Close up of a woman’s hand paying with her smartphone in a cafe, scan and pay a bill on a card machine making a quick and easy contactless payment.
D3sign | Moment | Getty Images
Payment apps have come under scrutiny by lawmakers and regulators as their usage skyrockets.
It only takes a tap to instantly send money to friends and family. Customers also use them to quickly buy goods online.
That ease of use has 80% of Americans using mobile payment apps, according to a recent survey by NerdWallet. What’s more, 50% of those respondents said they use these apps at least once a week.
Transaction volume across all payment app service providers in 2022 was estimated at about $893 billion, according to the Consumer Financial Protection Bureau.
That agency also estimates tap-to-pay transactions from digital wallets will soar by 150% between now and 2028.
Meanwhile, there are growing concerns about financial safety for consumers.
The CFPB is focused on “erecting guardrails and some requirements and obligations for non-traditional players who are offering services very similar to a bank-based product,” said Amy Zirkle, the CFPB’s senior program manager for payments.
More from Personal Finance:
Tax filing season is here. What you need to know
‘Fraud is at a crisis level’: 5 financial scams to watch out for
2024 Tax Tips: Reviewing your 1099 form
To that point, greater oversight of mobile payment apps may be coming.
Democratic lawmakers on Capitol Hill are supporting a proposed rule by the CFPB that would require federal oversight of digital wallets and payments, forcing them to comply with federal funds transfer, privacy and other consumer protection laws that they are not currently required to follow.
Lawmakers are also calling on payment app companies to clarify their reimbursement policy if consumers get scammed and to make it easier for users to report fraud.
“People lose their money because payment apps and banks don’t put enough measures in place to protect their customers,” said Sen. Sherrod Brown, D-Ohio, chairman of the Senate Banking Committee, at a hearing earlier this month on scams in the banking industry.
Still, new regulations take time to be put in place. In the meantime, experts say that consumers need to understand how these apps work, the fees that may be charged and the risks involved in storing money in a mobile payment app.
How payment apps work
Payment apps like Cash App, PayPal or Venmo store payment information and allow the user to make payments online or in person and send money to friends and family.
Meanwhile, Zelle, a popular peer-to-peer digital payment app, lets users trade money with friends and family directly from a bank account. That program ties directly to a bank or credit union account and transfers funds directly.
Unlike Cash App, PayPal and Venmo, Zelle does not allow a user to carry a balance in the app.
A digital wallet, such as Apple Wallet or Google Wallet, does double duty as a payment app, using Apple Pay or Google Pay, and a place to store information like health insurance cards and loyalty cards for hotels, airlines and other merchants.
Payment app fees can be costly
Payment apps sometimes charge fees for the convenience of instantly transferring money or linking credit cards to the app if they use Cash App, PayPal, or Venmo.
Cash App doesn’t charge to send money that is processed within one to three business days, but instant payments have fees ranging between 0.5% and 1.75%. PayPal and Venmo, which PayPal owns, charge a fee of 1.75% of the transfer value or up to $25 for instant transfers.
With PayPal and Venmo, the user will not pay a fee if they send money to people using your PayPal or Venmo balance from your bank account or debit card. However, if you send a payment that is funded by your credit card, you’ll be charged a 3% fee for the total amount of the transaction. CashApp also charges 3% for payments tied to credit cards.
Zelle does not charge an extra fee for an instant transfer. However, Zelle recommends confirming with your bank or credit union that there are no fees for Zelle transactions.
About 33% of mobile payment app users link their apps to a credit card, and 24% usually pay the fee to get instant transfers from the payment app to their bank account, according to the NerdWallet survey. Those fees can add up quickly.
Money sitting in most payment apps is at risk
Most people who use payment apps keep their money sitting in those apps instead of transferring the funds to a bank account. That’s risky, experts warn.
“Do not treat this like a bank because it doesn’t give you the same level of protection for your funds,” CFPB’s Zirkle said.
The money you keep in most payment apps is not Federal Deposit Insurance Corp. insured, which provides protection up to $250,000 if a federally insured bank or credit union fails.
Because money stored on payment apps is generally not insured, it can be risky to use it for that purpose, the CFPB says.
And, if the app fails, the CFPB warns, “your money is likely lost or tied up in a long bankruptcy process.”
To help protect funds in payment apps, link the app to your bank account and transfer money from the payment app as soon as you receive it, experts say.
Protect yourself from payment app scams
Payment apps aren’t regulated as heavily as debit and credit cards, so you might still be on the hook for unauthorized payments if a scammer gets control of your account.
“If you get tricked and send money to a thief, you’ve authorized that transaction,” said Scott Talbot, executive vice president of the Electronic Transactions Association, representing the payments industry. “The industry is focused on educating consumers to prevent them from getting tricked in the first place.”
The Federal Trade Commission advises consumers to never give out their access codes, protect accounts with a PIN or multifactor authentication and to double-check the recipients information before sending money.
If you get an unexpected request for money from someone you recognize, speak with them to make sure the request is from them — and not a hacker who got access to their account. If you think you may have been scammed, contact the payment app directly and also file a report with the FTC at reportfraud.ftc.gov.
Don’t miss these stories from CNBC PRO: