CFPB Targets Large Digital Payment Apps, But Will It Stick?
President Trump and the Consumer Financial Protection Bureau have a complicated history. The bureau's recent move to supervise and examine the largest big tech and fintech payments services may irritate the innovation-friendly administration, but it may also see some appeal to more oversight of digital players.
By Steve Cocheo, Senior Executive Editor at The Financial Brand
Subjecting the largest nonbank companies that provide digital funds transfer and payment wallets to federal examinations similar to banks: At first blush, the idea caters to the banking industry’s longstanding goal of a level regulatory playing field with big tech and fintech competitors. So the Consumer Financial Protection Bureau’s issuing such a rule after almost a year’s deliberation might seem cause for celebration amid banks and credit unions.
As finalized, the CFPB’s rule calls for supervision and examination of digital payments providers that process more than 50 million transactions annually, with some exceptions. The final rule’s threshold was increased by a factor of 10 from the level originally proposed, focusing the coverage on a relative handful of large players (including Apple, Google and PayPal). Notably, while crypto payment services were included in the original proposal, the CFPB backed them out of the rule entirely, for future consideration. The Trump administration’s strong interest in the crypto fraternity can’t be ignored here.
Observers say that the final rule on supervision of the large digital payments providers should be considered in the context of other developments out of the CFPB. One is the coming implementation, with staggered effective dates, of the Section 1033 open banking rule, finalized earlier this year. Another is the early December assertion by the bureau of a supervisory role over Google, which triggered an immediate lawsuit by the company.
"Google would be the crown jewel of the CFPB’s supervisory expansion," says Richard Crone, head of Crone Consulting, payments advisors. He sees Google as the ultimate data hub, uniting financial data, payments data and more, something irresistible to the current CFPB and perhaps the next.
There’s a viewpoint that it all ties together — and that it could all unravel depending on what happens to individual CFPB actions, policies and rules put in place towards the end of the Biden administration.
Beyond the regulatory expansion, Crone believes the biggest impact will be the combined data implications of the three moves.
Like much coming out of the CFPB these days, nothing is simple. First, it’s a big question mark whether the rules will survive the transition to the second Trump administration — and, even if they do, whether they will actually be implemented
Elon Musk, self-described "First Buddy" and co-chairman of the Department of Governmental Efficiency, has already said he’d like the kill the bureau — potentially an uphill battle since it was created by Congress. On the other hand, the Congressional Review Act could be used to unwind some rules.
And, failing either possibility, the new CFPB could just let the final rule on examinations sit unused.
"All they have to do is say, ‘We’ve got a busy exam schedule, so we’re not going to have time to get to Google or Apple over the next couple of years’," says Gary Stein, managing director in the payments practice at Accenture.
Much depends on who helms the CFPB under President Trump. Looking beyond the next administration, Stein points out that politics could swing back the other way next time, leaving measures like the exam rule conveniently to hand.
Indeed, some think that the torrent of pronouncements pouring out of CFPB these days reflect a very long-term game.
What If the Rule Goes into Effect as Intended?
All this said, the rule could not only move ahead but examinations of big techs and fintechs covered by the rule could happen. For banks that see the digital providers as competitors in the bigger picture, this could bring some relief.
For example, a frequent complaint from traditional banking institutions has been that problems with transactions using their payment accounts through such tools as digital wallets often get foisted onto the banks by the nonbank digital providers, says Peter Tapling, managing director of PTap Advisory.
Under the CFPB’s unusual ability to range beyond traditional players and to assert enforcement authority over nontraditional providers, digital payments providers have always been subject to the bureau in that regard. What the rule would change — with specific coverage and carve outs — is exposing these players to routine examinations for compliance outside of an enforcement process. Ideally, some problems that come home to roost at banks could be headed off by CFPB examiner reviews.
"The bureau could always have sued Apple or Google or some other provider if it felt there was a violation of one of the relevant regulations, like Reg E, or the UDAAP statute," says Accenture’s Gary Stein. A former deputy assistant director at the CFPB, Stein says that the possibility of being examined just like a big bank will make compliance issues more top of mind at the big techs and fintechs covered by the rule. The cost of examinations for an organization, long faced by traditional players, represents a "tax on bandwidth and people" that the nonbanks haven’t faced before.
Tapling sees this effort as a kind of "pilot," not the final iteration, at least as envisioned by the current CFPB leadership and staff.
"What I mean by that," Tapling explains, "is that the CFPB narrowed the scope of the parties that they’re going to regulate under this rule to a point where they’re going to start applying pressure, and then they’re going to see whether that pressure helps or not."
