The Consumer Financial Protection Bureau (CFPB) has proposed a rule that would establish the CFPB’s supervisory authority over certain nonbank covered people participating in a market for “general-use digital consumer payment applications.”

The proposed market would include providers of funds transfer and wallet functionalities through digital applications for consumers’ general use in making payments to other people for personal, family, or household purposes. Examples include consumer financial products and services offered by large tech providers that are commonly described as “digital wallets,” “payment apps,” “funds transfer apps,” “person-to-person payment apps,” “P2P apps,” and the like.

These are the financial products and services delivered through digital applications that help consumers make a variety of consumer payment transactions, including payments to friends and family and for purchases of nonfinancial goods and services, such as Venmo, PayPal, and many others.

Supervisory activity

The CFPB would notify an entity when the CFPB intended to undertake its supervisory activity, and the entity would then have an opportunity to submit documentary evidence and written arguments in support of its claim that it was not a larger participant.

As the CFPB notes, in establishing the CFPB’s supervisory authority over such persons, the proposed rule would not impose new substantive consumer protection requirements or alter the scope of the CFPB’s other authorities. In addition, some nonbank covered persons that would be subject to the CFPB’s supervisory authority under the proposed rule also may be subject to other CFPB supervisory mandates under the Consumer Financial Protection Act (CFPA).

Nonbank digital payment apps have rapidly grown … to become the most popular way to send money to other individuals other than cash, and are used for a higher number of such transactions than cash.

The CFPA gives the CFPB supervisory authority over all nonbank covered persons offering or providing three enumerated types of consumer financial products or services:

• origination, brokerage, or servicing of consumer loans secured by real estate and related mortgage loan modification or foreclosure relief services;
• private education loans;
• payday loans.

Why a supervisory authority now?

The CFPB is proposing to establish supervisory authority over nonbank covered persons who are larger participants in this market because “this market has large and increasing significance to the everyday financial lives of consumers,” it says. “Consumers are growing increasingly reliant on general-use digital consumer payment applications to initiate payments.

“Recent market research indicates that 76% of Americans have used at least one of four well-known P2P payment apps, representing substantial growth since the first of the four was established in 1998. Even among consumers with annual incomes lower than $30,000 who have more limited access to digital technology, 61% reported using P2P payment apps.”

All across the US, merchant acceptance of general-use digital consumer payment applications has rapidly expanded as businesses seek to make it as easy as possible for consumers to make purchases through whatever is their preferred payment method.

According to one recent market report, nonbank digital payment apps have rapidly grown in the past few years to become the most popular way to send money to other individuals other than cash, and are used for a higher number of such transactions than cash, the CFPB states.

The consumer watchdog says that by supervising these participants who engage in a substantial portion of the overall activity in this market, the agency could help to ensure that they are complying with applicable requirements of federal consumer financial law, such as the CFPA’s prohibition against unfair, deceptive, and abusive acts and practices, the privacy provisions of the Gramm-Leach-Bliley Act, and the Electronic Fund Transfer Act.

The agency could thereby monitor for new risks to both consumers and the market, plus better track emerging risks as new product offerings blur the traditional lines of banking and commerce, it says.

Comments … and a comment

The agency is accepting comments from the industry and public up to January 8, 2024, or 30 days after publication in the Federal Register, whichever is later.

It also seems worthy of mention that the US Supreme Court heard oral arguments last month in a case with the potential to gut the CFPB. The case is CFPB v. Community Financial Services Association of America, and it hinges on the constitutionality of the agency’s funding. If the high court sides with the trade group representing payday lenders, its ruling could have significant impacts for consumers.

For example, any rules the CFPB has issued in the past 12 years — ones revolving around credit cards, mortgages, debt collection — could be nullified. And, even more concerning, since a couple of other regulatory agencies, such as the Federal Reserve, share a similar funding model to the CFPB’s, they may also be called into question. We’ll see how the justices handle that conundrum.