The Consumer Financial Protection Bureau (CFPB) has created a flurry of activity in the past 12 months regarding topics such as open banking, excessive banking fees, and their most recent proposal looks to bring additional oversight to digital wallets currently operating in the U.S. What does this new proposal mean for wallet providers, merchants, and consumers alike?
Contrary to other CFPB proposals we’ve seen as of late, this proposal does not introduce new rules or regulations into the scope of CFPB purview but rather looks to expand their regulatory authority as prescribed by the Consumer Financial Protection Act (CFPA). The expansion targets certain members in a market described as “nonbank covered persons participating in a market for ‘general-use digital consumer payment applications’”. Ultimately, this simply expands the businesses that the CFPB could supervise under the mandate passed in the Dodd-Frank Act. This is the sixth instance since 2011 of the CFPB defining a market for the sake of executing their supervisory authority.
Why is the CFPB proposing this?
In the proposal made by the CFPB, they explain the proliferation of types and uses of nonbank financial services businesses, especially those that are available to consumers online or on their mobile devices. Market research cited suggests that 76% of all Americans have used “1 of 4 well-known P2P payment apps”. They then clarify that even 61% of low-income consumers, those with less than $30,000 of annual income, have used at least 1 of the 4 largest P2P payment apps. This growth is significant and has even eclipsed cash transactions in recent years. Due to the size and importance of the market to U.S. consumers, the CFPB is ensuring that they can supervise the large players.
The proposal, as stated above, aims to cover nonbank persons participating in general-use digital consumer payment applications, but with the stipulation that they have to be sufficiently large. Any wallets or digital payment apps that transact more than five million transactions annually would be covered by this proposal. They do not define the exact applications that their definition would cover, but they do specifically mention general-use digital wallets and P2P payment apps, so Apple Pay, Google Pay, Venmo, Cash App, and similar services should be covered.
What are the exclusions?
There are four key exclusions to this proposal outlined that provide some additional context to the wider intent. The first is that all international money transfers will be excluded, as per the 2014 rulemaking. The second is transfers of funds that are linked to the receiving of other types of funds such as exchanging foreign currencies or purchasing/selling cryptocurrency for fiat. The third exclusion, and perhaps the most important for retail businesses, is it includes digital wallet transactions when the funds are sent to a retailer through their own proprietary application. So, when a consumer purchases goods and uses stored credentials in the merchant’s own wallet, this proposal would not cover that transaction. Finally, this proposal would exclude the extension of credit through proprietary digital wallets of the person extending the credit, so in-house financing offered by businesses would also be excluded.
What to look out for
The CFPB proposal does not directly address merchants, even those with digital wallets, but with both the proliferation of financial services apps and the increase in contactless use mean that certain payment methods might see some churn in the future. Director Chopra and the CFPB remain very active in consumer payments and there could be additional proposals in 2024 that affect merchants, such as those on consumer data privacy rights and open banking. Merchants should keep an eye on the CFPB activity to remain nimble to any changes that would affect their business. Please reach out to Beth Provenzano to join our MAG Advocacy and Communications committee to stay up to date with the latest changes!