Are you carrying a Venmo balance? How about Zelle? Cash App or PayPal?  More than 75% of U.S. adults have used some form of payment app, and that number goes up to 85% for consumers under age 29, according to data from The Pew Research Center.

We get how it happens. You go out for a celebratory dinner with a group of friends, but only a few of you have cash, so you offer to put the whole tab on your credit card — you might as well snag those rewards, right? — and then over the course of the next few days (or, hopefully, immediately) your friends all transfer the money they owe you into your account… But then life goes on, and there’s a chance you may simply forget that money is even there — or you may even start to view your app as a little slush fund for a vacation, or even “mad money” since, after all, you’ve already paid the credit card bill.

The thing is, it’s a problem. Such a big problem that Consumer Financial Protection Bureau (CFPB) issued a warning in June about the fact that users are leaving balances totaling billions of dollars in the apps themselves rather than transferring those funds back to their accounts at credit unions or banks. The big issue is that these funds aka your money — while it is in the hands of the apps — is not insured. And, as we saw earlier this year with a spate of bank failures (remember Silicon Valley Bank and Signature Bank?) that is a potential danger.

“Deposit insurance coverage would only apply to funds which are held on deposit at an NCUA-insured credit union in the unlikely event of a failure. If the consumers’ funds have not been deposited into an account at the bank or credit union, then those funds would not be eligible for deposit insurance coverage,” the CFPB advised.

Unfortunately, consumers are using these apps as if they are banks or credit unions — without a second thought about the consequences. “Popular digital payment apps are increasingly used as substitutes for a traditional bank or credit union account, but lack the same protections to ensure that funds are safe,” says CFPB Director Rohit Chopra. “As tech companies expand into banking and payments, the CFPB is sharpening its focus on those that sidestep the safeguards that local banks and credit unions have long adhered to.”

The question is: What do you do now? We get it (and we’re with you, btw) you’re not going to stop using these apps. In 2022, approximately $893 billion was transferred on various apps, and that number is projected to reach approximately $1.6 trillion by 2027, according to data from The Consumer Financial Protection Bureau. That’s because they’ve made it ridiculously easy to transfer money and pay for myriad things. No matter which app you’re using, you don’t have to write a check or carry large amounts of cash. Just tap a few times on the screen, and a deposit or withdrawal will be immediately reflected in your account. The point to keep in mind: Don’t maintain a balance. And while you’re at it, follow the following safety guidelines:

• Never share your login information: 10% of all payment app users say they’ve fallen victim to a scam, according to data from the Pew Research Center.) How do you keep your login information as safe as possible? Don’t use the same username or password for multiple websites (and please don’t use “password” as your password.) Choose a password with at least 15 to 20 characters including letters, numbers and symbols (the strongest ones are typically a string of unrelated words). Don’t share your password with others. Use a password manager (your browser likely comes with one). And opt for multi-factor authentication. Yes, we know it’s a pain. Do it anyway.
• Understand the rules of payment app transfers. There’s usually no fraud protection (there is zero-liability protection with both your credit and your debit cards typically). That means if you accidentally transfer your money to the wrong person (or to a scammer) you can’t cancel the transfer.
• Tune in to payment app financials. Think about who is benefitting from all that money that you’re leaving inside your payment app. Right — it’s the payment app itself. The company that owns that app is making their own money on it by investing it. As the CFPB reports: “Some payment app companies invest users’ funds in loans and bonds. The company profits, in part, by earning money on these investments and generally paying no interest on users’ balances. Thus, the payment app companies have a strong financial incentive to keep customer funds on the platform and not automatically sweep them back to the customer’s linked bank or credit union account.” They continue, “ User agreements for these payment apps are often confusing, murky, or even silent on exactly where consumer funds are being held or invested, whether and under what conditions they are insured at a partner bank, and what would happen if the payment app company or the entity holding the funds were to fail.” Gulp.

Finally, stay tuned. To combat many of these issues with payment apps, many states are looking to enact policies to ensure that app providers are able to meet their financial obligations to customers should the worst happen. But these new laws are merely an idea right now, and they vary from state to state. So for now, it’s up to you to transfer your funds out of apps and put them into an account that’s insured at your local credit union or bank — even better, transfer it to an account that’s earning an above average rate of interest. Consider it just one more good money habit to incorporate into your day-to-day financial routine!

from our partnership with Filene/HerMoney