The Consumer Financial Protection Bureau (CFPB) has proposed a rule to define a market for general-use digital consumer payment applications. Larger participants in this market would be subject to CFPB supervision and examination authority under the Consumer Financial Protection Act (CFPA). The proposed market would cover providers of funds transfer and wallet functions through consumer digital applications for consumers' general use used to make payments to other persons for personal, family, or household purposes. Examples include many consumer financial products and services that are commonly described as "digital wallets," "payment apps," "person-to-person apps," "P2P apps," and similar applications.
The proposed rulemaking comes amid a CFPB and federal government effort to exercise greater regulatory oversight over fintechs and other nonbank providers of financial services. The proposed rulemaking comes after a preview earlier in 2023 and several years of CFPB scrutiny of the industry, including a 2021 market inquiry of large tech companies operating payments systems. The proposal also was announced just days after the federal Financial Stability Oversight Council issued new Guidance for Nonbank Financial Company Determinations, which set forth procedures for considering whether to designate a nonbank financial company for Federal Reserve supervision under Section 113 of the Dodd-Frank Act.
Comments are due before January 8, 2024, or 30 days after publication in the Federal Register, whichever is later
Larger Participant Test
The proposed rule would set forth a two-part test to determine whether a nonbank covered person is a larger participant in the general-use digital consumer payment applications market:
Consumer Payment Transaction Volume
The nonbank covered person (together with its affiliated companies) must provide general-use digital consumer payment applications with an annual volume of at least 5 million consumer payment transactions.
- The proposed rule would require nonbank covered persons to aggregate their consumer payment transaction volume with affiliate consumer payment transaction volume to determine if a provider of general-use digital consumer payment applications is covered under the proposed rule. In aggregating transactions across affiliated companies, an individual consumer payment transaction would only be counted once even if more than one affiliated company facilitates the transaction.
Not a Small Business Concern
The nonbank covered person must not be a small business concern based on the applicable Small Business Administration (SBA) size standard. As prescribed by existing regulation, any nonbank covered person that qualifies as a larger participant would remain a larger participant until two years from the first day of the tax year in which the person last met the larger-participant test.
Definitions Concerning Providing a General-Use Digital Consumer Payment Application
Consumer Payment Transaction(s)
The proposed rule would define the term "consumer payment transaction" 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. Except for enumerated exclusions, the term applies to transfers of consumer funds and transfers made by extending consumer credit.
Although the proposed rule does not define "funds," the CFPB notes that the definition of "funds" under the CFPA is not limited to fiat currency or legal tender, and includes digital assets that have monetary value and are readily usable for financial purposes, including as a medium of exchange. As such, under the proposed rule, the transfer of funds in the form of digital assets by or on behalf of a consumer physically located in a state to another person primarily for personal, family, or household purpose could qualify as a "consumer payment transaction" if it would otherwise meet the definition of a "consumer payment transaction."
The CFPB breaks the definition of a "consumer payment transaction" into four distinct components:
- The first is that the payment transaction must result in a
transfer of funds by or on behalf of the consumer. This component
focuses on the sending of payment and not receipt. The proposed
definition would encompass a consumer's transfer of their own
funds as well as a creditor's transfer of funds to another
person on behalf of the consumer as part of a consumer credit
transaction.
- The second is that the consumer must be physically located in a
state. This would be satisfied, for example, when the consumer uses
a general-use digital consumer payment application on a personal
computing device or at a point of sale that is physically located
in a state. If a consumer is physically located outside of any
state at the time of engaging in a payment transaction, then it
would not be a consumer payment transaction covered by the proposed
rule.
- The third is that the funds transfer must be made to another
person besides the consumer. For example, this could be another
consumer, a business, or another type of entity. This component
distinguishes the proposed market from adjacent but distinct
markets that include other financial products and services,
including the activities of taking deposits; selling, providing, or
issuing stored value; and extending consumer credit by transferring
funds directly to the consumer.
This component would exclude transfers between a consumer's own deposit accounts, transfers between a consumer deposit account and the same consumer's stored value account held at another financial institution, such as loading or redemptions, and a withdrawal from the consumer's own deposit account from an ATM.
- The final component is that the funds transfer must be for primarily personal, family, or household purposes. For general-use digital payment applications that could also be used for commercial purposes, only consumer payment transactions for personal, family, or household purposes would fall within the scope of the proposed rule.
The proposed rule includes the following exclusions from the definition of consumer payment transaction:
- An international money transfer as defined by 12 C.F.R. §
109.107(a).
- A transfer of funds that is (i) linked to the consumer's
receipt of a different form of funds, such as a transaction for
foreign exchange or (ii) that is excluded from the definition of
"electronic fund transfer" under 12 C.F.R. §
1005.3(c)(4). This exclusion would encompass, among other
transactions, the exchange of fiat currencies, a purchase of a
crypto-asset using fiat currency, a sale of a crypto-asset in which
the seller receives fiat currency in return, or the exchange of one
type of crypto-asset for another type of crypto-asset.
- A payment transaction conducted by a person for the sale or
lease of goods or services that a consumer selected from an online
or physical store or marketplace operated prominently in the name
of such person or its affiliated company.
This exclusion clarifies that, when a consumer selects goods or services in a store or website operated in the 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 is generally not a consumer payment transaction
Furthermore, when a consumer selects goods or services in an online marketplace and pays using account or payment credentials stored by an online marketplace operator or its affiliated company, such a transfer of funds is generally not a consumer payment transaction. For the transaction to qualify for the exclusion, it must be for the sale or lease of a good or service the consumer selected from a digital platform operated prominently in the name of an online marketplace operator or their affiliated company.
However, the exclusion does not apply when a consumer uses a payment or account credential stored by a general-use digital consumer application provided by an unaffiliated person. For example, when a consumer selects goods or services for purchase or lease on a website of a merchant, and then from within that website chooses an unaffiliated person's general-use digital consumer payment application, then the exclusion would not apply, and the transaction would be considered a consumer payment transaction.
- An extension of consumer credit that is made using a digital application provided by the person who is extending the credit or that person's affiliated company.
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