Google (GOOGL) is making a big change to its mobile payment service, Google Wallet, Yahoo Finance has learned. Funds that are left in Google Wallet will now be FDIC-insured, which means Google users’ money is now a whole lot safer — and they probably never even knew it.
Here’s why this matters: when you stash your cash in mobile payment apps like Venmo, PayPal and Google Wallet, that money is not FDIC-insured. The Federal Deposit Insurance Corporation protects funds held by banking institutions up to $250,000. This is a good thing because, as history has proven time and again, banks can fail and when they do, the little guys need someone looking out for them.
These hot new money transfer services fall under the category of “non-banking institutions,” which includes the likes of payday lenders and prepaid debit cards. As a nonbank, they aren’t legally required to be federally insured.
These aren’t places consumers normally park their money, but rather tools to transfer funds from one person or entity to another. But that doesn’t mean customers don’t use them to stash their cash. For example, Google Wallet customers who send cash to or receive cash from other Google users can choose to keep those funds in what’s called their Wallet Balance.
As of now, Google Wallet’s user agreement says balances are not FDIC-insured. However, a Google spokesperson confirmed in a statement to Yahoo Finance that its current policy has changed. The company will hold Wallet balances in multiple banking institutions that are FDIC-insured, which means if anything were to happen to the company, users funds’ would be protected. The spokesperson did not provide any further details or say when the company would update its user agreement.
So, what about those other apps?
Neither Venmo nor PayPal — both eBay (EBAY) products — offers FDIC insurance for users who leave cash floating in their accounts. A spokesperson for both companies says they do not make public how they store unused user funds.
If you use one of these services simply to transfer money from point A to point B, which is their main purpose, you shouldn’t have to worry. So long as the cash you’re sending is tied to a bank or credit card account, your funds will be protected. (PayPal does offer zero liability protection for users, which means that they are covered for fraudulent account activity.)
For example, you might receive a $100 Venmo transfer from a friend who’s chipping in for her share of a group dinner. Rather than transfer that cash directly from Venmo to your bank account, you decide to leave it there. This isn’t unheard of, especially for heavy users of the app. You might like having a little cash stashed away in Venmo to have on hand for quick transfers. Just know that as long as that money is sitting in your Venmo account, your funds aren’t insured.
Ditto for PayPal. You may purchase something online and use your PayPal account to route the payment. If you return the item and the company refunds you, that cash will not go back into your bank account. It will go back to your PayPal account, which is not FDIC-insured. You may just forget to move the money to your bank account (a transfer that can take 2-3 business days) or decide you’d rather keep it there for the next time you shop online. It is not federally insured.
(Fun fact: This wasn’t always the case. For many years, PayPal stored consumers’ unused balances in various banks, all of which were FDIC-insured. It stopped this practice in 2012 after a California state law made it much more expensive for them to do so.)
PayPal spokesperson released this statement to Yahoo Finance:
People love to use PayPal because we offer best-in-class security and industry-leading consumer protections. PayPal provides our customers zero liability account protections if there are unauthorized payments and buyer protections if the item they purchase is not as described or does not arrive as promised. The safety and satisfaction of the people who use PayPal will always be our top priority. While it is true that PayPal balances are not FDIC-insured, it’s important to note that this insurance is intended to insure the savings in people’s bank accounts. Our customers do not use PayPal in this way. This is because it is not required to store a balance in a PayPal account to use PayPal and it’s free to withdraw any funds that may be in the account. For customers who do hold a balance in their account PayPal adheres to the same Regulation E consumer protection laws as banks.
The fact that users are not required to keep a balance in their PayPal account is a fair point, but, as we illustrated in our example above, this doesn't mean that PayPal users don't leave balances in their accounts. Even if users may not think of their PayPal account like a bank, they may still be wrongly assuming that their funds are similarly protected. And "Regulation E consumer protection laws" they mention only apply to remittances (money transferred overseas).
OK, so what’s the worst that could happen?
In a worst-case scenario, if one of these companies fails and files for bankruptcy, their customers would become their creditors. That means they would have to go through a bankruptcy court like everyone else to get their money back. With FDIC insurance, the government would pay customers back in a matter of days.
“Hopefully, these people would be first in line to get their money back, but the problem is bankruptcy could take a while and they could wait months to get their money,” says Thaddeus King, officer of consumer banking project at Pew Charitable Trusts. He and his colleagues have been pushing the government to require prepaid accounts to offer FDIC insurance.
The Consumer Financial Protection Bureau is trying to pass rules that would strengthen oversight of nonbanks, but they fall short of requiring FDIC insurance — the rule only forces nonbanks to disclose the fact that they aren’t FDIC-insured.
Disclosure isn’t necessarily the root of the problem, given many companies are already plainly providing the information. All three mobile payment services we’re highlighting here (Venmo, PayPal, and Google Wallet) plainly inform users that their balances are not FDIC-insured in their user terms and agreements.
The odds that these companies will tank are slim, but not impossible, says Susan Weinstock, who runs Pew’s consumer banking project.
“That’s why FDIC insurance was created during the Great Depression, for exactly that reason,” she says.
By leaving cash in these companies’ (digital) hands, you’re essentially giving them an unsecured loan.
“It’s impossible for your average consumer to keep track of how financially secure a company is,” King says. “Even sophisticated people would not be able to know whether a company is well-capitalized and secure.”
The bottom line: The safest way to be sure your cash is protected is to transfer any unused balances from these accounts as soon as possible into a regular U.S. banking institution, which is FDIC-insured. And if you like the idea of having your cash FDIC-insured, let the CFPB know.
Consumers have won this battle before. American Express (AXP) customers asked the company to change the terms of its BlueBird prepaid debit card because the government doesn’t let people load federal benefits like Social Security onto prepaid cards that weren’t FDIC-protected. AmEx added the feature to two of its four prepaid debit card offerings in 2012.