Money transfer apps, which allow you to quickly pay friends and family through your smartphone, have grown in popularity in recent years. And the coronavirus pandemic has only expanded their use — to pay gig workers, make donations or simply avoid using cash.
The apps have even been promoted as a way to receive government stimulus checks.
But linking the mobile apps to your credit cards may get more expensive, thanks to a payment industry change.
To use an app for cash transfers, customers typically connect it to an outside payment source. Most users link their debit card or a bank account, since in most cases that lets them transfer money without charge. A few apps, however, also give customers the option to link to a credit card and pay a small fee (about 3 percent) for “peer to peer” payments, like splitting the dinner tab. Those apps include PayPal and its Venmo arm, as well as Cash App, which is owned by Square. (Zelle, the app backed by traditional banks, doesn’t accept credit cards.)
But there has been a change in the way the money transfers are coded as they zip from your phone and move through the Visa and Mastercard payment networks. That change enables banks to also charge their own, separate cash advance fees — typically $10 but sometimes much more — for payments made using credit cards on those networks. The fees don’t apply when customers make a purchase.
Justin Higgs, a spokesman for PayPal and Venmo, said the change had been driven by “industry requirements” that the apps had to comply with to offer peer-to-peer credit card payments.
In other words, card-issuing banks asked that the apps and payment networks flag cash transfers to distinguish them from purchases. In the credit card world, cash advances are considered riskier and carry higher fees. Credit cards typically charge the fees when customers use the cards to obtain cash from an A.T.M. or to transfer money using services like Western Union. Credit cards also charge a much higher rate on the amount advanced, and there’s no grace period before the interest starts growing.
The change formally took effect in September after months of talks so that payment apps could give advance notice to their customers, said William Stickney, a Visa spokesman.
It’s not yet clear how many banks are now charging for the cash transfers. A spokesman for Cash App said in an email that it appeared that “very few banks and cards are choosing to charge the fee.”
But some customers are seeing unwelcome charges on their credit card statements.
Lisa Colli is one of them. A public relations consultant in Boston, Ms. Colli said she had long used PayPal, including its peer-to-peer payment service, and had also begun using Venmo in January.
In mid-April, she was surprised to see “cash equivalent” fees of $10 for Venmo and PayPal transactions on her Bank of America credit card statement. The charges totaled $40 for four payments.
Ms. Colli said she had connected the payment apps to her credit cards because she was wary of linking her bank account and possibly exposing it to hacking or fraud. “I’m not comfortable with the security yet,” she said. The service fee charged by the apps — usually a couple of dollars because the transactions were generally small — seemed an acceptable price for greater peace of mind, she said.
Ms. Colli complained to Bank of America, which removed the fees and accrued interest. She said she was pleased with the bank’s response, but felt it should have done more to notify her about the cash advance fees.
The bank representative, she said, told her that the fees were not new. Instead, peer-to-peer transactions are now being properly coded so that banks can identify them and apply appropriate charges.
Bank of America’s sample credit card agreement states that the bank considers cash “equivalents,” including “person-to-person” money transfers, to be cash advances.
The potential for extra bank fees, Mr. Higgs said, is “clearly spelled out” within the PayPal and Venmo apps before a customer proceeds with a transaction. Users have also been told about the fees online. “Things could add up!” Venmo’s website says. “Be sure to check with your card issuer on the fees they may charge.”
Ms. Colli said that she recalled seeing a pop-up message in the app when making a payment, but that it didn’t say how large the fee might be. (The banks set the fees, so the apps don’t have those details, Mr. Higgs said.)
She said she considered the fees excessive. “I’m going back to using cash, I guess.”
Here are some questions and answers about payment apps:
Will all credit cards eventually charge the cash advance fee?
Not necessarily. Mr. Higgs said PayPal and Venmo “welcome working directly with any credit card issuers that may want to prevent their customers from being charged a fee.”
Chase is not charging its credit card holders the cash advance fee for peer-to-peer payments, a spokesman said. Citibank is charging the fees when the transactions are classified as a money transfer.
Other big banks that issue credit cards, including Capital One and Wells Fargo, didn’t immediately respond to a request for comment. You can check your credit card user agreement to see what the card charges for cash advances.
Discover, which issues cards and operates its own payment network, treats app transfers as regular “merchandise” transactions, so there is no additional fee, said a spokesman, Robert Weiss. American Express is also not charging a fee.
How can I avoid paying extra fees with payment apps?
Details vary by app. Generally, the easiest way to avoid fees is to link the app to a bank account or a debit card, and to use standard wait times to move funds from the app into your linked bank account. Venmo and Cash App, for instance, charge no fee for standard transfers, which can take a day or two, but charge a fee for “instant” deposits, which move money into your linked account in minutes.
What steps can I take to increase security when using mobile payment apps?
Security issues surfaced initially with some payment apps, which deliver payments rapidly via text or email and may offer little recourse if funds are sent to the wrong person. The Federal Trade Commission cited Venmo in 2017 for misleading customers about its security and privacy features. (The agency and PayPal settled the complaint in 2018.) Zelle has also faced concerns about lax consumer protections.
A study in October by the Pew Charitable Trusts found that worries persist: About 30 percent of consumers said they avoided using mobile payments at least sometimes because of concerns about a loss of funds.
But the apps have improved their security and are generally safe to use, said Christina Tetreault, director of financial policy with Consumer Reports. An analysis by the magazine in late 2018 found that five popular payment apps used an “acceptable level” of data encryption.
It’s still best to use the apps with people you know, Ms. Tetreault said. She also advised using any optional extra security features the apps make available, like adding a PIN or fingerprint identification each time you open the app on your phone. Venmo’s website notes that it doesn’t offer buyer or seller protection, and advises against using payments for “high risk” goods like tickets and Craigslist items.