On December 11, PayPal, Inc. filed suit against the Consumer Financial Protection Bureau in the United States District Court for the District of Columbia alleging that the CFPB’s Prepaid Card Rule (“the Rule”) represents a “category error” and violates the First Amendment. At issue is the applicability of the Rule to digital wallets compared to general purpose reloadable cards (“GPR cards”). The CFPB subjects both GPR cards and digital wallets to the Rule.
PayPal’s primary offering is digital wallets. Digital wallets typically are used by a consumer to access his or her traditional payment instrument – such as a credit or debit card – to initiate an electronic fund transfer. A consumer links his or her payment instrument to a digital wallet, then PayPal completes the transfer of funds on the consumer’s behalf when a transaction is made through PayPal. A GPR card typically is a physical card that stores consumer funds until the consumer uses the card or transfers those funds. While funds can be stored in a digital wallet, consumers can make purchases or send money through PayPal without actually storing money in PayPal. Most of PayPal’s consumers use its service to transfer funds and make purchases, not to store funds. GPR cards primarily are used “to store the consumer’s bank account, debit card, credit card, and/or prepaid card credentials.”
PayPal alleges that GPR cards and digital wallets are materially different from one another, yet the CFPB subjects both to the same regulatory disclosure regime. During the rulemaking process, the CFPB acknowledged that differences exist between digital wallets and GPR cards, but the fact that digital wallets have the capacity to store consumer funds led the CFPB to take the position that digital wallets should be regulated in the same way as GPR cards.
PayPal alleges that the Rule requires PayPal to make misleading and confusing disclosures about its digital wallet fees and functionalities, and places unreasonable restrictions on the consumers’ ability to link payment instruments to their PayPal accounts. The Rule requires PayPal to make disclosures about fees that PayPal does not charge, and to use language that misrepresents the actual fees paid by most consumers to PayPal. As a result, PayPal alleges that consumers mistakenly would believe that PayPal charges fees to access funds stored with PayPal, or to make an electronic fund transfer. PayPal also alleges that the Rule prohibits PayPal from including explanatory phrases to clarify the disclosures and describe the nature of the fees that PayPal charges. PayPal says that the Rule effectively forces PayPal to make confusing consumer disclosures, and bars PayPal from providing information that would help consumers make informed payment decisions.
As to the First Amendment claim, PayPal alleges that its constitutional rights are infringed because the CFPB is forcing PayPal to convey a message “without regard for whether that compelled speech meaningfully advances the government’s professed interests.” The disclosures that PayPal must now make are confusing and misleading to its consumers, and the Rule prevents PayPal from providing its consumers with information in an attempt to clarify the fee disclosures.
With respect to restrictions placed on a consumer who desires to link his or her payment instrument to a PayPal account, the Rule bans consumers from linking payment instruments to digital wallets for the first 30 days after the consumer acquires a digital wallet. PayPal alleges that forcing this wait period before a consumer may link his or her payment instruments to a digital wallet would be confusing and would limit the consumer’s ability to benefit from one of the core features of a digital wallet – immediate accessibility.
PayPal asks the Court to: (1) declare the Rule arbitrary, capricious, and an abuse of discretion; (2) vacate the Rule and enjoin the CFPB from implementing, applying, and enforcing the Rule; and (3) declare the Rule unconstitutional as an infringement on protected commercial speech.