushed tougher rules, "permissible investments" vary from risky securities to more stable bonds. Legislative efforts so far have left out deposit insurance protections or requirements for payment apps to automatically sweep balances into an insured account.
The decentralized nature of payment app regulation makes it difficult for consumers to understand how they work, said David Birch, a U.K.-based digital financial services adviser, adding: "The regulatory landscape in the U.S. remains needlessly confusing, overly expensive and complex."
In a push for tougher rules at the federal level, the CFPB proposed a rule in 2023 that would require non-bank financial companies handling more than 5 million transactions a year - including many digital payment apps - to follow the same rules as traditional banks and credit unions, such as capital requirements and investment restrictions. Public comment on the rule closed in January, and the bureau plans to finalize its proposal later this year.
The Financial Technology Association's Lee argued that the CFPB proposal would stifle innovation in the financial technology sector, adding that digital payment companies should be incorporated "more fully and directly into the national payments system" rather than "layering on regulation simply for the sake of more regulation" and being lumped in with traditional banks.
• What are other risks?
That same Consumer Reports survey found that 6 percent of users have sent money to the wrong person, to a scammer or to someone who never got it. Whether these people were ensnared by a fraud scheme or simply mistyped their lunch date's Venmo username, those issues can be hard to reverse, Stavins said.
There's less risk if consumers have a good relationship with their bank, since traditional financial institutions are required to protect consumers, she said. But for apps, "It's on the consumer to make sure they're not sending money to the wrong person," Stavins said.
Payment problems can also lead to customer service nightmares like DesCamp experienced. About 77 percent of people who reached out to a payment app to resolve an issue have faced at least one problem during the process, and 1 in 5 reported not being able to resolve their most recent issue, according to Consumer Reports.
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