By Ray Birch
WASHINGTON—In a move that will likely be viewed positively by many credit unions, the Consumer Financial Protection Bureau has finalized a rule to supervise the largest nonbank companies offering digital funds transfer and payment wallet apps—such as Zelle, Google Pay, PayPal and Venmo.
Early reports from analysts indicate the move will be beneficial for consumers and the financial services industry. However, experts also believe the rule’s impact will not be felt immediately, adding, too, the legislation is likely to be challenged in courts or possibly repealed under a new CFPB director.
The latest of the CFPB’s spate of new rules should also better protect FI account holders’ data as the U.S. moves closer to fully adopting open banking. As CUToday.info reported, the CFPB introduced a new open banking rule last month.
The latest rule, the Bureau said, will help it ensure that nonbank companies – specifically those handling more than 50 million transactions per year – follow federal law just like large banks, credit unions, and other financial institutions already supervised by the CFPB.
While the CFPB has always had enforcement authority over these companies, the rule gives the CFPB the authority to conduct proactive examinations to ensure companies are complying with the law in these and other areas, the agency said.
The rule will be effective 30 days after publication in the Federal Register.
13 Billion Payments Annually
The CFPB said it estimates that the most widely used apps covered by the rule collectively process over 13 billion consumer payment transactions annually.
"Digital payments have gone from novelty to necessity and our oversight must reflect this reality,” said CFPB Director Rohit Chopra. "The rule will help to protect consumer privacy, guard against fraud and prevent illegal account closures."
The CFPB noted that these companies began as a convenient alternative to cash and have evolved into a critical financial tool, processing over a trillion dollars in payments between consumers and their friends, families, and businesses.
“While banks and credit unions offering consumer payment services are subject to CFPB examinations and inspections, many of these very large technology firms handling billions of transactions are not. The CFPB has closely observed developments in this emerging market, including by monitoring consumer complaints and launching an inquiry into Big Tech and peer-to-peer platforms offering popular payment apps,” the CFPB said.
Key Points
The final rule will enable to the CFPB to supervise companies in key areas including:
- Privacy and Surveillance: “Large technology companies are collecting vast quantities of data about an individual’s transactions. Federal law allows consumers to opt-out of certain data collection and sharing practices, and also prohibits misrepresentations about data protection practices,” the CFPB said.
- Errors and Fraud: “Under longstanding federal law, consumers have the right to dispute transactions that are incorrect or fraudulent, and financial institutions must take steps to look into them. The CFPB is particularly concerned about how digital payment apps can be used to defraud older adults and active duty servicemembers. Some popular payment apps appear to design their systems to shift disputes to banks, credit unions, and credit card companies, rather than managing them on their own,” the Bureau said.
- Debanking: “Given the volume of payments consumers make through many popular payment apps, consumers can face serious harms when they lose access to their app without notice or when their ability to make or receive payments is disrupted. Consumers have reported concerns to the CFPB about disruptions to their lives due to closures or freezes,” the CFPB said.
Detecting Problems Early
The CFPB noted that supervision can prevent harm by detecting problems early.
“Supervision also is an important tool for the CFPB to assess risks that can emerge rapidly in this market, including from outages and other issues that could lead to millions of consumers losing access to their funds,” the Bureau said.
In the final rule, the CFPB said it made several significant changes from its initial proposal. The transaction threshold determining which companies require supervision is now substantially higher, at 50 million annual transactions. Given the evolving market for digital currencies, the CFPB also limited the rule's scope to count only transactions conducted in U.S. dollars.
“The rule represents the latest step to strengthen oversight of large technology firms in consumer financial markets. The CFPB warned Big Tech firms in 2022 about their obligations under consumer protection laws when using behavioral targeting for financial products. The CFPB also issued a report about how funds held in some popular apps are not protected by federal deposit insurance, and advised consumers to regularly move their funds to an insured account. The CFPB also published research about regulations imposed by Apple and Google in the ‘tap-to-pay’ market,” the Bureau said.
Rule’s Impact
Brandy Bruyere, a partner at Honigman, LLP, told CUToday.info the rule has the potential to make the largest of the digital payment apps come to the table and be clearer that consumers can make their unauthorized use claims with the app, not just the credit union or bank that the app is linked to.
“The CFPB will be able to examine these larger payment app providers for compliance with regulations, including Regulation E, which requires making consumers whole for unauthorized electronic fund transfers, and require changes in practices if they are not complying,” said Bruyere.
