Podcast Summary
Is This a Bank? Identifying Non-Traditional Financial Players: Venmo, PayPal, and Cash App are non-traditional financial players offering payment, investment, and budgeting services, blurring the lines between banking and non-banking institutions.
In today's digital world, various companies are competing to be part of our financial lives, striving to manage and store our money, much like banks do. During this episode of "The Indicator from Planet Money," hosts Darien Woods and Wayland Wong played a game called "Is This a Bank?" where they identified companies that might not be traditional banks but still serve financial functions for consumers. These companies include Venmo, PayPal, and Cash App, which allow users to make payments and even invest or budget their money. While these platforms may not offer all the services of a traditional bank, they are increasingly becoming essential parts of our financial lives. It's important to be aware of the services these companies offer and how they handle our money, as they continue to blur the lines between banking and non-banking institutions.
Is PayPal a Bank?: PayPal functions like a bank by facilitating transactions and offering loans, but it doesn't hold a traditional banking charter or provide FDIC insurance, making it a financial services company instead
A bank is an institution that accepts deposits from individuals and businesses, and then lends that money out to other borrowers, earning interest in the process. PayPal, a well-known financial technology company, functions similarly in some ways, as it allows users to send and receive money, obtain loans, and even invest their funds. However, the question of whether PayPal is considered a bank is not straightforward. While it engages in banking activities, it does not hold a traditional banking charter or offer FDIC insurance for its customers' deposits. Therefore, although PayPal performs many banking functions, it is not technically a bank, but rather a financial services company. This highlights the evolving nature of the financial industry and the blurred lines between traditional banking and new fintech innovations.
Payment apps lack FDIC insurance: Consumers should be cautious about storing large sums on payment apps like PayPal and Apple as they aren't covered by FDIC insurance and offer less regulatory oversight than traditional banks.
While platforms like PayPal and Apple offer convenient ways to store and manage money, they do not come with the same level of insurance and regulatory oversight as traditional banks. The Consumer Financial Protection Bureau (CFPB) has warned consumers against keeping large sums of money on payment apps, as they are not covered by FDIC insurance. PayPal, despite its size and financial services offerings, is not a bank and does not offer the same guarantees. Apple, with its mobile payment service, credit card, buy now, pay later lending program, and high yield savings account, has amassed over $10 billion in deposits, leading some to question if it should be classified as a bank. However, Apple has not applied for a banking charter and its savings account is offered through Goldman Sachs, which is FDIC insured. It's important for consumers to understand the differences and risks associated with these financial technology companies and traditional banks.
Tech Companies Acting as Banks: Apple and Starbucks, though not banks, manage deposits, partner with banks, and offer digital experiences, making them de facto banks. Apple faced transfer delays, while Starbucks rewards customers for preloading funds.
Tech companies like Apple and Starbucks, while not traditional banks, exhibit banking behaviors by accepting and managing deposits from their customers. Apple partners with Goldman Sachs to provide FDIC-insured accounts, while Starbucks holds over a billion dollars in customer funds through its mobile app. These companies design the digital experience and partner with banks to manage the financial aspects, making them de facto banks. Apple faced issues with transfer delays, resulting in customer compensation, while Starbucks' customers earn rewards for preloading funds on their app. The line between tech companies and banks continues to blur as technology transforms the financial industry.
Businesses can expand financial power through loyalty programs and financial services: Companies like Starbucks and General Electric have used loyalty programs and financial services to amass significant financial power, potentially leading to new opportunities for businesses to expand and increase profits
Companies, even those like Starbucks known for selling specific products, can amass significant financial power through loyalty programs and other financial services. Starbucks, for instance, has more money in its loyalty program and gift cards than some small community banks, making customers stick around and keep buying. This strategy has been successful for other companies, like General Electric in the 1930s, which started a lending program to help consumers buy appliances and later became one of the biggest lenders in the country, accounting for half of its profits at one point. This trend could mean that tech companies like Apple might one day become banks that sell computers or that Starbucks could become a major credit card issuer that sells coffee. The potential for financial growth through loyalty programs and financial services is a significant opportunity for businesses to expand and increase profits.
