Revising the CFPB's guidelines for digital payment apps is crucial for Trump to prevent an impediment to innovation in this sector.
Geez, the Consumer Financial Protection Bureau (CFPB) just slapped some fresh regs on digital wallet and payment apps, like Venmo and Apple Pay, pushing them into traditional bank territory. The CFPB's new rule paints everyone with the same brush, squashing innovation in the digital payment world and failing to address consumer problems. With a Trump administration set to take over, it's about time these rules were revamped.
The CFPB's rule has two critical flaws. Firstly, its one-size-fits-all thinking doesn't distinguish between various fintech goods. It scrambles peer-to-peer payment apps, stored-value wallets, pass-through wallets, neo-banks, cryptocurrency exchanges, and money transfer providers into one big mess. Regulating them all with the same formula breeds lousy consumer policy and confusion for the private sector.
The CFPB's final rule admits that each financial product "presents different consumer harms," but fails to justify its catch-all approach, sticking with its legal obligations under antitrust law. This argument misses the point: Different products have different threats, and the CFPB ought to regulate them separately to avoid overlords of red tape. A neo-bank, which offers many traditional bank services but without the branches, is way riskier when it comes to unfair lending practices compared to a cryptocurrency exchange, which is more prone to market volatility. Regulating a neo-bank and cryptocurrency exchange the same way, well, that just harms consumers by keeping 'em in the dark about the specific risks attached to each financial product.
The rule's second pitfall involves the definition of a "larger participant," the term for tech companies under CFPB's new scrutiny. The CFPB made a few changes from the November 2023 proposed rule, raising the threshold for "larger participant" status from $5 million to $50 million in annual transaction volume, reducing the number of eligible participants from 17 to 7.
These seven fortunate qualifiers will face a whole lotta regulatory attention, with on-site inspections and regular "check-ins" on activities. These newly-regulated firms are gonna struggle to compete with their unregulated counterparts, who've skipped on the compliance costs. Take the CFPB's 2015 rule on ability-to-pay mortgage loans, which saw approvals for otherwise good applicants drop by 33.8 percent.
For the ten companies that managed to dodge larger participant status, some might inch closer as the years roll over. How the CFPB handles these regulations determines whether these companies will be racing to comply and keep growth at bay or stepping back on innovation to ensure they sail below the regulatory threshold. If the CFPB's oversight becomes a valuable asset for larger participants, say, a sign of trust for consumers, unregulated competitors could lose ground to bigger established players.
A dynamic definition of larger participants that considers factors beyond transaction volume, like user base, market activity, and product type, would work better. Sadly, the CFPB rejected this idea, claiming it would be too complex and difficult to manage. If simpler ain't the way, the CFPB should raise the threshold to $100 billion in annual transaction value at least. In 2022, Zelle moved $630 billion with a whopping 61.6 million users, while Venmo passed $244 billion with 77.7 million users. A $50 million threshold is low-ballin' if the CFPB wants to regulate big digital payment providers like Zelle, Venmo, and Cash App.
The incoming presidential administration has signaled its intentions to readjust the CFPB's priorities. With these new rules still in their infancy, the Trump administration should hit the pause button on enforcement and use the rulemaking process to revise the CFPB's larger participant rule for non-bank companies. The revisions should focus on product-specific rulemaking and raise the threshold for what constitutes a larger participant, leading to a more balanced framework that shelters consumers without snuffing out innovation in the surging digital payment sector.
Source: Emily Elconin/Bloomberg
Additional Insights
- Flexibility and Innovation: A tailor-made approach to regulating digital payment apps could promote flexibility and innovation in the fast-paced world of digital payments, preventing unnecessary obstruction of competition.
- Risk-Based Approach: Product-specific regulations help create a risk-based approach to financial oversight, ensuring that regulations are proportionate to the unique risks attached to each digital payment product.
- Consumer Protection: Focusing on specific products allows regulations to be targeted at protecting consumers from risks specific to those products, such as fraud or data breaches.
- Inclusive Supervision: Raising the threshold for larger participants ensures that only significant players in the digital payments market are subject to CFPB supervision, preventing smaller companies from being hindered by excessive regulatory compliance costs.
- Efficient Resource Allocation: Focusing on larger participants allows the CFPB to allocate its resources more efficiently toward companies that pose a greater risk to consumers due to their size and market influence.
- Encouraging Small Business Growth: A higher threshold could stimulate the growth of smaller digital payment companies by reducing regulatory barriers, fostering competition and innovation in the sector.
- The CFPB's rule, affecting digital wallet and payment apps, overlooks the diversity of fintech goods, failing to distinguish between peer-to-peer payment apps, neo-banks, and cryptocurrency exchanges, which could breed poor consumer policy and confusion for the private sector.
- The CFPB's new rule sets a $50 million threshold for "larger participants," reducing the number of eligible firms from 17 to 7, yet a dynamic definition considering factors like user base, market activity, and product type would provide a more efficient and balanced approach.
- If the CFPB's oversight becomes a valuable asset for larger participants, unregulated competitors could lose ground to bigger established players, potentially hindering innovation in the digital payment sector.
- The incoming Trump administration should reconsider the CFPB's larger participant rule for non-bank companies, focusing on product-specific rulemaking and raising the threshold for what constitutes a larger participant, in order to create a framework that protects consumers without stifling innovation in the digital payment sector.
