Leaving money in Venmo, PayPal or other cash apps may seem convenient. You don’t need cash on hand and can pay anyone at any time, but there are serious downsides to leaving money in P2P accounts.
Fortunately, there are ways to have a bank account and use P2P accounts safely.
Here’s what you must know.
First, let’s talk about the risks:
• Your money isn’t insured. If you have money in a bank account, you’re insured up to $250,000 per depositor. If your cash app company closed, you lose any money you had in the account.
• They can freeze your account. PayPal does this often. If they suspect any fraudulent activity on your account, they’ll freeze it, leaving you no access to your funds.
• You won’t earn interest. Even though savings account interest rates aren’t anything to be excited about, it’s something. If you leave your money in PayPal, Venmo, or any other P2P account, you won’t earn interest.
To make matters worse, guess who makes the interest on the money you leave in your account?
Did you guess the P2P app?
In the fine print of the agreements you probably don’t read both PayPal and Venmo state they transfer account balances to an account in their name. They don’t spend the money (thankfully), but they earn the interest on YOUR funds.
If you think about the money they’d make on the millions of dollars stored in their accounts, it’s staggering, not to mention eye opening.
What can you do with Funds Left in a P2P App?
Unlike a bank account, your money in your P2P app won’t earn interest, but you can use the funds, which is what most people leave the money in the account for, but you shouldn’t.
While using a P2P app may be convenient, there are other ways to use it while still getting the benefits of a traditional bank account. What’s the difference? With a bank account you get:
• FDIC insurance protects you if the bank closes
• Fraud protection (on certain accounts)
• Interest (on certain accounts)
But you can have the best of both worlds. Keep your money in a bank account, but connect your P2P app when you want to use it.
Let’s say you want to split the dinner bill with a friend. You can set up a direct transfer from your checking account with your chosen P2P account. This way you have the convenience of paying your friends, but also get the benefits of a bank account and not the risks of a P2P account.
P2P accounts have their time and place, but be careful how you use them. Don’t keep a balance in them. Instead, link your bank account to them. If you have a separate bank account for the funds needed, you give yourself even more protection. With today’s electronic abilities, you can transfer funds within minutes to different accounts.
Use them to your advantage and get the protection you need.