Woman pays with Paypal app
Paypal

Fintech is becoming a bigger part of financial life for more and more consumers in the U.S. Banks are adding more online payments capabilities, and payment app companies are trying to act more like banks.

PayPal is hardly new to this game, although it’s been no less aggressive than upstart players in adding to its feature set. Beginning in early 2018, all PayPal customers will be able to use Acorns, an app that invests leftover change from your daily purchases in exchange traded funds (ETFs).

For consumers, this development raises the question of whether accounts offered by PayPal and other fintech companies can replace what banks and credit unions offer. Could PayPal be your new bank account?

PayPal account limitations for bank customers

In the eyes of the Federal Deposit Insurance Corp. and state regulators, PayPal is not a bank. But that hasn’t stopped it from acting like one.

Funds stored in PayPal accounts were once deposited into bank money market accounts and some PayPal balances were eligible for pass-through FDIC insurance. If an FDIC-insured bank failed, PayPal account funds stored there were protected up to a certain threshold ($250,000), just like regular bank deposits.

Today, pass-through insurance is no longer available for PayPal account balances. Neither is its mobile check deposit feature.

For PayPal users, there are no check writing capabilities or branches either. “[Convenient] access to branches is still a very important feature for most Americans according to a lot of the data that we have,” says Jacob Jegher, senior vice president of banking and head of strategy at Javelin Strategy & Research.

Using your PayPal account as a checking account

With more than 17 million active merchant accounts, PayPal allows consumers and business owners to seamlessly make purchases and pay vendors. That’s why some people choose to store money in their accounts.

Michele Ellis-Williams, an Atlanta-based entrepreneur, keeps at least $10,000 in her business account at all times. PayPal helps her run her consulting firm more efficiently and makes it easy to purchase items online.

Jeff Rizzo, owner of a YouTube channel and blog that reviews consumer products, also uses a PayPal business account. In addition to storing funds in the account, he finds himself keeping money in his personal PayPal account for extended periods of time.

Should consumers treat personal PayPal accounts like bank accounts? Technically, it’s possible: You can apply for a PayPal prepaid card and link it to your PayPal account.

Like other reloadable prepaid cards, the PayPal version lets you add money via direct deposit or at physical locations in its reload network. From there, you can use the card to withdraw cash, pay bills or transfer money from your PayPal account to use for online and in-store purchases.

PayPal’s prepaid card users can earn cash back and open a Bancorp Bank savings account that pays 5 percent APY on balances of $1,000 or less. According to a statement from the Bancorp Bank, cardholders qualify for FDIC insurance under applicable insurance rules.

But using PayPal as a checking account can be a hassle, says Will Hernandez, editor of MobilePaymentsToday.com. Prepaid cardholders can only transfer up to $300 per day or $2,000 within a 30-day period from their PayPal accounts. In addition to the monthly fee, charges may apply whenever you load money onto the card or use a feature called PayPal Cash to deposit funds.

Better banking alternatives?

Many of the functionalities offered by banks have been replicated by third-party providers, says Jegher from Javelin. But the kind of security and insurance banks provide is unmatched. So for many people, a PayPal account may be best used in tandem with a traditional account at a federally-insured institution with other attractive features like low fees and high CD and savings account rates.

If you can’t qualify for a standard bank account—because a history of mismanaging accounts has landed you in ChexSystems—you may not mind using a prepaid card. Just make sure you understand how much you’ll pay in terms of fees and whether they can be waived, says Caroline Ratcliffe, a senior fellow at the Urban Institute. A rule that will make it easier to understand charges associated with prepaid cards has yet to go into effect.

Unbanked consumers should also consider second chance checking accounts. Though they often have restrictions, such as no check writing capabilities and withdrawal limits, at some point you may be able to qualify for a traditional account. Through an initiative called Bank On, you can also find accounts that don’t charge any overdraft fees.

Of course, having a relationship with a bank isn’t always necessary, says Karen Biddle Andres, vice president of network engagement at the Center for Financial Services Innovation. “The important thing is that you have tools that allow you to have a strong daily system for managing your finances that you can be resilient in the face of an unexpected expense or shock and that you can pursue opportunity over the long run.”