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The Computer and Communications Industry Association (CCIA) has pushed back on new plans to regulate US big tech payment apps, describing them as a solution looking for a problem to solve.
In a 17-page consultation response, the CCIA argues that there is little justification for the proposed rules, whether in terms of protecting consumers or promoting competition.
Published on the final day of a two-month comment period, the CCIA was responding to a new rulemaking proposal unveiled last November by the Consumer Financial Protection Board (CFPB). CCIA members include big tech firms such as Apple, Google, Amazon and Meta.
As covered by Vixio, the CFPB intends to introduce new rules that will define and regulate “larger participants” in the market for “general-use digital consumer payment applications”.
If adopted, the proposal would apply to all non-bank consumer financials that handle at least 5m transactions per year, and would subject these firms to the same supervisory exam process as banks and credit unions.
Rohit Chopra, director of the CFPB, said that regulations need to be updated to reflect the fact that non-banks are increasingly offering payment services that used to be the exclusive domain of banks.
He added that non-banks and “large technology firms” are practising “regulatory arbitrage”, while blurring the lines that have traditionally separated banking and payments from other commercial activities.
“The CFPB has found that this blurring can put consumers at risk, especially when the same traditional banking safeguards, like deposit insurance, may not apply,” he said.
Lack of cost-benefit analysis
The CCIA has called for the proposals to be reconsidered on several grounds.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the CFPB is required to consider the costs and benefits to both consumers and businesses of proposed rules.
It is also required to conduct a risk assessment to justify the introduction of new regulations that will affect markets for consumer financial products and services.
The CCIA argues that the proposal fails to clearly identify a specific risk it seeks to address, and merely identifies the possibility of “new risks” from “new product offerings” without explicitly stating them.
The CCIA also notes that the CFPB already has investigatory and enforcement powers to ensure compliance with existing federal financial regulations.
These powers can be activated if and where the CFPB identifies consumer protection issues through its market monitoring activities.
As such, while duplicating powers that the CFPB already has, greater compliance burdens will be placed on firms that would need to submit to new supervisory examinations.
The CFPB estimates that each examination would cost a covered person $21,001 in compliance officer and attorney fees, but the CCIA rejects this estimate as “grossly” understated.
The association points out that the estimate is based on a 2014 example of a business that processes just 1m transactions per year.
Flaws in proposed definition of 'larger participants'
From here, the CCIA then turns to another important but “arbitrary” number around which the proposed rule is built.
As mentioned, the rule would define any firm that processes more than 5m transactions per year as a “larger participant” — a threshold that the CCIA argues is extremely low.
Based on figures from Pew Research, the CCIA points out that 76 percent of Americans have used at least one of the four largest peer-to-peer (P2P) payment apps in their lifetimes (PayPal, Venmo, Zelle, Cash App).
In 2022, this would have amounted to 254m people. Had they all made just one transaction, this would mean that a payment firm would need only a 2 percent market share to meet the threshold of 5m transactions.
“In other words, the CFPB’s proposal would capture almost all participants of the market — which is contrary to the intended scope seeking to regulate only larger participants,” says the CCIA.
The association also writes that the low threshold would also capture firms with “significantly” different business models.
This would lead to higher compliance and research and development costs for newcomers to the market, making them a less attractive prospect for venture capital while doing little to affect incumbents.
Similarly, the CCIA also argues that the proposal is “overbroad” in that it does not discriminate between different types of non-bank payment firms.
For example, the following four types of firm would be subject to the same regulations:
1) An entity that allows consumers to make payments from a stored value balance held by that entity.
2) An entity that itself receives funds from a consumer’s bank account for transmission to a third party.
3) An entity that charges payment methods in the context of the sale of goods and services.
4) An entity that merely holds and passes payment method details, such as card numbers, but never participates in the flow of funds from the consumer to the third party.
A solution looking for a problem
The final argument in CCIA’s response is that the proposed rules are not necessary based on current levels of consumer satisfaction in the target market.
In 2017, Morning Consult asked a national sample of almost 2,000 Americans about their experience using particular services offered by large non-bank payment apps.
The vast majority of users of such apps, including Google Pay and Apple Pay, reported being “satisfied” or “very satisfied” with the services offered.
As such, the CCIA argues that the regulator is defying its own mandate by making regulatory proposals “ex-ante”, i.e. prior to evidence of market failure or consumer harm.
“Overly complex, intrusive or broad regulatory regimes are likely to deter entry and investment from innovative companies,” the association writes.
“Therefore, any proposed regulation should only be introduced to address particular market failures, which is not the same as the mere existence of market power.”
