Today, the Consumer Financial Protection Bureau (CFPB) finalized a rule to supervise the largest nonbank companies offering digital funds transfer and payment wallet apps, such as Apple Pay.
The rule helps the regulator ensure that companies handling more than 50 million USD transactions per year follow federal law like banks, credit unions, and other financial institutions that are already supervised by the CFPB.
Seven participants that met the 50 million threshold, but the CFPB declined to publicly disclose their identities. The group of estimates that the seven collectively process over 13 billion consumer payment transactions annually, responsible for approximately 98% of transactions in the market.
Why now?
The CFPB made the rule because digital payment products are now mainstream, and consumers have reported disruptions to their lives due to closures or freezes. While the regulator can already take action against companies that violate the law, the new rule enables it to regularly supervise their practices.
“Digital payments have gone from novelty to necessity and our oversight must reflect this reality,” said CFPB Director Rohit Chopra in a press release. “The rule will help to protect consumer privacy, guard against fraud, and prevent illegal account closures.”
The final rule declines to predict just how many examinations in the market it would undertake every year, but the CFPB explicitly notes it is unlikely that all seven participants would undergo supervisory examinations in the same year.
The CFPB says the frequency of the examinations depends on a variety of factors including the size and volume of transactions, the conduct of market participants and the risks they pose to consumers, and the extent of existing State consumer protection oversight. [p241]
According to the CFPB, the rule’s objective is to ensure that federal consumer financial law is enforced consistently between nonbanks and depository institutions in order to promote fair competition.
What’s the new rule?
The new rule empowers the regulator to supervise these companies in key areas, including privacy and surveillance, errors and fraud, and debanking. “Debanking” refers to consumers losing access to their app without notice or experiencing disruptions in their ability to make or receive payments, according to the CFPB.
In terms of privacy, large technology companies are currently collecting vast quantities of consumer data. Federal law prohibits misrepresentations about data protection practices, allowing consumers to opt out of certain data collection and sharing practices. The CFPB aims to supervise these companies to ensure these rules are enforced.
The CFPB has also been notably concerned about how digital payment apps can be used to defraud older adults and active duty servicemembers. Its 2023 annual report on the top financial concerns facing military families highlights the growth of digital payment app usage in the servicemember community, the unique risks, and the potential abuse from bad actors.
Due to the rise of servicemember complaints about incurring serious financial harm from scams and fraud when using digital payment app providers, the CFPB believes this is a rapidly growing financial threat to military families.
The regulator noted that some popular payment apps appear to shift responsibility for resolving disputes to banks, credit unions, or credit card companies instead of handling them directly. Under federal law, consumers have the right to dispute incorrect or fraudulent transactions, and financial institutions are required to investigate these claims.