Digital Payments: The Ins and Outs of Money Transfers

If you’re a tech-savvy consumer—or just someone who’s gone to lunch with friends and owed the person across the table a ten-spot—chances are you’re familiar with these steps:  

1. Go to Send Money
2. Choose a Recipient
3. Enter an Amount
4. Hit Continue

Pretty standard stuff, right? In fact, person-to-person (P2P) money transfers using digital wallets (or mobile wallets, when using smartphones) are booming.

A recent Forbes article noted that Venmo, which is PayPal’s P2P payments service, reportedly processed $62 billion in these payments in 2018. The same article said that Zelle, the digital payments platform created by some of the nation’s largest banks and available through mobile banking apps, handled nearly double that amount in 2018, or $122 billion.

While these transactions are increasingly common, ever wonder what happens to your money after you hit send?

In a recent blog post and a podcast, Julie Stackhouse of the St. Louis Fed’s banking supervision division explains what happens behind the scenes with money transfer transactions, as well as other topics related to financial technology—aka fintech.

Are Banks Involved?

“Each service is a little different, but in every situation, unless the service is in itself a bank, a bank is involved,” Stackhouse said when discussing online money transfers in a Timely Topics podcast episode.

Stackhouse offered a personal example of using Apple Pay to make payments to her workout instructor. Her family uses a lot of Apple products, which made adopting the service convenient for her, she said.

“Great for my kettlebell class,” Stackhouse said. “When I need to pay my instructor and he'd take cash, but that's not convenient for me … I can make that Apple Pay payment to him.”

What Happens Behind the Scenes?

Stackhouse explained that Apple transmits the payment data through normal banking channels using traditional banking organizations. “To you, it looks like Apple,” she said. “To me as a regulator, it looks like it is working through the banking system.”

While Stackhouse’s example was for Apple Pay, there are e-wallets for other operating systems and devices: Samsung Pay and Google Pay for Android, for example.

Stackhouse noted that each service is different, adding that “as consumers, it is increasingly important that we understand whether the service is actually making a transfer of our money or if the service is putting the money into an account where we have to take it out later. Each is different.”

Some products will aggregate funds in an uninsured account until you move them. “That's not necessarily bad,” Stackhouse said, “but that may not be optimal for you.” While the cash balances are in that account, they’re not protected by the FDIC’s Deposit Insurance Fund.

Read the Literature

Stackhouse said that by reading the disclosures, consumers can better understand how a service works, and then adapt the product to individual preferences.

For instance, if you’re using a payments service that aggregates funds in an uninsured account, you might opt to instruct the service to move funds the next day rather than having them sit in the account.

Product websites can be a good starting point for guidance. For purposes of illustration only, let’s look at Zelle, which sends money instantly to recipients’ bank accounts. Its homepage states that “you can move money from your account to someone else’s within minutes, so it’s important you know and trust the person you’re sending it to.” Zelle notes that money is sent directly to recipients’ bank accounts and cannot be canceled unless the intended recipient hasn’t signed up for Zelle.

Also on the homepage, Zelle states: “If you don’t know the person, or aren’t sure you will get what you paid for (for example, items bought from an on-line bidding or sales site), we recommend you do not use Zelle for these types of transactions.” 

In her blog post, Stackhouse also suggested that before opting into any online payments service, consumers should learn what personal data may be collected and how that data might be used.

“One consumer concern is data privacy,” Stackhouse noted. “Depending on the wallet service, data may be stored by a third party and used for purposes not intended by the consumer.”

Check out the Reviews

For more help with education, Stackhouse noted that Consumer Reports and similar ratings organizations are starting to review these types of services and offer matrices for how they work and what people should know.

“I'm very confident that as consumers, if you go out to the internet and just do a little bit of homework, you really will understand how the product works and feel probably pretty comfortable with many of these products,” she said.

Additional Resources

• On the Economy: Fintech: How Digital Wallets Work
• Timely Topics: Supervising the Nation’s Banks
• Open Vault: Fascinating Facts about Cellphone and Smartphone Usage