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Funds On Payment Platforms May Not Be FDIC Insured, US Regulators Warn

Funds on payment platforms may not be FDIC insured, US regulators warn

BUSINESS 5 JUNE 2023

The United States Consumer Financial Protection Bureau (CFPD) has issued a public advisory warning users of mobile financial applications that their deposits on such platforms may be at risk in the event of a collapse.In its warning, the CFPB said that deposits in some financial applications may not be covered by the Federal Deposit Insurance Corporation (FDIC). Typically, the FDIC insures depositors of up to $250,000 in commercial banks and approved financial institutions, but the rise of payment service apps blurs the distinction.

Currently, over $1 billion worth of funds are stored on payment service apps without any FDIC coverage. The report added that operators encourage users to keep funds on the platform by utilizing deception involving the FDIC’s name and likeness.

Non-bank platforms go the extra mile by relying on “murky” user agreements that fail to shed light on the status of funds in the event of a collapse. The CFPB said the funds stored on these non-bank platforms are often used to invest in loans and bonds with no interest paid to the users.

“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,” read the report. “For instance, nonbank payment apps that invest customer funds in securities or other non-deposit products expose the company to the risk of insolvency if the investments’ value declines.”

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