Amanda Khatri
Editorial Manager
The roaring success of digital wallets by a tiny cabal of Big Tech firms has piqued the interest of financial regulators, who are now probing whether businesses acting like banks should be regulated like them too.
More than half of adults in the UK use their phones to regularly buy things, which has led to questions over who is to blame when something goes wrong.
Would financial stability be threatened if the technology suddenly stopped working, regulators want to know, and should that concentration of financial activity really be held by just three or four technology players?
The UK’s Financial Conduct Authority has joined forces with the Payment Systems Regulator to probe the matter, following in the footsteps of regulators in the US, Australia, and Canada, all of whom are pondering the same question, should digital wallet operators be subject to banking regulations?
A bank in your pocket
The popularity of digital wallets cannot be denied; millions of people in the UK are using phones to pay for things in shops, and around the world, more than a billion people (and growing) regularly use contactless payments.
The addition of digital wallets to phones built and sold by Apple and Google has put a bank inside the pockets of every person who owns a device, sparking regulatory concerns that have also triggered competition concerns, consumer protection risks, and market integrity issues.
Regulators around the world believe a tipping point has passed where non-banks are offering payment services like regulated entities, and carrying similar risks that could develop into wider operational issues affecting the financial services industry.
“The UK is seeing a seismic shift in how people pay, as digital wallets become a part of everyday life for many people,” said FCA’s chief executive Nikhil Rathi. “We want to make sure we can maximise the opportunities and benefits for consumers and businesses while protecting against any risks this technology may present.”
Along with Apple and Google, the UK is probing Amazon, Meta, Square and PayPal, and considering whether to subject the tech firms to the kinds of financial examinations banks endure, and what that process would entail.
Blurred lines between tech and finance
In the US, the Consumer Financial Protection Bureau (CFPB), a powerful consumer watchdog, believes Big Tech companies have the market for digital wallets in a stranglehold.
The regulator says the likes of Apple Pay and Google Pay have an unfair competitive advantage and could limit payment options for consumers.
“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 new regulations, “would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight,” he said.
Chopra wants the tech firms to “play by the same rules as banks and credit unions”.
“Big Tech and other companies operating in consumer finance markets blur the traditional lines that have separated banking and payments from commercial activities”, the agency said. “This blurring can put consumers at risk”.
The CFPB’s proposed rule has been met with resistance from an influential tech lobby group, the Computer & Communications Industry Association (CCIA), whose members include Amazon and Meta.
The CCIA responded to the proposals in a filing with the agency that noted the plans do not identify a specific risk, only that new risks are possible in the industry without saying what they are.
“It’s worth keeping in mind as the CFPB considers further regulations on digital services that consumer feedback seems to point towards a general satisfaction with payment services, which suggests the absence of a market failure in the sector,” said Krisztian Katona, the CCIA’s vice president of global competition and regulatory policy.
“We would urge regulators to tailor new regulations to specific problems they want to fix as broad, overly burdensome or heavy-handed digital regulation could significantly hinder new startups in this industry, and harm US innovation and economic growth,” she said.
The proposal was also criticised by US Representative Patrick McHenry, head of the House Financial Services Committee, who said the rules would “only limit nonbanks’ ability to offer products and services consumers and small businesses rely on — eliminating choice and competition in our payments system”.
In a separate letter, the Financial Technology Association which includes PayPal and Stripe also shared concerns stating that the existing rules were good enough and requested the regulator to backtrack on the proposed rule.
How are governments responding to the growing popularity of digital wallets?
In Australia, the federal government said it intends to update regulatory frameworks to cover popular digital payment services, naming Apple Pay, Google Pay, and WeChat as presently exempt from monitoring under laws.
The Reserve Bank of Australia would be given additional oversight of payment services or platforms that present risks of national significance, the government said.
In 2022, the Bank of Canada, the main regulator for payment service providers (PSPs) announced an expansion of rules to improve the reliability and safety of digital payments.
“We’re not going to use a blanket supervisory approach to the task at hand,” said Rob Morrow, Bank of Canada's executive director of Retail Payments Supervision. “We will take a risk-based approach that will focus on end-user impacts and the efficiency of payment services.”
"By ensuring these key risks are well managed, we will further build and maintain Canadians’ confidence that mo’ ways of paying do not, in fact, create mo’ problems,” said Morrow, referencing the Notorious B.I.G.’s 1997 hit.
When the rules come into force, an estimated 2,500 entities will fall under the regulator’s supervision including firms like Square and Stripe. Non-compliance could lead to fines of up to CA$10m (USD$7.5m).
CUBE comment
For financial regulators, the fact that Big Tech firms don’t view themselves as banks isn’t a problem; any business that operates within the realm of financial services is increasingly likely to be regulated as such.
Whilst the headlines have focussed on the Big Tech players, innovators, and suppliers further down the chain – third parties – are also unlikely to be exempt given the regulatory attention now being paid to fintech.
The lines between finance and technology have become blurred enough for supervisors to expand their oversight remits to consider how important technology players are to the running of modern financial services; such matters go beyond payments and into aspects of cloud computing, data management, and customer service.
This presents a requirement within tech firms for compliance resources they previously didn’t need, and many are turning to automated solutions to get ahead of the inevitable cascade of regulatory updates heading their way.
Automated Regulatory Intelligence is empowering tech firms to get ahead of regulatory change, monitor developments, update policies and controls, and enable them to get on with innovation rather than being bogged down in compliance matters.
Find out how CUBE uses AI and machine learning to categorise, monitor, convert, and align relevant regulatory information with your business framework, ensuring your firm reaches confident compliance every time.