With an effective date 30 days from publication, the rule is set to go into effect before Chopra is no longer director of the CFPB, Bruyere said, reminding that the Trump Administration will likely remove the current CFPB director.
“So, the next question is, will this rule be challenged by the industry or perhaps abandoned by the incoming administration?” Bruyere said. “It is possible that the impacted payment app companies would seek to invalidate this rule as an inappropriate exercise of the CFPB’s discretionary authority to determine what is a large market participant. That’s not a slam-dunk argument. But with new leadership the CFPB may not defend that kind of lawsuit. We saw that kind of activity in 2017-2018, with the federal government not vigorously defending rule challenges from the prior administration.”
Bruyere said another pathway to challenge the rule, which may not be as successful, is advocacy.
“Given the change in the administration and GOP control of both chambers of Congress, the payment apps could work with members of Congress to invalidate the rule under the Congressional Review Act, a statute that has been used about 20 times by the legislature to override a regulation,” said Bruyere. “This has been done for two CFPB rules – a rule restricting the use of arbitration agreements, and a guidance bulletin on indirect auto lending. Banks and credit unions generally supported this rule though, and while some members of Congress signed on to comment letters against the rule, building Congressional consensus for this kind of challenge with the slim margins for determining the majority in both the House and Senate make this seem unlikely. The new administration says its goals include federal workforce reductions and eliminating regulations, so, I’m not confident much will come from this rule over the next several years.”
One Controlling Source
Michael Moebs, economist and CEO at Moes $ervices, advocates for consolidation of payments under one controlling source.
“The Federal Reserve, per the 1913 Federal Reserve Act, controls and monitors the U.S. payment system,” said the economist and chair of Moebs $ervices. “Payment systems need to be under one controlling source in every nation. Prior to 1914 there was chaos in the U.S. payment system. Congress in 1913 voted and authorized the Federal Reserve Act. Zelle, PayPal, Venmo, Chime, Google Pay, Apple Pay, etc. have risen to prominence in the so-called fintech market because payment systems need modernization. There needs to be oversite on the movement of money because any market cannot self-regulate itself.
“In the 1950s and 1960s the Uniform Commercial Code (UCC) was created but never nationalized,” continued Moebs. “The UCC oversight are the 50 states. The UCC has payment system sections. Is it time to nationalize the UCC by Congress? This is not the domain of the CFPB. Only the Federal Reserve has payment authority.”
Level Playing Field
WalletHub CEO Odysseas Papadimitriou welcomed the new CFPB rule saying it levels the playing field among financial services companies.
“I don't think it is fair competition for companies to be able to offer similar services and be regulated differently,” Papadimitriou told CUToday.info. “I think that's bad for competition, and it’s not how capitalism works. I think regulation should be done by the type of service offered and not by the type of entity that is offering the service. I'm supportive of this.”
Papadimitriou said concerns over fintechs leading to greater fraud exposure as open banking takes hold in the U.S. are exaggerated.
“I think an inverse argument can be made that with open banking and consumers being able to aggregate their information on trusted financial partners it will be easier for them to be alerted of suspicious activity in one place, as opposed to having to monitor five or ten different accounts for fraud,” Papadimitriou said.
Mixed Reviews
Former NCUA Chairman Dennis Dollar pointed out the rule has had a lot of mixed reviews going back to the comment period.
"The fintechs are almost unanimously against it as are some banks and credit unions that partner with, invest in and use the services of these types of fintechs," said the Dollar Associates principal. "However, there are some banks and credit unions that kind of like the fintechs having to face some of the same CFPB regulatory activism they have to face. The response has been a mixed bag."
One thing, however, is obvious, added Dollar.
"The CFPB director is moving to do exactly what many predicted he would do as the fierce partisan he has been labeled--fairly or unfairly--and that is to push as many final regs out the door as possible before the Trump inauguration, following which he will almost certainly be summarily replaced," said Dollar. "The real question will be whether the next CFPB director chooses to enforce these lame duck rules, whether that next director moves to repeal them, or whether the inevitable lawsuits that will be brought against these last-minute rules will be defended by the next CFPB director or the Justice Department under a new Attorney General. It’s going to be interesting because, as has been said many times over the years, elections matter and the results change things in politically appointed positions as much as in elected positions.”
Google Under Supervision
In a related move, last week the CFPB took steps to place Google under formal federal supervision, the Washington Post reported.