The Financial Services Community and Tech Industry Waits to See if 2024 Brings CFPB Scrutiny to $1.7 Trillion Worth of Digital Payments

On January 8, 2024 the public comment period for a proposed rule published by the Consumer Financial Protection Bureau on November 7, 2023 closed. The proposed rule seeks to extend CFPB supervisory jurisdiction to “larger participants” of the Fintech industry; specifically, the CFPB proposes greater regulatory authority of the big players in the digital wallet and peer-to-peer money transfer space. It is estimated that the proposed rule would result in oversight of nearly 13 billion transactions covering more than $1.7 trillion in transfer.

The Dodd-Frank Act grants the CFPB supervisory authority over “larger participant[s] or a market for other consumer financial products or services.” The CFPB currently asserts supervisory authority over five markets: consumer reporting, international money transfers, automobile financing, consumer debt collection, and student loan servicing. The proposed rule would extend the CFPB’s supervisory to a sixth market, the market for “general-use consumer payment applications” i.e. payment apps and digital wallets. The CFPB’s supervisory authority casts a wide net, and would allow the CFPB to examine the entire entity, not just the payment application portion of a company, for compliance with federal laws. A company like Meta could have its entire operations scrutinized by the CFPB if “Meta Pay” fell within the definition of a “larger participant” in the app payment industry. 

The proposed rule would use a two-part test to evaluate whether a company would qualify as a “larger participant” in the app payment market. The first part of the test is a volume threshold, whether the company does more than five million transactions annually. The second part of the test would exclude small entities, as defined by the Small Business Administration. The CFPB did consider a ten million transaction volume threshold, but determined that the lower volume was better suited to protect consumer interests.

The rule would apply to two types of payment functions: funds transfers and a wallet functionality. The rule relies on currently defined terms, but would cover either receiving funds for the purpose of transmitting them or accepting and transmitting payment instructions through an app under the funds transfers function. The wallet functionality provision would apply to any app that both (1) stores account or payment credentials, including in encrypted or tokenized form, and (2) transmits, routs, or otherwise processes such stored account or payment credentials to facilitate a consumer payment.

The CFPB estimates that the proposed rule would cover 88% of known transactions in the nonbank market for general-use payment apps. The proposed rule would go into effect thirty days after it becomes a final rule, with the CFPB notifying impacted entities of their stats as a larger participant. The proposed rule would allow a company disputing its status as a “larger participant” forty-five days to provide evidence that they do not qualify under the two-part test discussed above. 

The proposed rule would not apply to banks or other depository institutions. However, the proposed rule might apply to vendors retained by depository institutions to manage and/or operate their apps.