The Consumer Financial Protection Bureau (CFPB) has recently unveiled a groundbreaking proposed rule that could reshape the regulatory landscape for payment app and digital wallet providers. This rule would impose federal supervisory rules applicable to banks and other financial institutions, ensuring that these non-bank entities prioritize consumer protection and fair practices. In this article, we’ll provide an overview of the CFPB’s proposed rule and its potential implications for the digital payments industry.
The Rise of Digital Wallets and Payment Apps
In recent years, digital wallets and payment apps have become increasingly popular for conducting financial transactions. These applications, offered by tech giants like Apple, Google, and PayPal, allow users to store their payment information securely and make purchases with ease. While these innovations have simplified the way we handle money, they’ve also raised concerns about data privacy and consumer protection.
The CFPB’s Proposed Rule
The CFPB’s proposed rule is aimed at addressing these concerns by introducing new regulations and oversight for digital wallet providers and other Big Tech companies involved in the digital payments ecosystem. Key components of the proposed rule include:
- Data Privacy and Security: The rule would require digital wallet providers to establish robust data privacy and security protocols. This includes safeguarding users’ personal and financial information and promptly notifying consumers in case of data breaches.
- Anti-Discrimination Measures: To ensure fair access and treatment of all consumers, digital wallet providers would be prohibited from engaging in discriminatory practices, such as denying access to services based on race, gender, or other protected characteristics.
- Transparency Requirements: Companies offering digital wallets and payment apps would need to provide clear and concise information to users regarding fees, terms, and conditions. This transparency aims to empower consumers to make informed decisions about their financial transactions.
- Complaint Resolution: The proposed rule enforces a mechanism for resolving consumer complaints, requiring companies to establish efficient procedures for addressing issues raised by users.
- Prohibition of Unfair and Deceptive Practices: Digital wallet providers would be prohibited from engaging in any unfair or deceptive practices that could harm consumers. This includes deceptive marketing tactics and hidden fees.
Applicability
The proposed rule aims to regulate general-use digital consumer payment applications, meaning companies providing a “covered payment functionality” through a digital application for consumers’ general use in making consumer payment transaction(s).
The rule proposes several definitions required to apply the law:
- Consumer Payment Transaction – means the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes.
- Covered Payment Functionality – a nonbank covered person if its market activity includes only one or both of the following functionalities:
- Funds transfer functionality – means receiving funds for the purpose of transmitting them; or accepting and transmitting payment instructions.
- Wallet functionality – means the storing of account or payment credentials and the to process such data to facilitate a consumer payment transaction.
- Digital Application – means a software program accessible to a consumer through a personal computing device, including but not limited to a mobile phone, smart watch, tablet, laptop computer, or desktop computer.
- General Use – means the absence of significant limitations on the purpose of consumer payment transactions facilitated by the covered payment functionality provided through the digital consumer payment application.
Up start firms will be relieved to hear that this proposal would not apply unless they are processing many transactions. If implemented, the rule would apply only to those larger companies handling more than 5 million transactions per year.
The Proposal also excludes certain types of transactions, including the following:
- International money transfers
- Foreign exchange (conversion of US dollars for another currency)
- Payments processed for the sale or lease of goods or services to a consumer from an online or physical store or marketplace operated by the non-bank;
- Certain transactions of digital assets
- Transfers of funds for the primary purpose of buying or selling a security or commodity
- Consumer credit extensions, including lending money by nonbanks to consumers to buy goods or services
Application to Digital Assets
The term “funds” includes digital assets that have monetary value and are readily useable for financial purposes, including as a medium of exchange. Under the proposed rule, the transfer of funds in the form of the digital assets (e.g. Bitcoin) by or on behalf of a consumer physically located in a State to another person primarily for person, family, or household purposes would qualify as a “consumer payment transaction” unless one of the proposed exclusions to the definition of that term applies.
Reasoning
The CFPB stated in its release that “Big Tech and other companies operating in consumer finance markets blur the traditional lines that have separated banking and payments from commercial activities.” According to CFPB Director Rohit Chopra, the 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.”
The proposed rule would require larger, non-bank consumer payment companies to:
- Adhere to applicable funds transfer, privacy, and other consumer protection laws: The CFPB would be able to supervise larger participants for compliance with applicable federal consumer financial protection laws, which includes applicable protections against unfair, deceptive, and abusive acts and practices, rights of consumers transferring money, and privacy rights.
- Play by the same rules as banks and credit unions: The CFPB’s supervision of these large companies can foster a level playing field with depository institutions. Greater supervision of nonbanks in this market would ensure federal consumer financial protection law is enforced consistently between non-depository and depository institutions in order to promote fair competition.
The CFPB has authority to conduct supervisory examinations over all nonbank companies in the mortgage, payday loan, and private student loan industries, as well as those who serve as service providers to banks and credit unions. Additionally, the agency can supervise individual entities that pose a risk to consumers, as well as larger participants in other markets.
The proposed rule would be the sixth in a series of CFPB rulemakings to define larger participants operating in markets for consumer financial products and services that play a substantial role in consumers’ everyday lives. The first five rules covered larger participants in consumer reporting, consumer debt collection, student loan servicing, international money transfers, and automobile financing.
Implications for FinTech Companies
The CFPB’s proposed rule is another step toward expanding its regulatory oversight of Big Tech and non-bank companies involved in the digital payments industry. While these companies have enjoyed a relatively free hand in developing and offering these services, this rule would subject them to additional federal oversight and regulation similar to traditional financial institutions.
Perceived Consumer Benefits
For consumers, the CFPB’s proposed rule brings the promise of clearer terms and conditions, improved data security, and efficient complaint resolution mechanisms should enhance the overall user experience and promote trust in digital wallet providers.
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