Big Tech Foes Eye CFPB Rule as Step to More Intense Oversight

The Consumer Financial Protection Bureau’s aim to supervise payment apps offered by companies including Alphabet Inc. and Apple Inc. represents a potential first step in broader regulation of the digital payments market.

The CFPB’s proposal this week would allow the agency to get under the hoods of the 17 largest digital wallets and payment apps, such as Google Pay, Apple Pay, PayPal Holdings Inc.’s Venmo service, and Block Inc.’s Cash App, to determine their compliance with federal payments, privacy, and other laws. Beyond just compliance with regulations, the rule would let the agency’s examiners sit in corporate headquarters and have access to any information they want.

But federal regulators and supporters of vigorous antitrust and consumer protection enforcement may have their sights on something bigger: potentially designating the largest players in the digital payments market as systemically important financial institutions, or SIFIs, that would result in enhanced regulatory supervision and capital requirements.

“The critical financial infrastructure of this country is supposed to be carefully watched and carefully regulated, and made stable and resilient,” said Shahid Naeem, a senior policy analyst at the American Economic Liberties Project, a think tank that promotes increased competition. Naeem added that the failure of a major payment network could have potentially disastrous effects on businesses and consumers throughout the economy.

Banks are already subject to CFPB supervision for compliance with Regulation E, the enabling regulation for the Electronic Fund Transfer Act, and federal privacy laws. The CFPB’s proposed larger participant rule is intended to bring that same level of scrutiny to the growing market for digital payments.

The CFPB defined a larger participant in the digital payments market as any company that completes at least 5 million transactions per year.

“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,” CFPB Director Rohit Chopra said in a statement announcing the proposal.

The big digital payments companies all declined to comment this week after the CFPB rule was announced.

‘Far-Reaching, Penetrating’

Many companies that would be subject to the payments larger participant rule, like PayPal, are already supervised by the CFPB for compliance with other regulations, including its remittance rule.

But direct CFPB supervision is going to be a major change for Google, Apple, and Facebook parent Meta Platforms Inc.

“What this rulemaking does is it sweeps in for the first time in history vast swaths of industry in a far-reaching, penetrating industry protocol,” said Jenny Lee, an independent fintech consultant and former CFPB enforcement attorney.

CFPB supervisors will likely have access to proprietary company information beyond their transaction information, which they could use to search for violations of the CFPB’s unfair, deceptive, and abusive acts and practices, or UDAAP, standard.

“Once the CFPB’s in, they will never go out. That’s really a big stick to those companies,” said Dan Quan, a former CFPB senior adviser and the founder of venture capital firm Nevcaut Ventures.

For many critics of Big Tech companies and their forays into financial services, merely policing them for Reg E and privacy compliance isn’t enough. Skeptics have raised concerns about the placement of large deposits of customer money stored at Venmo, Cash App, and other payments firms that could disappear and destabilize banks, should people lose confidence in the apps.

“The dominance of these firms is something you really need to untangle with a fine-toothed comb,” Naeem said.

Some have even discussed putting capital requirements on nonbank, digital payment providers.

“These platforms can run like banks but lack the heavy regulation, access to a government lender of last resort, and deposit insurance of traditional banks,” said Todd Phillips, a professor at Georgia State University’s Robinson College of Business.

As a result, digital payment platforms will “pose risks to their customers unless federal regulators subject them to similar capital, liquidity, and risk management requirements as banks,” he said.

‘Not There Yet’

Chopra suggested in an October speech that he favors a review of whether the largest, private digital payments companies and stablecoin issuers should be tagged with a SIFI designation. Such a designation would mean a company would be subject to direct Federal Reserve supervision.

It’s unclear whether the other regulators that sit on the Financial Stability Oversight Council with Chopra, including Treasury Secretary Janet Yellen, Fed Chairman Jerome Powell, and Securities and Exchange Commission Chairman Gary Gensler, are on board with such a review.

While the FSOC issued new guidance last week outlining how it would go about designating a firm for enhanced supervision, there are factors that could dissuade them from taking on that fight.

For example, MetLife Inc., the biggest US life insurer, challenged its 2014 designation in court and won that case, escaping enhanced supervision.

Already, trade groups representing digital payment apps are aggressively challenging the CFPB’s larger participant proposal. A potential SIFI designation for a Venmo or Cash App is likely to stoke a similar response.

“Consumers love payment apps because they’re accessible, inclusive, and user-friendly – unlike big banks. Rather than trying to make fintech services work like banks, the CFPB should be working to make banks as accessible as fintechs,” Janay Eyo, the policy director at the Chamber of Progress, a technology industry group that includes Google and Apple, said in a Nov. 7 statement.

Plus, there are questions about the importance of the digital payments system to the broader financial system.

The CFPB said the 17 companies that would be included in its larger participant rule accounted for 13 billion transactions totaling $1.7 trillion in 2021. That’s just over half the total purchase volume for traditional credit card issuers, which hit $3.2 trillion in 2022, according to a November CFPB report.

And in many instances, digital wallets are just storing credit card data. So if the wallet or payment app goes down, customers can still use their existing credit or debit cards.

“In terms of scale, they’re not there yet,” Quan said of the potential risk digital payment apps pose to the broader financial system.

But the popularity of apps like Venmo, Google Pay, and Apple Pay are only growing, so backers of tougher oversight say it’s better to start too early than too late.

“It’s really good to see our top regulators looking at this issue because we don’t want to be behind the ball on this,” Naeem said.