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Why You Shouldn’t Keep Balances on Payment Apps

July 24, 2023
A woman smiling at her phone.

Why You Shouldn’t Keep Balances on Payment Apps

Payment apps, such as Venmo, Cash App, and PayPal, have gotten very popular in recent years, and for good reason. They allow you to conveniently reimburse friends and family members —  known as peer-to-peer transactions — or to make purchases from private sellers and select businesses. Payment apps can be advantageous over cash, eliminating the need to prepare and deliver a physical payment.

In order to make quick and convenient transactions, payment apps are designed to pull money directly from your designated bank account. However, while sent payments are automatically transferred out of your bank account, received payments are not automatically transferred into it. Instead, received payments form a balance inside your payment app, staying there until the money is either spent or manually transferred back to your bank account.

It can be tempting to leave this balance in your payment app, especially if you plan on using it for future transactions. Keeping a balance on your payment app can even offer psychological advantages, such as seeming like ‘bonus money,’ or being able to make purchases without affecting your bank account balance.

But, is it safe to keep money in Venmo, Cash App or Paypal? Let’s discuss why you should think twice before keeping a balance on payment apps.

Important Considerations

Your Payment App Balance Isn’t FDIC Insured

The most compelling reason not to keep a balance in your payment app? Venmo, Cash App, and PayPal are not FDIC Insured.

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the U.S. government that oversees insured banks, protecting customers against the loss of deposits. Credit Unions, such as DCU, have very similar coverage from another organization — the NCUSIF (National Credit Union Share Insurance Fund).

Venmo, Cash App, and PayPal aren’t technically checking accounts or savings accounts, so they don’t receive the same type of insurance coverage that banks and credit unions do. Instead, most payment apps have partnered with FDIC-insured banks, offering “pass through” FDIC insurance protection. Activating this coverage often requires users to take additional steps or to sign up for certain services, but there’s still a general lack of clarity about it, especially from a consumer standpoint.

Transferring Funds Back to Your Bank Takes Time

Technically, you can keep money in your Venmo, Cash App or PayPal account for however long you like. But, if you ever need to transfer that money to your bank account, you’ll have to wait a while. Transferring money out of your payment app can take up to three days, making for a difficult situation if you’re in a rush.

Most payment apps give you the option to perform an instant transfer, but this comes at a cost. Venmo, for example, charges a 1.75% fee for instant transfers. While this may not sound like a lot, it can add up quickly — especially for larger amounts of money. If you instantly transfer $500, you’ll pay $8.75 in fees. Do this four times a year, and you’ll pay an extra $35 just to access your money.

These issues can be avoided by transferring your payment app funds to your bank account right away, sidestepping the need to wait several days or use the instant transfer feature.

Payment Apps Don’t Earn Interest

When your money is being held in your payment app, it’s not earning any interest. Instead of letting your funds sit stagnant, transfer them to an interest-accruing account, such as a DCU Primary Savings Account, to start making money on your account balance. It’s an easy, passive way to generate extra income.

DCU’s Primary Savings Account has an outstanding APY (Annual Percentage Yield) as high as 6.17% on the first $1,000. With an account balance of just $500, you could earn up to $31 of interest in a year. That’s $31 more than you’d have if those funds were stored in a payment app. You can even earn interest on DCU Checking Accounts, with no monthly maintenance fees or minimums to open.

Common Concerns and FAQs

  • Are payment apps regulated by financial authorities?

No, payment apps are not regulated by financial authorities, such as the FDIC for banks or the NCUSIF for credit unions.

  • Are payment apps safe for larger amounts of money?

Since payment apps aren’t FDIC or NCUSIF insured, there is limited protection for your money, especially on account balances.

  • What happens if my payment app account is hacked?

Since there’s a lack of clarity from most payment apps, it’s hard to know exactly what kind of protection users have. Although Venmo, Cash App and PayPal have “pass through” FDIC insurance coverage, it may not be applicable to all users.

  • Can I earn interest on my payment app balance?

No, payment apps do not offer interest. To start earning interest, transfer your funds to an interest-accruing bank or credit union account.

  • How quickly can I withdraw funds from a payment app?

Most payment apps take 2-3 days to transfer funds to your bank account. However, for a certain fee (1.75% on Venmo) there is the option to initiate an instant transfer.

  • What are the potential tax implications of keeping balances on payment apps?

If your payment app has been funded over $600 in one year, your earnings must be reported to the IRS for tax purposes. But you’re free to leave any type of balance on your payment app, although your money won’t be as secure as it would be in a bank or a credit union.

Key Takeaways

While it may be convenient, and even psychologically beneficial, to keep funds in your payment app, there are several reasons to avoid doing this. Because payment apps don’t operate under FDIC or NCUSIF insurance coverage like banks or credit unions, it may not be safe to keep money in Venmo, Cash App, or PayPal. Although most payment apps offer “pass through” FDIC protection, the stipulations and coverage are often relatively unclear.

It can also take several days to transfer funds back to your bank account, which can be problematic if you need to access your money immediately. While you can complete an instant transfer, there are fees attached to this service, so you’ll lose a certain percentage of your money. To top it off, when your money is in a payment app, it doesn’t generate any interest like it would in a savings account or select checking accounts.

This isn’t to say payment apps are bad. They offer a convenient way to access your money, especially for smaller peer-to-peer transactions. However, when it comes to storing money, it’s best to keep your funds in a checking account — or better yet, a great savings account. If you’re interested in finding the best savings account to fit your needs, start exploring options to help you save money faster and smarter.

Please note, membership is required to open a DCU Checking or Savings Account. Visit our membership eligibility page for more information.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.

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