Google (GOOGL) will be making a major improvement to its mobile payment service, Google Wallet. Google user’s money will become a lot safer with the latest development. According to a Google spokesperson, the company’s will make all cash balances that stayed in Google Wallet FDIC-insured. Most users probably still don’t know it.
Currently, the money you stash in mobile payment apps, such as PayPal, Venmo, and Google Wallet is not FDIC-insured. Only funds held by banking institutions are protected by the Federal Deposit Insurance Corporation up to $250,000. History has proven time and again that banks closed when depositors least expected it to happen. So, the FDIC-insured fund provides some extra peace of mind to consumers.
Unlike banks, the new money transfer services fall under the same category of the likes of payday lenders and prepaid debit cards, which are all considered non-banking institutions. As a nonbank, they aren’t required by law to be federally insured.
Consumers don’t normally park their money in these places. They are using them as tools to transfer funds from one entity or person to another. But customers still use them to stash their cash in some situations. For example, customers of Google Wallet who send or receive cash from other Google users can choose to keep funds, which is called Wallet Balance.
As of this writing, under the user agreement stated in Google Wallet, balances are not FDIC-insured. But, a Google spokesperson confirmed in a statement recently that its current policy has changed. Google will hold Wallet balances that are FDIC-insured in multiple banking institutions, which means if the company fails, user’s funds will be protected. The spokesperson did not say any further details or say when the update would be implemented.
Neither PayPal nor Venmo, which are both eBay (EBAY) products, offers FDIC insurance for users who keep cash in their accounts. A spokesperson for both companies says they don’t make public how they store stash funds of their users.
If you use their primary purpose, which is to transfer money simply from one point to another, you shouldn’t have to worry. If the cash you’re sending is tied to a credit card or bank account, your funds are safe. PayPal offers zero liability protection for users, meaning they are covered for fraudulent account activity.
For example, your friend is chipping in $200 for her share of a group outing or tour. Rather than transferring the amount you received from your friend directly from Venmo to your back account, you decided to just leave that number there. You might prefer to have a little cash on hand in case you need quick transfers. But that money sleeping in your Venmo account isn’t insured.
The same for PayPal. You may use your PayPal account to pay your online purchase. If, in any case, you want to return the item and the company refunds you, the cash you use for payment won’t go back to your bank account. Instead, it will go back to your PayPal account, which isn’t FDIC-insured. You may just decide to leave that money in PayPal and use it the next time you shop online. The amount is not federally insured.
This was not the case for PayPal for many years. The company used to store user’s unused money in various banks that were FDIC-insured. It stopped the practice in 2012 as California state law made it more expensive for the company to do so.
In worst case scenario, if these non-banking institutions fail and file for bankruptcy, their users would become their creditors. If the users want to get their money back, they will need to go through a bankruptcy court just like everyone else to get their money back. With FDIC insurance, the customers will just wait a few days for the payment from the government.