The CFPB’s final rule on supervision and examination stands out from many other banking and financial rules with thresholds because this new rule is based on payments volume, rather than the size of the company. (Many banking rules, such as the application of Durbin Amendment strictures, are based on an institution’s asset size, for example.)
Providers not currently covered may engineer their volumes to stay out from under as long as they can. Banks have been known to manage their asset size until they are prepared for the extra regulatory burdens that come with assets of greater than $10 billion, for example.
On the other hand, Stein says the existence of the rule would encourage providers not currently covered to begin preparing for the transition as they grow, building up compliance and other capabilities. Part of what will drive that is what he sees as the inevitable findings from examinations of the major providers.
"Examinations usually turn something up," says Stein. Results could be summarized in CFPB’s Supervisory Highlights publication series. In addition, if findings aren’t addressed, he adds, they could show up in public enforcement actions.
"That would be a wake-up call to those obviously just below the threshold as well as those well below the threshold," says Stein.
Read more: Federal ‘Payments Charter’ Threatens Turf Battle Between D.C. and the States
What Will Be ‘North Star’ for a New Trump CFPB?
Just what part of the Trump philosophy comes to bear on the CFPB future remains to be seen. For example, the law that established the bureau gave it duties over some regulations that used to belong to the Federal Reserve that arose from statutes, not regulatory invention, so even killing the bureau is no magic wand. (This includes Regulation E, concerning electronic funds transfers, and Regulation Z, containing truth in lending rules.)
Stein notes that many banks have complained over the years about the regulatory advantages big techs and fintechs enjoy. A sympathetic new CFPB director could pick up the supervision and examination powers to demonstrate fairness and a level playing field.
As a veteran CFPB staffer, Stein also points to a bit of early bureau DNA: Spotlighting results for consumers. He recalls that early news releases recounting the terms of this settlement or that by the young bureau would include a line towards the end of the document presenting a running tally of the dollars returned to consumers and payments assessed in the wake of enforcement actions.
Referring to a recent release about funds returned to consumers in the wake of penalties assessed on a group of credit repair companies, Stein points out that the $1.8 billion figure featured prominently.
"There’s nothing as quantifiably measurable as dollars returned to consumers," says Stein. An ambitious CFPB director, intent on achieving higher offices, might just like becoming known as a crusader.
With both big traditional players and the digital providers as fair game, "it gives you the opportunity to go do more mammoth hunting," says Stein.
While Stein didn’t say this, is it conceivable that an appointee of a President who rode a populist wave into office might just like the image of fighting for the little guy?
Even if supervision and examination rules remain in a lower-key form, Stein points out that they could drive a cooperative approach to innovation in financial services. Examiners might surface product development that requires a course correction, for example.
From banks’ perspective, if the supervision and examination effort became onerous, the hoped-for level playing field effect could boomerang, Peter Tapling speculates. The more the regulatory pressure built on the big nonbanks, the more attractive it could conceivably get to consider a banking charter. SoFi did it, acquiring a charter, he points out. Big techs and fintech in the 50 million transactions class might bite the bullet and go for it.
Would a community financial institution like to see an Apple consumer bank? says Tapling: "I’m guessing not."
Read more: Is the Future of Payments Public or Private? The Fed’s Waller Weighs In
The Importance of Being Google — and Its Regulator
Taking on Google Payments "represents the CFPB’s attempt to supervise a tech titan that already commands unparalleled consumer data insights," says Richard Crone. Literally dozens of financial data streams can be captured through Google’s wallet, he says. His firm estimates that the customer lifetime value of the unified data, per transaction account, ranges between $267 and $736.
Google’s ability to capture and extract value from such data flows goes far beyond the abilities of traditional institutions, according to Crone. He likens the legacy players as utilities sitting on the data but not being able to do much with the information because much of it lives in internal vertical silos and has never been evaluated horizontally. Part of Google’s resistance to supervision arises, he says, from the risk of exposure of its algorithms that mine value from the banking industry’s data and other sources.
"This is no regulatory slam dunk," Crone says.
Crone says this ties in with the open banking rule, which, he says, essentially forces banks and credit unions to provide consumers’ banking data to big tech and fintech providers — at no charge and on demand. He sees this undermining the traditional industry in favor of the tech leaders.
Crone contends that CFPB has begun to realize how much it has turned over, potentially, to the tech firms.
"The CFPB is now backpedaling, realizing that 1033 will make Google and other tech titans more powerful — another not well-thought-through unintended consequence of the CFPB’s earlier actions — making the bureau even more vulnerable to the new administration’s mandates for curbing its power," says Crone.
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