CFPB Proposes New Rules for Digital Wallet and Payment Apps

The CFPB is proposing new rules for digital wallet and payment apps, aiming to protect consumers from potential risks.

These new rules are designed to ensure that digital wallets and payment apps are transparent and fair in their practices.

The CFPB is requiring digital wallets and payment apps to clearly disclose their fees and terms to consumers.

This move is a response to growing concerns about the lack of transparency in the digital payment industry, where consumers may be unaware of hidden fees or charges.

By implementing these new rules, the CFPB hopes to promote a safer and more secure digital payment environment for consumers.

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Definitions are key to understanding the CFPB's digital wallet regulations. The CFPB defines a digital payment application as a software program accessible through a personal computing device, including mobile phones, smart watches, tablets, laptops, or desktop computers.

A digital payment application can be an application or website that facilitates consumer payment transactions. For example, a digital wallet that stores and transmits data unrelated to consumer payments is not considered a digital payment application under the CFPB's definition.

The CFPB defines consumer payment transactions as funds transfers by or on behalf of a consumer in a U.S. state or territory to another person, primarily for personal, family, or household purposes. This includes payments to individuals or businesses and is not limited to peer-to-peer (P2P) payments.

Consumer payment transactions also include transfers made by extending consumer credit, but certain exceptions apply. The CFPB excludes traditional payment processors, entities operating solely as business-to-business intermediaries during consumer payment transactions, or providers of digital wallets that store and transmit data unrelated to consumer payments from the definition of consumer payment transactions.

Here are the key definitions according to the CFPB:

The CFPB's definitions are essential for understanding their digital wallet regulations and how they apply to consumer payment transactions.

The CFPB's purpose in supervising digital wallets is to ensure compliance with federal consumer financial laws, including the Electronic Fund Transfer Act and the Gramm-Leach-Bliley Act.

The CFPB is particularly concerned about payment fraud targeting older adults and active duty servicemembers, as well as EFTA violations occurring on digital payment apps.

The agency will examine larger participants for compliance with these laws, including dispute and error resolution practices that enable digital payment apps to offload fraud and error resolution to financial institutions.

The CFPB's focus on digital wallets stretches back to 2021, when it ordered several P2P payment platforms to provide data to the agency.

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The CFPB's Final Rule for digital wallets means nonbank entities providing covered payment functionality should expect increased scrutiny and oversight of their operations, particularly around privacy and data collection.

Nonbank entities subject to examination should prepare for areas like fraud and dispute resolution practices to remain a focus of supervisory scrutiny.

Nonbank entities that meet the transaction volume threshold should take steps to solidify their internal compliance procedures to prepare for CFPB supervision and examination.

The timing of the Final Rule may leave its future uncertain, as a future Republican-appointed director could elect to revise, withdraw, or decline to enforce it.

Congress may also seek to rescind the Final Rule under the Congressional Review Act, which could preclude the CFPB from promulgating a rule on a substantially similar topic unless authorized by law.

The Consumer Financial Protection Bureau (CFPB) has been keeping a close eye on the digital wallet space. Companies offering payment services are federally regulated as money services businesses, but they're not supervised by a federal prudential bank regulatory agency.

This framework has been questioned by policymakers, who worry it may not be enough to mitigate risks, especially for big tech companies involved in payments. The Bank for International Settlements has criticized the current approach, noting it was formulated with small remittance service providers in mind.

The CFPB has taken action to monitor the entry of large technology firms into consumer financial markets. In October 2021, the CFPB ordered six technology platforms offering payment services to provide information about their products, plans, and practices for consumer payments.

The CFPB has the authority to supervise "larger participant[s] of a market for other consumer financial products or services" as defined by rule. The CFPB has previously asserted supervisory authority over larger participants in five other markets.

The proposed rule would bring larger participants of a sixth market—the market for "general-use consumer payment applications"—under the CFPB's supervisory jurisdiction. This means that these companies would be subject to examination by the CFPB at its discretion.

Supervision may involve requests for information or records, on-site or off-site examinations, or some combination of these activities. The specifics of an examination may vary by market and by firm.

The CFPB's supervisory authority is not limited to the products or services that qualified a company for supervision, but also includes other company activities that involve other consumer financial products or services or are subject to federal consumer financial law.

Here are some ways the CFPB may examine a company:

In the United States, companies offering payment and peer-to-peer (P2P) transfer functions are federally regulated as money services businesses.

These businesses are not supervised by a federal prudential bank regulatory agency like banks are.

Instead, they're supervised by the agencies of the states in which they're licensed and subject to registration with and oversight by the Financial Crimes Enforcement Network (FinCEN) and examination by the Internal Revenue Service (IRS).

The current framework has been questioned by policymakers, particularly for Big Tech companies involved in payments.

The Bank for International Settlements has criticized the current approach, noting that it was formulated with small remittance service providers in mind and will fall short of addressing the challenges associated with dominant big tech platforms.

The CFPB Director, Rohit Chopra, views banking, money, and payments as "essential facilities" akin to critical infrastructure like transportation and telecommunications.

This has led the CFPB to question surveillance and monetization of customer transaction data, the blurring of lines between technology companies and finance, and competition in the marketplace.

The CFPB has undertaken a series of actions to monitor the entry of large technology firms into consumer financial markets.

In October 2021, the CFPB ordered six technology platforms offering payment services to provide information about their products, plans, and practices for consumer payments.

Alerts are a crucial aspect of digital wallets, and the CFPB has rules in place to protect consumers.

You can opt out of receiving marketing communications from your digital wallet provider, but be aware that some providers may still send you transactional messages, such as receipts or account updates.

Digital wallet providers must clearly disclose their alert policies to consumers, including the types of alerts they will send and how often they will be sent.

The CFPB requires digital wallet providers to obtain your consent before sending you marketing communications, so you have control over the types of alerts you receive.

Some digital wallet providers may offer customizable alert settings, allowing you to choose the types of alerts you receive and how often you receive them.

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The CFPB has finalized a rule to supervise the largest digital payment platforms, marking a critical milestone in financial regulation.

These platforms process over 50 million annual transactions, which is a staggering number that highlights the importance of regulation.

The CFPB identified several areas of concern, including the vast amounts of consumer data collected by these platforms, which raises red flags about privacy and security.

The rule aims to enforce compliance with federal consumer protection laws and preempt potential harms, such as unauthorized data collection or service disruptions.

The CFPB is expanding its authority to conduct proactive examinations, which will help to identify and address issues before they become major problems.

The rule is effective 30 days after publication in the Federal Register, which is a significant step toward safeguarding the interests of millions of consumers.

The CFPB is targeting nonbank companies with this rule, which shows that regulation can be applied to a wide range of industries, not just traditional banks.

For more insights, see: Digital Wallet Data Cloud