On November 7, 2023, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule to supervise large providers of digital wallets and payment apps. Specifically, the proposed rule on Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications would extend the CFPB’s supervisory authority to certain nonbank covered persons participating in a market for general-use digital consumer payment applications. Comments on the proposed rule are due by January 8, 2024.
Overview of Rulemaking
Under the Consumer Financial Protection Act, the CFPB has supervisory authority over “larger participant[s] of a market for [….] consumer financial products or services,” as defined by rule. Subject to certain exclusions, the proposed rule would cover larger participants in the market for providers of digital apps that offer fund transfers and wallet functionalities for consumers’ general use to make payments to other persons for personal, family, or household purposes.
Whether an entity is a “larger participant” will depend on whether the nonbank covered person and its affiliated entities meet two criteria: (1) they provide general-use digital consumer payment apps with an annual volume of $5 million in consumer payment transactions or more; and (2) they are not a small business concern based on the Small Business Administration’s size standard. The CFPB would be permitted to require the entity to submit documents for the purposes of assessing whether the entity would be subject to the rule.
The proposed rule would define certain key terms and concepts, including:
- Consumer payment transactions: Subject to certain exceptions, these transactions would include funds transfers on behalf of a consumer in a state to another person, primarily for personal, family, or household purposes. The defined term would also include payments to individuals or businesses and would not be limited to peer-to-peer (P2P) payments. Also subject to exceptions, the term would include transfers made by extending consumer credit.
- Covered payment functionality: This term would mean one or both of the following:
- Funds transfer functionality: With respect to a consumer payment transaction, receiving funds for the purpose of transmitting them or accepting and transmitting payment instructions; or
Wallet functionality: A product or service that: (1) stores account or payment credentials, including in encrypted or tokenized form, and (2) transmits, routes, or otherwise processes such stored accounts or payment credentials to facilitate a consumer payment transaction.
- Digital application: This term would refer to a software program that a consumer can access through a personal computing device.
- General use: Under the proposed rule, this concept would refer to consumer payment transactions facilitated by the covered payment functionality, provided through a digital application, which transactions would not be subject to significant limitations on the purpose of the payment.
The CFPB estimates that the proposed rule would bring 17 entities under CFPB supervision.
Impact & Purpose
Under the proposed rule, the CFPB would examine larger participants for compliance with applicable federal consumer financial laws, including the Electronic Funds Transfer Act and implementing Regulation E; the privacy provisions of the Gramm-Leach-Bliley Act; and laws prohibiting unfair, deceptive, or abusive acts or practices.
The proposed rule follows recent CFPB actions relating to digital payment apps. In June 2023, the CFPB issued a report noting that servicemembers, veterans, and their families submitted over 1,000 complaints about digital payment apps in 2022. In the same month, the CFPB also warned consumers that funds within digital payment apps may not be protected by federal deposit insurance. These issuances followed an October 2021 CFPB order for six large technology and P2P payment platforms to provide data to the CFPB relating to their businesses. The CFPB issued a statement with the order, inviting public comment.
The CFPB explained that the proposed rule, which considered information received from the order and public comments, was designed to address risks in the financial system. In a press release, the agency noted, “[d]espite their impact on consumer finance, Big Tech and other nonbank companies operating in the payments sphere do not receive the same regulatory scrutiny and oversight as banks and credit unions.” The CFPB has enforcement authority over these companies but does not have supervisory authority, with “examiners carefully scrutinizing their activities to ensure they are following the law and monitoring their executives.”
Proponents of the proposed rule argue that these “larger participants” are systemically important to the U.S. economy and their failure could destabilize banks. In an October speech, CFPB Director Rohit Chopra indicated that he supports designating the largest, private digital payments companies and stablecoin issuers as systemically important financial institutions.
The Bigger Picture
The CFPB expects that, if finalized, the proposed rule would promote fair competition and level the playing field between nonbanks and depository institutions. The proposed rule is also intended to advance the CFPB’s statutory mandate to ensure that consumer financial law is enforced for both nonbanks and depository institutions.
The proposed rule may also be a harbinger of more regulation to follow. Federal Deposit Insurance Corporation Chair Martin Gruenberg, among other policymakers, has expressed his support for the Financial Stability Oversight Council applying tailored, enhanced, prudential standards and enhanced reporting requirements for certain nonbank financial institutions. Chair Gruenberg also voiced his approval of new guidance that makes it easier to designate nonbanks as systemically important financial institutions, and he emphasized that nonbanks may pose a significant risk to the U.S. financial system.
The proposed rule also comes amidst market developments not directly driven by the regulatory agencies, including U.S.-based digital payments network Zelle’s recent announcement that it would implement new safety measures, including requiring financial institutions to reverse Zelle transfers for senders that are the victims of certain scams.
We will continue to follow developments in the nonbank payment space, including in relation to the CFPB’s proposed rule to supervise larger participants of the market.