Today’s peer-to-peer payment apps have changed the way we spend our money. There’s no more running to the bank to get cash to pay the babysitter or pulling out multiple credit cards at the restaurant to split the dinner check with a large group of friends. It’s far easier to just say, “I’ll Venmo you the money.”
However, if you’re the popular neighborhood babysitter with a big Venmo, Cash App or PayPal balance, or the person who picks up the tab at the restaurant and gets repaid through a P2P app, should you just leave the money sitting in your account?
All three apps have security features designed to keep your account safe. Each promises data encryption and fraud monitoring to protect your personal information and your funds. But, despite their best efforts, the system isn’t foolproof.
Fraudsters have a variety of ways to get you to give up your information through phishing schemes, often using emails designed to look as if they have come from PayPal or another app. And, if you ever become a victim of one of these scams, your money could be gone.
While it’s convenient to leave a small amount of money in your account to repay a friend for picking up a few groceries for you, experts advise against letting larger sums idle. Here’s why.
P2P Apps Lack Protection of a Bank
Younger Americans who have grown up in the digital age might never have received money via a check, except from Grandma as a birthday gift, and might not see the point of having a checking account, other than for direct deposit. From that account, they just draw on the money through Venmo or another app to pay the bills. But, experts said, the P2P payment apps can’t substitute for a bank account.
If you leave a pot of money sitting in your PayPal, Venmo or Cash App account, it isn’t protected by the Federal Deposit Insurance Corp. or National Credit Union Administration like money in a bank or credit union. Plus, you don’t have a chance to derive any income from it.
“The rules of money are a lot like the rules of boxing. You must protect yourself at all times,” said Stephen Kates, a certified financial planner and principal at Clocktower Financial Consulting. “Leaving money in your payment app of choice — PayPal, Venmo, or Cash App — is not prudent for a few important reasons.
“First, these apps are not banks and will not offer any FDIC insurance on your money. Second, you are not earning interest on any cash sitting idle in these accounts when you could be earning up to 2 to 3% on your money in many high-yield savings accounts. Lastly, these apps are far more susceptible to phishing and scams than a traditional bank. Once the money is gone, it is hard to claw back. For these reasons, it is always better to consolidate idle cash to a bank account. Never keep any money in these apps that you could not afford to lose.”
Is it likely that one of these apps will fail and go belly up tomorrow? Probably not. Still, your traditional checking account is insured up to $250,000 in the event of bank failure. Can you say the same about your PayPal account?
Instead of using an app like Venmo to buy something, such as concert tickets online, use a credit card. If you have any trouble with your purchase, remember you’re liable only for a maximum of $50 in case of fraud. Additionally, depending on your credit card, you can earn rewards for purchases — not so much for paying with PayPal.
It Makes Tracking Money — and Saving It — More Difficult
If you’re one who likes to stick to a budget and account for your cash, having money spread across various apps doesn’t help you to stay on top of your funds, said Jared Weitz, the CEO of United Capital Source.
“Leaving money in a PayPal, Venmo or Cash App account makes it harder to track your finances,” he said. “When all your liquid capital isn’t in one place, it makes it more challenging to get a clear picture of your financial status. Overall, it’s a much wiser decision to leave your money in your bank account instead.”
Having a balance in your P2P account also could lead to more impulse spending, knocking you off budget, said Joel Ohman, a certified financial planner and CEO of ExpertInsuranceReviews.com.
“If you find that you’re making too many purchases without thinking about it, you may decide that the convenience of these apps is a hindrance to sticking with a budget. So, you may choose to keep a zero balance or a low balance as a way to force you to think twice about purchases,” he said.
Technical Difficulties Happen
Bonnie (Ling) Thich, a financial blogger at Finsaavy Panda, said she lost access to a good chunk of money through an app.
“Based on personal experience and what happened to me, I would never leave a sizable amount of money in any PayPal account,” she said.
“My PayPal account was accidentally suspended with over five figures in there. It was not easy dealing with the issue because they don’t have a physical location or number to call like most banks or financial institutions do. I had to deal with support through their online chat support which took three to four months to resolve with the risk of not getting my money back,” Thich added.
“It’s convenient for spending and transfers, but extremely inconvenient and risky when your account gets suspended by accident. My word of advice is to avoid accumulating a big sum. Transfer most of your money into your bank as soon as you receive cash or when you get paid.”
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