What happens with the money you have stored in apps like Paypal or Venmo if they fold?

The Consumer Financial Protection Bureau (CFPB) has sent out a warning to Americans that use digital payment apps. Consumers are storing billions of dollars on services such as PayPal, Venmo, and Cash App but that money “may not be safe in the event of financial distress.”

That’s because unlike funds held in a bank or credit union with federal deposit insurance coverage, those stored on digital payment apps are not guaranteed by the federal government. Furthermore, the service providers “are not typically subjected to the same oversight” and their user agreements often lack information including on what would happen if the company fails.

“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,” said Rohit Chopra, CFPB Director, in a statement.

What happens with the money you have stored in apps like Paypal or Venmo if they fold?

The CFPB is shining a spotlight on digital payment apps in the wake of high-profile bank collapses in recent months like Silicon Valley and most recently First Republic. The former was put into distress when customers began a run on the financial institution that catered to tech companies and venture capitalists, the vast majority of its deposits were uninsured. That began a contagion that spread to other regional banks forcing the government to step in to stabilize the sector.

These nonbank entities are not covered by the Federal Deposit Insurance Corporation and National Credit Union Administration which insure up to $250,000 held in bank accounts by those entities. That means that if a nonbank goes belly up, any funds stored on the app could vanish and leave customers with no recourse.

The CFPB recommends transferring funds to insured accounts

Users of these nonbank apps are advised to transfer their money stored on digital pay apps to an insured bank or credit union. The financial watchdog notes that last year transaction volume across all service providers was roughly $893 billion by their estimates. In the next few years, that number is expected to nearly double to $1.6 trillion. Young adults are prevalent users of these apps with around 85 percent of 18- to 29-year-olds having used one.

The companies often do not move the money immediately according to the financial watchdog. Furthermore, digital payment apps may not be storing the money in an insured account but instead investing the funds to earn money. These investments are not under the same oversight as investments made by other financial institutions.

The CFPB cautions about the information available to customers or better the lack of specific details in user agreements. That can include if the money is being used for investments or held in an account. Nor is it always clear that when stored in an account under what conditions the money may be insured. Most crucially, should the institution fail, what will happen to the user’s funds.