Consumer watchdog seeks to regulate Big Tech wallets and digital payments

Mark Taylor

Mark Taylor

Senior Editorial Manager

The top US consumer finance watchdog wants new powers to regulate technology firms that offer digital wallets and payment applications, subjecting the likes of Google. Amazon, Meta, Square, and Apple to financial examinations. 

The Consumer Financial Protection Bureau (CFPB) issued a regulatory proposal on Tuesday aimed at non-bank Big Tech firms that offer digital payments similar to that of banks or credit unions.  

Digital payment apps and wallets continue to grow in popularity, but many of the Big Tech firms behind them are not subject to CFPB supervisory examinations, the regulator said.  

The rule proposed would ensure that nonbank financial companies handling more than 5 million transactions per year adhere to the same rules as large banks, credit unions, and other financial institutions already supervised by the CFPB. 

“Payment systems are critical infrastructure for our economy. These activities used to be conducted almost exclusively by supervised banks,” said CFPB Director Rohit Chopra. “[The] 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.” 

Who will be affected by the CFPB proposals? 

The CFPB said it estimates around 17 companies would be captured, accounting for 88% of market share. 

Peer-to-peer platforms like Venmo and Cash App and cryptocurrency wallets would also be included, CFPB officials said. 

A major transformation in how banking services are provided is underway in the US, with a growing number of consumers linking their bank accounts to digital wallets such as Apple Pay. 

“Big Tech and other companies operating in consumer finance markets blur the traditional lines that have separated banking and payments from commercial activities,” the CFPB said.  

It believes “this blurring can put consumers at risk, especially when the same traditional banking safeguards, like deposit insurance, may not apply”.  

“Despite their impact on consumer finance, Big Tech and other nonbank companies operating in the payments sphere do not receive the same regulatory scrutiny and oversight as banks and credit unions,” Chopra said.  

Why is the CFPB seeking to regulate payments and digital wallets? 

While the CFPB has enforcement authority over Big Tech firms, the proposals would allow its examiners to carefully scrutinise their activities “to ensure they are following the law” and monitor their executives. 

Specifically, the agency said, the proposals would ensure Big Tech firms “adhere to applicable funds transfer, privacy, and other consumer protection laws” and “play by the same rules as banks and credit unions”. 

The regulator said digital apps’ share of e-commerce payments has grown to match, and in some cases overtake, that of traditional payment tools such as credit and debit cards.  

The public will be consulted before final implementation of any new rules. 

Is further regulation of Big Tech likely?  

Recently, Chopra spoke out about the encroachment of Big Tech in the payments space, noting in a speech that the US was “lurching toward a consolidated market structure, like the one that has emerged in China, that blurs the lines between payments and commerce and creates the incentives for excessive surveillance and even financial censorship”.  

Legal experts said Big Tech, fintech, and digital payments firms should watch the developments closely as more scrutiny of their activity is inevitable. 

“Hint: Touch money, get regulated like banks,” said Kathleen McMahon, management consultant at AdaptivProcess Consulting and a former Wells Fargo VP. “That’s what is coming down the pipeline fast for fintech and nonbanks. This is still in the proposal stage, but such an announcement typically indicates they are far down the path to finalising this already. Heads up.” 

Tim Wu, Columbia University law professor and tech regulation expert said the CFPB’s proposal is “an important step in the right direction” to protect consumers from abusive practices. Massachusetts Senator Elisabeth Warren, an advocate for consumer protection, said the CFPB’s proposal is “an important step to protect consumers from Big Tech”. 

CUBE comment 

US regulators have long danced around the issue of how to supervise aspects of fintech, and the mantra “act like a bank, get regulated like a bank” has been used as a threat against technology firms that offer financial products. 

Now, the CFPB has made a move and has put the biggest names on notice that it aims to perform financial examinations on its books if it wishes to continue serving consumers with digital wallets and payment products. 

The growth of digital payments over the last decade has been nothing short of staggering, and the pace at which technology firms have outflanked banks offering traditional brick-and-mortar services has left regulators trailing. 

As experts have noted, however, supervision is now catching up. Any fintech, Big Tech, non-bank payment firm active in the digital transaction space should be aware of what is coming on the horizon, and develop a robust compliance strategy ready for the level of examination coming down the line.