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After a 60-day consultation period, the US Consumer Financial Protection Bureau (CFPB) is currently reviewing its proposed regulations on non-bank payment apps. Facing a backlash from the industry, how are the proposals likely to evolve?
In November last year, the CFPB announced its intention to bring large non-bank payments apps under examiner oversight for the first time.
In the proposal, the CFPB said that large operators of both digital wallets and peer-to-peer (P2P) payment apps would be brought under the same supervisory exam process as banks and credit unions.
If adopted in its current form, the rulemaking would apply to non-bank financial companies that handle at least 5m transactions per year and do not qualify as a small business administration (SBA).
The CFPB initially estimated that about 17 entities would be covered by the proposed rule. However, industry respondents strongly rejected this estimate, arguing that the real number would be much higher and would effectively extend to “almost all” participants.
Melissa Baal Guidorizzi, a partner and fintech specialist at Orrick law firm, told Vixio the CFPB’s figure is likely drawn from its “Prepaid product agreements database”.
This database currently contains 16 active products categorised as “Digital wallet/P2P”, including names such as Cash App, Google Pay, PayPal Cash and Remitly.
Notable absences, considering they are mentioned explicitly in the CFPB’s proposal, include Zelle and Venmo.
As such, Guidorizzi noted that many responses to the proposed rule expressed “confusion” as to its scope and sought greater clarity.
Going forward, she said the defined market for “larger participants” is likely to change, but the rule itself will be finalised, and that firms should start preparing their compliance procedures sooner rather than later.
“Non-bank entities that have not yet been subject to a federal exam should consider how that process could impact their business and start preparing,” she said.
“As noted by at least one commenter, preparing for an exam can be at least a year long process.”
How might the proposal change?
The consultation for the proposal, which closed on January 8, elicited strong pushback from a wide range of payments operators, particularly from big tech.
In general, Guidorizzi said the comments aligned with the interests of respondents, as could be expected.
For example, bank trade associations voiced support for “levelling the playing field” with non-banks, while non-banks argued that they are already subject to supervisory obligations at the state and federal levels.
There were, however, two common criticisms of the proposal that crossed industry lines.
The first is that both bank and non-bank respondents agreed that the CFPB’s definition of “general-use digital consumer payment application market” lacks clarity.
Amazon, for example, asked for the rulemaking to be “paused” and reconsidered for this reason, or, at the very least, that services such as Amazon Pay be excluded from its scope.
Amazon said the proposed rule does not identify “specific risks” attributable to the covered persons, and fails to explain how the rulemaking would mitigate any such risks to consumers.
As a retailer, Amazon is concerned that Amazon Pay would be captured by the proposed rules, leading to “substantial costs” both for itself and for consumers and merchants.
Amazon argues that Amazon Pay, a so-called “Payment Method Wallet”, is distinct from other covered persons such as P2P payment apps.
Payment method wallets merely hold payment method credentials issued by third parties, it said, and allow a chosen payment method (credit card, debit card, etc.) to be charged in a transaction.
In contrast, what Amazon refers to as “Consumer Funds Wallets” hold funds on behalf of consumers or provide consumers with direct access to their funds.
“Commenters noted that the proposal could include so many different types of digital products and services that it could result in inconsistent regulatory obligations and stifle innovation,” said Guidorizzi.
She added that the CFPB’s regulations team is likely to focus on these themes in the final rule, and is also likely to draw on use case examples from public enforcement actions and exams for prepaid accounts with digital interfaces.
The curious case of crypto
The second common criticism identified by Guidorizzi was the widespread rejection of the CFPB’s plans to include crypto-asset transactions within the scope of the rule.
On this point, bank trade associations agreed with firms such as Coinbase that the CFPB would overstep its authority by including crypto-asset products within its definition of “digital wallets”.
“The CFPB has never formally sought or been given, and currently lacks, the authority over crypto-assets that it asserts in the proposed rule,” said Paul Grewal, chief legal officer at Coinbase.
“The CFPB should modify the proposed rule to explicitly state that applications used for crypto-asset transactions are not within the scope of the proposed market.”
Coinbase said its concerns are “amplified” by the likelihood that Congress will enact new legislation to regulate digital assets, which could conflict with the proposed rule.
If the CFPB maintains that crypto-assets be included within the scope of the rule, Coinbase asked that the rule be re-proposed, taking into account crypto’s “unique characteristics”.
Other respondents also highlighted that this type of foundational market change requires additional study, comment and possibly a separate rulemaking, said Guidorizzi.
“The crypto comments may have the most impact in the end,” she said. “If the CFPB is unable to provide more detailed support for why crypto-assets are ‘funds’ in the final rule, they may choose to defer the question to a later rulemaking.”
