On November 7, 2023, the Consumer Finance Protection Bureau (“CFPB”) proposed a new rule that calls for federal regulatory oversight of large nonbank companies that offer digital wallets and payment apps to consumers. The proposed rule seeks to bring Big Tech companies and financial technology firms under the CFPB’s regulatory umbrella by subjecting companies handling more than five million transactions per year to the agency’s supervisory examinations under the Consumer Financial Protection Act (“CFPA”). Actions the CFPB could take under this new supervisory authority include (1) assessing compliance with Federal consumer financial law; (2) obtaining information about such persons’ activities and compliance systems or procedures; and (3) detecting and assessing risks to consumers and consumer financial markets. The CFPB would be able to conduct examinations of various scopes of these newly supervised entities and, where appropriate, request information from supervised entities prior to or without conducting examinations.
The proposed market for this rule would include providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other persons for personal, family, or household purposes. Examples include many consumer financial products and services that are commonly described as “digital wallets,” “payment apps,” “funds transfer apps,” “person-to-person payment apps,” “P2P apps,” and the like. If adopted in its current form, this new oversight would only apply to companies that handle five million or more digital payment transactions every year and that are not a small business concern based on the applicable Small Business Administration size standard. Additionally, certain types of transactions, such as international money transfers and the purchase, sale, or exchange of crypto-assets, would be excluded from this five million transaction threshold. At the moment, the CFPB estimates that would cover about 17 companies, but the CFPB is still considering whether a lower or higher threshold should be implemented.
The CFPB has become increasingly concerned about non-bank and technology companies in the digital payments space, and if this rule is adopted, then it will be interesting to see how it will be extended to other payment market participants. While the proposed rule seems to be a sandbox to oversee larger participants, it is difficult to foresee that the CFPB would stop its regulatory oversight of the industry here. “Payment systems are critical infrastructure for our economy,” CFPB Director Rohit Chopra said. “These activities used to be conducted almost exclusively by supervised banks. Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subject to appropriate oversight.”
Currently, the CFPB seeks comment, including suggestions of alternatives on the proposed threshold for defining larger participants of the market for general-use digital consumer payment applications as defined in the Proposed Rule, which are to be submitted by January 8, 2024. We will continue to monitor this newly proposed rule and update you on its adoption. If you would like to read the entire text of the proposed rule, please click on the following link: https://files.consumerfinance.gov/f/documents/cfpb_nprm-digital-payment-apps-lp-rule_2023-11.pdf.
