Navigating the CFPB's Proposed Rule on Digital Payments Oversight

In a bid to adapt to the evolving landscape of digital finance, the Consumer Financial Protection Bureau (CFPB) has unveiled a significant proposal that could reshape the regulatory framework for nonbank companies providing digital payment applications. At the core of this proposed rule is an expansion of the CFPB's supervisory authority to encompass larger nonbank entities involved in "general-use digital consumer payment applications." This move, driven by the proliferation of digital wallets and payment apps, seeks to address a notable regulatory gap, where many of these nonbank companies have operated without undergoing CFPB supervisory examinations. Here are some fast facts and a quick summary of the newly proposed rule.  

Five Fast Facts:

1. Scope Expansion: The CFPB's proposed rule aims to extend oversight to larger nonbank companies providing "general-use digital consumer payment applications," particularly those handling over 5 million transactions annually.
2. ‍Consumer Finance Landscape Shift: Digital payment applications, fueled by Big Tech, have become integral to consumer finance. Despite their significant impact, nonbank players in this sphere lack the same regulatory scrutiny as banks and credit unions.
3. ‍Equal Regulatory Treatment: Under the proposed rule, larger nonbank digital payment companies would be subject to the same supervisory examinations as traditional banks, with the aim of ensuring consistent adherence to federal consumer financial protection laws.
4. ‍Addressing Risks and Complaints: The proposed rule responds to rising complaints about digital payment applications. It seeks to mitigate risks and protect consumers by enforcing compliance with funds transfer, privacy, and other consumer financial protection laws.
5. ‍Leveling the Playing Field: The proposal aims to promote fair competition by fostering a level playing field between nonbank and depository institutions. The CFPB believes this consistency in enforcement is vital to ensuring consumer protection across the financial marketplace.

Key Takeaways

The CFPB's initiative, spurred by the prominence of Big Tech and other large technology firms in the digital finance space, highlights the critical role played by digital payment applications in modern consumer finance. With millions relying on these applications for everyday transactions, including online and in-person retail spending, the proposed rule aims to bring about a level playing field. By subjecting larger nonbank entities that handle over 5 million transactions annually to the same supervisory exam process as traditional banks and credit unions, the CFPB aims to ensure consistent adherence to federal consumer financial laws.

This regulatory intervention comes at a time when complaints about digital payment applications and their operators have been on the rise. The blurred lines between banking, payments, and commercial activities in the realm of Big Tech and other nonbank companies have prompted the CFPB to act. The proposed rule not only responds to consumer concerns but also seeks to address potential risks associated with the lack of regulatory scrutiny in this rapidly growing sector.

This move is part of the CFPB's broader strategy to carefully monitor the entry of large technology firms into consumer financial markets. The regulatory actions taken by the CFPB in recent years, including warnings to big tech firms about compliance with federal consumer financial protection laws and inquiries into potential risks posed by their payment platforms, underscore the regulator's commitment to ensuring a competitive and secure financial marketplace.

"This conversation brings into focus the ripple effects on partners, emphasizing the need for a comprehensive understanding of the downstream impacts that may emanate from the direct supervision of non-bank participants, further underscoring the intricacies of regulatory relationships within the financial ecosystem." - Davis Wright Tremaine LLP

Listen to the SRA Watchtower Risk Intel Podcast for more insights. Episode 30: Unpacking CFPB’s Proposed Rule on Digital Payments Oversight With Guests From Davis Wright Tremaine

The CFPB estimates that the proposed transaction threshold would bring within the CFPB's supervisory authority approximately 17 entities, about 9 percent of all known nonbank covered persons in the market for general-use digital consumer payment applications. The CFPB notes at the outset that this is a rough estimate because the available data on entities operating in the proposed market for general-use digital consumer payment applications is incomplete. According to the CFPB's estimates, the approximately 17 providers of general-use digital consumer payment applications that meet the proposed threshold collectively facilitated about 12.8 billion transactions in 2021, with a total dollar value of about $1.7 trillion. The CFPB estimates that these nonbanks are responsible for approximately 88 percent of known transactions in the nonbank market for general-use digital consumer payment applications.

The proposed rule would exclude certain transactions from coverage, including:

• International money transfers
• Transfers of funds linked to foreign exchange transactions
• Transactions involving purchases from online marketplaces using a digital platform operated by the online marketplace operator
• Transactions involving extension of credit using a digital platform operated by the creditor.

Additionally, general-use digital consumer payment application market participants who qualify as small businesses would not be covered under the rule.

As stakeholders and industry players digest the implications of this proposed rule, the CFPB has opened a window for public input. Until January 8, 2024, comments and feedback are welcomed, providing an opportunity for organizations to contribute their insights and potentially shape the final rule.

Preparing for Impact

As the financial industry anticipates potential changes, companies operating in the digital payment space are urged to stay vigilant, actively participate in the comment period, and assess their compliance measures. This proposed rule signifies a pivotal moment in the intersection of technology and finance, emphasizing the need for adaptability and proactive industry monitoring within the sector.

SRA Watchtower’s holistic risk intelligence platform, Watchtower, helps banks, FinTechs, technology companies and other providers of financial services continuously measure the effectiveness of their risk management programs against industry standards and regulatory guidance. SRA Watchtower professionals are available to assist as you consider the implications of the proposed guidance.

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Disclaimer: This blog is intended for informational purposes only and does not constitute legal advice. Organizations should consult with legal professionals to understand the full implications of the CFPB's proposed rule on their specific operations.

Below are links to CFPD’s overview of this proposed ruling and links to make comments:

• Read CFPD Notice of Proposed Rulemaking

• Federal Register: Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications