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The US Consumer Financial Protection Bureau (CFPB) has filed a new rulemaking proposal that would subject large digital wallet operators, such as Apple and Google, to examiner oversight for the first time.
In the proposal, the CFPB set out its intention to bring “large players” in the digital wallet and payment app space under the same supervisory exam process as banks.
If adopted, the rulemaking proposal would apply to nonbank financial companies that handle at least 5m transactions per year.
These companies would then be subject to the same rules as large banks, credit unions and financial institutions (FIs) that are supervised by the CFPB.
The CFPB has invited comments on the proposal by January 8, 2024, or 30 days after publication of the proposed rule in the Federal Register — whichever is later.
Bringing digital wallet operators within scope
Rohit Chopra, director of the CFPB, said the services offered by digital wallet apps used to be provided “almost exclusively” by banks and it is time for the agency to take account of this shift.
"Today's rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight," he said.
The CFPB said digital wallets and the companies that operate them “blur the lines” that have traditionally separated banking and payments from commercial activities.
“The CFPB has found that this blurring can put consumers at risk, especially when the same traditional banking safeguards, like deposit insurance, may not apply,” it said.
The proposal is the sixth in a series of CFPB rulemakings to define larger providers of financial products and services that play a substantial role in consumers’ everyday lives.
The first five rules covered larger participants in consumer reporting, consumer debt collection, student loan servicing, international money transfers and car financing.
From enforcement authority to scrutiny powers
Despite their impact on consumer finance, bigtech and other nonbanks operating in the payments sphere do not receive the same regulatory scrutiny and oversight as banks and credit unions.
While the CFPB already has enforcement authority over digital wallets, it does not currently place examiners within firms that operate digital wallets.
As such, the proposed rule would subject larger, nonbank payment companies to the CFPB’s authority to conduct examinations.
This would help to ensure “consistent application” of federal consumer financial laws across the marketplace, the CFPB said, including laws on funds transfers, privacy and consumer protection.
The CFPB said it would also be able to supervise large, nonbank companies for compliance with applicable protections against unfair, deceptive and abusive practices.
“Today’s proposed rule, if finalised, would be one part of the CFPB’s efforts to carefully monitor the entry of large technology firms, including bigtech giants, into consumer financial markets,” it said.
Chopra wary of bigtech data harvesting
In the past few months, as covered by Vixio, the CFPB has signalled its intention to apply closer oversight to bigtech firms that provide payments services.
In October, for example, Chopra warned that the US is at risk of drifting into a Chinese-style payments duopoly without greater rulemaking against bigtech.
“I am fearing that the US is lurching towards a consolidated market structure, like the one that has emerged in China,” he said.
“It blurs the line between payments and commerce and creates the incentives for excessive surveillance and even financial censorship.”
He also warned that users of peer-to-peer (P2P) apps, such as PayPal, Venmo and Cash App, may lose their money if the companies go bust.
Earlier, in September, Chopra cautioned that restrictive mobile payment policies from Apple and Google could hold back the development of open banking in the US.
When Chopra took over as CFPB director in October 2021, he immediately took action against bigtechs, ordering Amazon, Apple, Facebook, Google, PayPal and Square to submit information on their data collection practices and dispute procedures.
Global pushback on bigtech in payments
The CFPB is not the only regulator that intends to move towards closer oversight of bigtech companies operating digital wallets.
Last month, Australia set out its intention to bring digital wallet providers like Apple and Google under payment system regulations for the first time.
By designating these providers as payment system “participants”, they would face greater oversight and compliance demands to access the same benefits they currently enjoy from providing payments access.
Matthew Haines, head of product and partnerships for tokenisation, mobile and new payments at Barclays UK, also said the UK’s Financial Conduct Authority (FCA) may be watching and looking to follow suit.
“In an increasingly interconnected world, these developments have the potential to reshape and redefine both the future of digital payment apps and bigtech regulatory oversight globally,” he told Vixio.
“This could create short-term pain for the bigtechs while hopefully benefitting the end-customer in the longer term; but as always, the devil will be in the detail.”
