CFPB Highlights Risks for Consumers Storing Funds on Nonbank Payment Platforms

In an analysis of deposit insurance coverage on funds stored through payment apps, the CFPB Office of Competition and Innovation and Office of Markets highlighted that U.S. consumers store "billions of dollars" on these apps and that "funds stored in a payment app may be at significantly higher risk of loss for a consumer than if it is deposited in an insured bank or credit union account." The CFPB found that payment platforms are exposed to risks of (i) insolvency if the consumer funds invested decline in value or (ii) bankruptcy if customers demand their funds all at once.

In its analysis, the CFPB explained that banks and credit unions are required to report their total deposits on a regular basis; nonbank payment platforms are not subject to the same regulations. The CFPB asserted that payment platforms' user agreements are often unclear on which consumer funds are being held or invested and the conditions under which the funds are insured at a partner bank. The CFPB said that for payment platforms that advertise deposit insurance, funds are only protected against the failure of the bank or credit union the payment platform is partnering with, not against the failure of the nonbank payment platform itself.

Further, the CFPB stated that while many payment platforms are regulated as money services businesses ("MSBs"), they are not subject to ongoing federal supervision for "safety and soundness" requirements like traditional depository institutions. While MSBs may be subject to safety and soundness requirements at the state level, the CFPB said that their regulatory restrictions regarding consumer investment types vary per state, with some states having no restrictions at all. The CFPB warned that this could cause some MSBs and payment platforms to invest funds in "potentially risky" securities.