The CFPB has issued a proposed rule to supervise nonbank companies that qualify as larger participants in a market for “general-use digital consumer payment applications.” Comments on the proposal are due by January 8, 2024 or by the date that is 30 days after the proposal’s publication in the Federal Register, whichever is later.
The proposal is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.” It would cover providers of consumer financial products and services that are commonly referred to as “digital wallets,” “payment apps,” “funds transfer apps,” and “person-to-person or P2P payment apps.”
Under the proposal, a nonbank would be considered a “larger participant of the general-use digital payment market” if it (1) has an “annual covered consumer payment transaction volume” of at least five million transactions, and (2) during the preceding calendar year, it is not a “small business concern” as that term is defined in the Small Business Act. A nonbank’s “annual covered payment transaction volume” means “the sum of the number of consumer payment transactions that the nonbank covered person and its affiliated companies facilitated in the preceding calendar year by providing general-use digital consumer payment applications.” In aggregating transactions across affiliated companies, an individual consumer payment transaction would only be counted once even if more than one affiliate facilitated the transaction. The CFPB estimates that its proposed threshold would make about 17 entities subject to CFPB supervision, which is about 9% of all known nonbank covered persons in the market for general-use digital consumer payment applications.
To be a participant in the relevant market, a company must be “providing a general-use digital consumer application,” which is defined to mean “providing a covered payment functionality through a digital application for consumers’ general use in making consumer payment transaction(s) as defined in [the rule].” A “consumer payment transaction” is defined as “the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes.” Key issues include:
- A “consumer payment transaction” is a payment transaction that results in the transfer of funds by or on behalf of a consumer. In addition to encompassing a consumer’s transfer of their own funds (such as funds held in a linked deposit or stored value account), a “consumer payment transaction” would encompass a creditor’s transfer of funds to another person on behalf of a consumer as part of a consumer credit transaction. For example, if a nonbank’s wallet functionality holds a credit card account or payment credential that a consumer uses to obtain an extension of credit from an unaffiliated bank and the consumer uses that functionality to buy nonfinancial goods or services using the credit card, the credit card issuing bank may settle the transaction by transferring funds to the merchant’s bank for further transfer to the merchant and a charge may appear on the consumer’s credit card account. That transfer of funds can constitute part of a consumer payment transaction for purposes of the rule regardless of whether it is an electronic fund transfer (EFT) subject to Regulation E.
- “Funds” is not limited to fiat currency or legal tender and includes digital assets, such as cryptocurrency.
- Four categories of transactions are excluded from the definition of a “consumer payment transaction.” The first two categories of excluded transactions are (1) international money transfers as defined in the CFPB’s Remittances Rule, and (2) a transfer of funds by a consumer (A) that is linked to the consumer’s receipt of a different form of funds, such as an exchange of fiat currencies or a purchase of a crypto-asset using fiat currency, or (B) for the primary purpose of purchasing or selling a security or commodity that is excluded from the definition of an EFT in Regulation E.
- The third category of excluded transactions is a payment transaction conducted by a person for the sale or lease of goods or services that the consumer selected from an online or physical store or marketplace operated prominently in the name of such person or its affiliated company. This exclusion is intended to clarify that when a consumer selects goods or services in a store or website operated in a merchant’s name and the consumer pays using account or payment credentials stored by the merchant who conducts the payment transaction, such a transfer of funds generally would not be a consumer payment transaction covered by the rule. The exclusion is also intended to clarify that when a consumer selects goods or services in an online marketplace and pays using account or payment credentials stored by the online marketplace operator or its affiliate, such a transfer of funds generally would not be a consumer payment transaction covered by the rule. To qualify for the exclusion, the funds transfer must be for the sale or lease of a good or service the consumer selected from a digital marketplace operated prominently in the name of an online marketplace operator or its affiliate. The exclusion would not apply when a consumer uses a payment or account credential stored by a general-use digital consumer payment application provided by an unaffiliated person to pay for goods on services on the merchant’s website or an online marketplace.
- The fourth category of excluded transactions is an extension of consumer credit made using a digital application provided by the person who is extending the credit or its affiliate. The CFPB indicates that it has proposed this exclusion so that the definition of the relevant market does not cover consumer lending activities by lenders through their own digital applications. A nonbank would not be seen as participating in the relevant market simply by providing a digital application through which it lends money to consumers to buy goods or services. However, a nonbank would be seen as participating in the relevant market if it provides a wallet functionality through a digital application that stores payment credentials for a credit card through which an unaffiliated bank extends consumer credit. In that situation, the nonbank’s role in the transaction is to help consumers to make payments and not to themselves extend credit to consumers.
- To be a participant in the relevant market, a company must provide a “covered payment functionality” through a digital application for a consumer’s general use in making payment transactions. A “covered payment functionality” is (1) a “funds transfer functionality,” or (2) a “wallet functionality.” A “funds transfer functionality” means, “in connection with a consumer payment transaction: (A) Receiving funds for purposes of transmitting them; or (B) Accepting and transmitting payment instructions.” A “wallet functionality” means “a product or service that: (A) Stores account or payment credentials, including in encrypted or tokenized form; and (B) Transmits, routes, or otherwise processes such stored account or payment credentials to facilitate a consumer payment transaction.”
- A “digital application” is defined as “a software program a consumer may access through a personal computing device, including but not limited to a mobile phone, smart watch, tablet, laptop computer, desktop computer.” It would not cover a consumer’s presentment of a debit card, prepaid card, or credit card in plastic, metallic or similar form at the point of sale. In using physical payment cards at the point of sale, a consumer is generally not considered to be relying upon a “digital application” because the consumer is not engaging with software through a personal computing device to complete the transaction.
- The term “general use” is defined as “the absence of significant limitations on the purpose of consumer payment transactions facilitated by the covered payment functionality provided through the digital consumer payment application.” The definition is intended to limit the relevant market to digital payment applications that consumers can use for a wide range of purposes. The definition includes a non-exhaustive list of digital payment applications whose payment functionalities would not be considered to have general use, such as payment functionalities that can only be used to purchase or lease a specific type of goods, services, or property, such as transportation, lodging, food, an automobile, or a consumer financial product or service as defined in the Consumer Financial Protection Act (CFPA). The “general use” definition would also not reach (1) accounts that are expressly excluded from the definition of “prepaid account” in Regulation E, such as many gift certificates or gift cards, (2) a payment functionality provided through a digital payment application that only supports payments of a specific debt or type of debt or repayment of an extension of consumer credit, such as a mortgage lender’s mobile app or website with a functionality that allows consumers to make loan payments, and (3) a payment functionality provided through a digital application that only helps consumers to divide up charges and payments for a specific type of goods or services, such as payment applications focused solely on helping consumers to split a restaurant bill.
The CFPB notes in its discussion of the proposal that the CFPA allows it to supervise all service providers to entities that it supervises. As a result, the proposal would also allow the CFPB to supervise all service providers to “larger participant” nonbank providers of digital wallets and payment apps, regardless of the service provider’s size. In addition, as the CFPB also notes, it can supervise any nonbank provider of digital wallets and payment apps—regardless of its size—that the CFPB has reasonable cause to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”
The proposal, if finalized, would represent the CFPB’s sixth use of its “larger participant” supervisory authority. The CFPB has previously issued “larger participant” rules for nonbanks engaged in consumer reporting, consumer debt collection, student loan servicing, international money transfers, and automobile financing.
The proposal has received praise from banking industry trade groups, who view the proposal as a step towards leveling the playing field between banks and nonbanks. At the same time, the proposal has met with strong criticism from the Republican Chair of the House Financial Services Committee.