The CFPB is shifting its focus to FinTech and nonbank payment systems, circling back to past frontiers. This recent warning echoes the sentiment of former CFPB’s Director, Richard Cordray, focusing heavily on FinTechs and nonbank payment systems. In the past year, the CFPB’s focus has been primarily on consumer lending and debt collection space. This recent warning is shifting the tide back to FinTechs.

On June 1, 2023, the Consumer Financial Protection Bureau (CFPB) published an issue spotlight, shedding light on the potential risks associated with popular digital payment apps extensively utilized by consumers and businesses. According to the CFPB’s analysis, funds stored on these apps may not be adequately protected in the event of financial distress, as they may not be held in accounts covered by federal deposit insurance. Consequently, the CFPB issued a consumer advisory on July 29, 2022, urging customers to transfer their balances to insured banks and credit unions to ensure the safety of their funds.

According to the CFPB, with the increasing prevalence of nonbank payment apps like PayPal, Venmo, and Cash App, more individuals are turning to these platforms for convenient and speedy transactions. However, unlike traditional bank and credit union accounts that benefit from deposit insurance, funds stored in nonbank payment companies may be exposed to potential vulnerabilities according to the CFPB.

This latest issue spotlight released by the CFPB reveals several critical findings, including the following:

1. Nonbank payment companies can generate revenue by holding user funds on their platforms. Unlike the automatic transfer of funds to linked bank or credit union accounts in traditional financial institutions, these digital apps retain and invest the funds received. Such activities typically lack the same level of oversight applied to insured banks or credit unions. Additionally, these apps generate revenue through merchant fees and other ancillary services, including the sale of crypto-assets and the provision of affiliated financial products.
2. User agreements for digital payment apps often lack crucial information. These agreements frequently fail to provide details on where funds are held or invested, whether they are insured and under what conditions, and the implications if the company or entity holding the funds were to experience financial difficulties.
3. Funds residing in payment app accounts frequently lack deposit insurance. When users receive payments through these apps, the funds are not automatically transferred to their linked bank or credit union accounts. Furthermore, payment app companies do not necessarily store customer funds in insured accounts through arrangements with banks or credit unions. Consequently, there is a risk associated with the company's investments, and in the event of its failure, customers could potentially lose their funds.
4. Payment apps have gained widespread usage, with over three-quarters of adults in the United States utilizing these services. The younger demographic, particularly consumers aged 18 to 29, exhibits a notably high adoption rate, with approximately 85 percent using such apps.

In response to these above-stated concerns, the issue spotlight points out that some states have implemented policies to ensure that digital payment apps fulfill their obligations. However, according to the CFPB, state laws generally do not mandate the storage of customer funds in insured accounts or their automatic transfer. This recent warning emphasizes the need for FinTech companies to have proper disclosures and awareness that any type of savings account-like features will be under regulatory scrutiny.