US proposal on non-bank payment providers slammed by industry, consumers and bipartisan politicians

The US Consumer Financial Protection Bureau is facing strong criticism from industry groups, Republican and Democrat lawmakers, and consumer advocates over its proposal to extend regulatory supervision to non-bank providers of digital wallets and payment apps. Others — including banking groups — have welcomed the move.

The total global value of digital wallets transactions is expected to grow from $9tn in 2023 to surpass $16tn in 2028, a rise of 77 per cent, with North America second only to China as the largest market, according to a 2023 report by Juniper research.

Under the proposal, which closed for comments on January 9, companies that facilitate more than five million transactions per year, such as Apple, Google and peer-to-peer platforms Venmo and CashApp, will be subject to CFPB supervision. They will be compelled — in the bureau’s own words — “to play by the same rules as banks and credit unions”. It estimates 17 companies will come under this new supervision.

The rule would help ensure these large non-bank companies adhere to applicable funds transfer, privacy, and other consumer protection laws.

The proposal is the result of the CFPB’s increasing interest in big tech’s role in finance. In a public speech on October 6 2023 at the Brookings institution, CFPB director Rohit Chopra said: “Their [big tech giants’] incursion into finance comes at a uniquely vulnerable moment for the historical separation of banking and commerce . . . Several trends are colliding: the erosion of traditional lines between core banking activities and commercial financial activities, the growth of e-commerce, and the ease of digital surveillance.”

It is this blurring of the lines between commerce and banking that can put customers at risk, especially when traditional banking safeguards, like deposit insurance, may not apply, the CFPB said in a statement.

Who is in, and who is out?

“This proposal is a bold step for the CFPB,” said Christopher Wolfe, managing director of North America Banks at Fitch Ratings. “The bureau is really trying to exercise the fullest extent of its powers under current law.” Wolfe believes a lot depends on how these things are calibrated. “The devil is in the detail and it’s important to get the calibration correct,” he said.

The proposal's lack of detail is concerning to Todd Beauchamp, Washington-based partner at law firm Allen & Overy. “It’s not clear about where the line is, who’s in and who’s out,” he said. “Without clear definitions, it makes it tough to get a view. They are saying ‘17 companies’ but who knows? The scope really needs to be further refined and clarified. Given the powers that the CFPB have, it has caused a lot of people a lot of concern.”

Much of that concern is coming from would-be supervised companies. “This regulatory proposal is perplexing because it appears to be more of an attempt to protect banking incumbents from new market competitors than a proposal to save consumers from harm,” said Krisztian Katona, vice-president of global competition and regulatory policy at the Computer and Communications Industry Association, a think-tank representing communications and technology companies.

Katona was the signatory on the CCIA’s 17-page written submission to the CFPB. In it he outlines four key criticisms of the proposal: failure to clearly identify specific risks — instead it considers the possibility of new risks; stifling innovation, resulting in less choice for consumers; out-of-date and inadequate cost-benefit analysis; and a lack of clarity around how the industry can predict which companies will actually come under the proposed supervision.

The CFPB said “there are approximately 17 entities” but recognises this is a rough estimate. The threshold of five million transactions, the CCIA estimates, is less than 2 per cent of all transactions — it believes the proposal stands to “capture almost all participants”.

The CCIA warned that, as drafted, the proposed rule could encompass “any larger participant” with a small component of their business that relates to consumer payments. These companies could find themselves subject to vast supervisory requests that cover aspects of their non-consumer business.

The Financial Technology Association, a trade association whose members include Klarna, PayPal and Wise, echoed these concerns. “Rather than properly analysing and defining specific markets, the CFPB’s proposed rule conflates diverse uses and products into a one-size-fits-all approach for the digital payments ecosystem,” said Penny Lee, president and CEO of the FTA, in a public statement.

Politicians from both sides weigh in

Both sides of US politics are also criticising the proposal in its current form. In two separate letters, both Republican and Democratic lawmakers asked the CFPB to provide more clarity, with the Republican signatories’ letter implying that the current proposal risks the bureau stepping outside its remit. 

It read: “Given the CFPB’s track record of overreach, we strongly urge the Bureau to refrain from exceeding its authority and instead, commit to clarifying and narrowing the scope of this rule.”

Consumer advocates, too, have weighed in. The American Consumer Institute, a consumer rights non-profit, has criticised the proposal as “a power grab”. Its submission read: “What could be an excellent opportunity for the CFPB to provide information to consumers on best practices when using digital wallets, is instead a regulatory expansion without clear consumer-focused justifications.”

Bank industry groups back the move

Others, however, are applauding the bureau’s flexing of its powers. The Clearing House and Bank Policy Institute, in a joint letter, argued that “consumers deserve consistent protection regardless of whether they are receiving payment services from depository institutions or non-banks. The Bureau’s exertion of its larger participant supervisory authority is a key step in ensuring that protection”.

Likewise, America’s Credit Union has written that the proposed rule would address regulatory gaps that currently exist within the market for consumer payments. It said: “These gaps are not only harmful to consumers . . . but also to credit unions who often have to step in to help members when an error involves a non-bank platform.”

Several submissions have officially asked for an extension of the comment period, but as yet it has not been extended. “It’s difficult to predict what a regulator will do, and there are a lot of moving parts and a lot of considerations — particularly in an election year — so trying to predict what will happen in this space is tough,” said Beauchamp.

Beauchamp said he sees two camps emerging: the first whose core business is payments and who essentially know that supervision “is coming, one way or another” and the second who are “on the margins”, who will try to influence whether or not they’re included — a difficult task, he believes, as you’re “not sure where the line will end up”.

Wolfe said he expects that the regulator will be carefully reviewing the comments and to look at where the comments are coming from. “If it’s just firms saying we don’t like the regulation, well, that’s one thing, but when community groups and the political sphere is pushing back — especially if it’s on both sides of the political spectrum — that’s where I think the regulator probably needs to read the room and adjust accordingly.”

The CFPB declined to comment.