CFPB’s New Rule Can Change the Game for Digital Payment Apps
The U.S. Consumer Financial Protection Bureau (“CFPB”) recently introduced a new proposed rule change that will expand its regulatory oversight to “‘general-use digital consumer payment apps.’” (Jessie Chang, ABA). The Consumer Financial Protection Act allows the CFPB to supervise nonbank entities in the mortgage, payday loan, and private student loan sectors, as well as service providers to banks and credit unions, but the CFPB can also oversee companies that pose consumer risks or are “larger participants in other markets.” (Consumer Financial Protection Bureau). While the CFPB has used its power to regulate “larger participants” in markets involved with consumer financial products and services before, this proposed rule will expand its oversight to a brand-new height by including more non-traditional banking companies. (A&O Shearman). CFPB Director Rohit Chopra stated the proposed “rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight.” (Consumer Financial Protection Bureau). This article examines the need for and the positive effects of this proposed rule, as well as the potential dangers.
This new rule has scope restrictions that would apply to large participants and for consumer transactions. Nonbank institutions will be considered large participants subject to the proposed rule if they have an annual volume of at least five million transactions and are not considered a small business by Small Business Administration size standards. (Jessie Chang, ABA). The proposed rule covers transactions for consumer purposes, meaning it must be “for personal, family, or household purposes.” (Greenberg Traurig). The CFPB means for this rule to cover what are referred to as “‘digital wallets,’” “‘payment apps,’” “‘funds transfer apps,’” and “‘P2P apps.’”(John Coleman, et al., Orrick). If implemented, the rule will primarily affect larger financial tech companies and payment app providers, with about 17 companies—processing over 88% of transactions and $13 billion in the digital payment space—being directly impacted. (Cooley). Amazon, Facebook, Google Pay, PayPal, and Apple are examples of companies that would be affected (Jessie Chang, ABA; Stacey Cowley, New York Times).
The companies that qualify as “larger participants” under the new rule will be subject to CFPB exams, audits, and will need to comply with federal consumer financial laws, including Regulation E and UDAAP (Unfair, Deceptive, or Abusive Acts or Practices). (Greenberg Traurig). The new supervisory oversight will allow greater power to access corporate records and send financial examiners straight to the companies to “interview employees, scrutinize policies and safeguards, and flag problems as they spot them.” (Stacey Cowley, New York Times).
Certainly, this proposed rule will extend protection to consumers who use digital payment methods by ensuring greater accountability with stricter oversight for the companies offering these payment methods. Considering the frequency and the amount of money in digital payment apps that are being used in every step of our economy by most members of our society, this regulation seems overdue. Consumers have rising complaints about these digital payment companies, and there is more risk and less protection than in a traditional bank. (Consumer Financial Protection Bureau). With digital payments becoming a crucial part of financial infrastructure, the lack of oversight leaves consumers vulnerable to unfair practices and a lack of recourse. CFPB’s ability to supervise is a valuable tool to detect questionable conduct and to pressure companies to improve their business practices. (Keith J. Barnett, et al., Troutman Pepper).
However, the new rule has potentially harmful effects on the companies now being regulated and leaves questions on how it will be applied practically. This proposed rule subjects companies to a brave new world for compliance with procedures they have not had to follow before and expenses that may have a stifling effect on the industry through raising costs for compliance and penalties. (Greenberg Traurig). These companies will likely pass that cost on to the consumers using their services, which may make these services too expensive for consumers to use. (Lynne Marek, Payments Dive). Additionally, the new rule creates uncertainty about what exact obligations companies now face and how far the rule goes to cover digital assets. (Crypto Council for Innovation). It also leaves uncertainty in the current regulatory framework considering existing state laws and licensing requirements. Id. The ambiguity in the rule can give CFPB examiners wide “discretion to collect information and leave ample room for arbitrary enforcement.” Id.
Overall, this rule has far-reaching implications and is a pivotal expansion for the CFPB that might be necessary for consumer protection. Although the CFPB does not have exact control over nonbank entities, defining them as “larger participants” is a novel way to expand that control over more and more industries. As the use of digital payment and nonbank platforms has expanded exponentially over time to more industries and companies, this proposed rule ensures that the authority and oversight of the CFPB will also continually expand. By ensuring its powers evolve with the shifting financial landscape, the CFPB can address emerging risks in the digital payments space. This shift represents a significant step in CFPB’s power and oversight.