The Consumer Financial Protection Bureau said Thursday that it has finalized a rule to oversee big technology companies that offer digital wallet apps and other electronic money transfer services.
The rule will allow the agency to examine and supervise the nonbank companies’ use of “vast quantities” of consumer data; how they correct errors and monitor fraud on their systems; and why they shut down apps for certain consumers, the CFPB said in a Thursday press release.
"Digital payments have gone from novelty to necessity and our oversight must reflect this reality,” CFPB Director Rohit Chopra said in the release. "The rule will help to protect consumer privacy, guard against fraud, and prevent illegal account closures."
The federal agency said in the release that it instituted “several significant changes” to its initial proposal. It had asked for public feedback when it first issued the proposal a year ago.
First, it placed a higher threshold on the number of annual transactions that will subject companies to the new rule, raising it to 50 million transaction annually, from five million. That change is more likely to focus the rule on large tech companies, such as Apple and Google, that the federal agency said it was targeting when it proposed the regulation.
Second, the agency has limited the final rule to transactions in U.S. dollars. That exempts what the CFPB acknowledged in the release is an “evolving market for digital currencies.” Such cryptocurrencies have received a lift in market value in the past week presumably because President-Elect Trump’s administration is seen as likely to be friendly to the industry.
Rising use of digital apps
The CFPB said the new rule was needed to protect the assets of the rising number of consumers who are using digital wallets and other payments apps.
The agency said last year that it was targeting 15 big nonbank technology companies, but it didn’t reiterate that goal in its latest release. A CFPB spokesperson declined to comment on which nonbank companies, or how many, it expects to be affected by the new rule.
In a more general description of the rule’s coverage, the agency estimated that the top digital payment apps covered by the rule handle more than 13 billion consumer transactions every year, and that they process more than one trillion dollars annually.
The CFPB also noted in the release that some of the apps are offered “by the world’s largest technology conglomerates,” and are now used frequently by middle- and lower-income consumers for daily needs and money transfers “that rival or exceed the use of cash.”
The proposal follows the agency’s 2021 request for information from six big tech players, including Amazon, Apple, Facebook, Google, PayPal and Block’s Square, regarding their payments systems. The agency sought more input the following year. On Thursday, the federal agency noted that it had also taken consumer complaints into consideration.
Detractors and supporters speak out
One of the trade groups that represents digital payments players, the Financital Technology Association, called the new CFPB rule “deeply flawed” and urged the agency to withdraw the proposal. Among FTA’s members are tech titans Amazon and PayPal as well as other rising players in the field, such as digital payments processor Stripe, buy now, pay later provider Klarna and Cash App parent Block.
“It’s not clear what problem this rule is solving,” a release issued by the FTA Thursday said. “Payment companies are well-regulated at the state and federal levels, and consumers are having positive experiences with them.”
The association also recommended that the federal government take a different tack and seek to better integrate the new tech tools. “Instead of layering regulation simply for the sake of regulation, we should follow the lead of other major economies and work to integrate leading payment companies into the national payment infrastructure,” the release said.
The CFPB argued it already had the authority to regulate the industry. “While the CFPB has always had enforcement authority over these companies, today's rule gives the CFPB the authority to conduct proactive examinations to ensure companies are complying with the law in these and other areas,” the release said. The rule will also let the agency detect trouble early, and respond to outages that could disrupt consumer use, it said.
The kind of situation the agency might pay closer attention to could include money transfer company MoneyGram experiencing an outage of its app services over several days in September. That disruption prompted a barrage of consumer complaints on social media outlets.
There are also examples of companies using consumer data. For instance, digital payments company, PayPal, has said it’s seeking to make more use of the data that it gleans from consumer transactions.
Consumer groups backed the CFPB’s move. “By completing this rule, the CFPB has taken payment apps out of a regulatory blind spot,” Consumer Federation of America Director Adam Rust said in an emailed statement. “Enforcement penalizes wrongdoing, but supervision prevents problems from happening in the first place.”
The federation also noted the new rule offers a safeguard for consumers: “The CFPB can keep an eye on Big Tech to ensure people are treated fairly when they use a payment app, just as it does already to banks and credit unions.”
