The Surprising Downsides of Venmo and Zelle Explained

While Venmo and Zelle are very simple to pay friends and family, there are downsides of using these businesses that most people don't know. In this video, we'll talk about the real cost of using these platforms, and the opportunity cost of having your money stay with these platforms.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

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TRANSCRIPT:

John: In today's environment, now we're getting three, three and a half, four, four and a half percent interest. You can buy a CD at that level today, at least last time I looked. And you go, “All right, now we're starting to talk about hundreds of dollars in lost potential income.”

Bridget: Okay, John, the three things I don't like about Zenmo and Velle😊

John: Zenmo and Velle…

Bridget: First, and this is really my biggest one, no consumer protections. So if something goes wrong, that's it. You say bye to whatever you've put through Venmo or Zelle. And maybe you could plead your case with the bank if it's Zelle or with the Venmo powers that be, but I don't think you have much chance, and you certainly don't have any legal leg to stand on.

John: Right.

Bridget: That’s the first thing I don't like about it. And just to remind people, with a regular credit card, you have at least 60 days, maybe longer, to dispute a charge. And just so you know, usually you win. Not always, but usually. And with a debit card or with a check, you have 30 days to dispute something and then the bank investigates. So that is at least some consumer charge. I've had false things on my bank account before, and the bank made it right.

So these are protections that have been fought for long and hard by consumer advocates. So banks, of course, want to come up with the next latest and greatest that is cheaper for them, better for them, and they don't have to deal with all these consumer protections. I'm not even begrudging them that, because people do like the convenience. But I just want to put that out there. What are your thoughts?

John: I think it's really important to understand what you're talking about when it comes to these sorts of things. It’s super convenient, but it's like having cash in your purse or your wallet. If you lose your wallet or the cash falls out, it's gone. But when we're doing these things, it feels like I’m paying with a credit card, but it goes on the phone. It feels like I’m paying with my debit card or my checking account with e-checks and all those things.

So it feels like these other things. But one of my key points is that you have to think about this like cash in your pocket. And if something bad happens or you let somebody else reach into your pocket, there’re aren’t any of those protections, like you were talking about. It’s those things where you go, “Oh, somebody charged something on my credit card.” I'm not sure if anybody hasn't had that happen to them.

And you call the credit card company, and they issue you a new card. It's a hassle, but no big deal, right? And when I talk with people, they go, “That's just the price of doing business and living in today's economy.” I get that. The thing is with Venmo and with Zelle aren't exactly like that, even though they feel like that. That's one of the things that I think is really important just to have clear in your head. These apps are cash, not some of the other ways of transferring money, as far as I look at it.

Bridget: Second beef, and this is with Venmo. If you set it up so that it's funded by your credit card, when the money moves to Venmo, you're getting a cash advance. And these are at high interest rates. Now, I think a lot of people don't look at the fine print, those little charges and stuff on their credit card. They just pay it. And it was actually hard for me to get this reversed because someone in my household inadvertently set it up that way, and I could have done the exact same myself too, just not realizing, okay, if I set it up this way on this app, then I'm taking a cash advance every time that I do that. And that's got like long term credit interest charges.

John: Right.

Bridget: If I just used my credit card like I normally do, then there's no extra interest charged.

John: That goes back to the feeling. I connect my credit card, and it feels like I'm charging something on it. Big deal. And again, all that tiny fine print like. How does it work? And it looks like, oh, it's just like putting a charge on, but it factually isn't. It's got those other high interest and fees, and you have to be aware of that. And again, just knowing how that works is so important.

Bridget: And then the third part, and again, this is another Venmo beef, that is that the money is sitting there. You earn no interest or anything on it. And geez, it could be easy to forget. So that's another beef I have. And so, I try to tell people, “Okay, we live in our economy, you probably need Venmo, but then at least keep your balance low.” Don't have more in there than you really need to function. What are your thoughts?

John: As you said, we probably need this. And I want to be really clear about the value of the convenience factor. Between friends and things there's not a lot of cash passing. We went to a ball game, and a friend bought the tickets. We went out for dinner, and I bought the dinner, and you need to pay me back. It’s super convenient. It's like living in Jetsons time sort of thing. We're not flying around on jet packs quite yet, but the idea that money passes back and forth, and we can just do this stuff, and it's instantaneous. There certainly is value as long as we think about these things in the right way. I love your warning.

Be careful when setting up your Venmo account with a credit card. It doesn't feel any different and the charges get hidden. Many people unfortunately don't watch their credit card statements on a monthly basis. I know I've been guilty of that over the years. This is stuff that's meaningful. So there's all these good things that come with it. It's not like you shouldn't have this as opposed to some other things. In your world and mine, sometimes people come in, and you go, “That's not really a good idea.” No, this is a good idea. You just need to be careful with it.

And we mentioned consumer protections before, but there’s also just the FDIC insurance sort of thing that you've got that at a bank. What happens if one of these companies shuts their doors tomorrow? Is it likely? No, not likely at all. But it has happened over time. Everything’s fine until it's not. And that ties in with the interest or the earnings. I'm on several non-profit boards, and we had a Venmo account, and there was money sitting in it. And it wasn't hundreds of thousands of dollars, but thousands.

I didn't look up how long Zelle or Venmo have been around, but it wasn't in the too distant past that your checking account or your savings account was getting like 1%. And if you got $6,000 or $8,000 or $10,000 and you're earning 1%, it's not nothing, but it’s not super significant. In today's environment, now we're getting three, three and a half, four, four and a half percent interest. You can buy a CD at that level today, at least last I looked. And you go, “All right, now we're starting to talk about hundreds of dollars in lost potential income just because of not paying attention.” It's almost like that thing, Bridget, when somebody gets an income tax refund.

And you get this money in the spring, and you go, “Oh, isn't this great?” And you go, “Yeah, but you loaned that money to the government, and you didn't get any interest on it.” Well, shoot, 15 years ago, 10 years ago, how much interest are you making on that over the course of the year? Now it's kind of like, hey, wait a minute, this is several hundred dollars in lost income. It probably didn't make that much difference five years ago, but now it does. And just being aware of this is key. Oh no, that's right. We're not earning interest on things, because again, it feels like I can go on my phone and see my checking account balance, I can see my Venmo balance. What's the difference? Well, these differences are really critical for people to understand.

Bridget: Okay, so it seems like a great place to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so we'd love to hear from you. But if you like what you hear on our show and you'd like to find an advisor that's local in your area, Bridget and I are also both members of the Alliance of Comprehensive Planners. And you can check out acplanners.org to find an advisor in your area.

Bridget: And don't forget to subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation.  We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.