The biggest surprise for many who awaited the Consumer Financial Protection Bureau’s final rule for prepaid cards was discovering that its reach extends to some of the payments industry’s highest-profile tech firms, such as PayPal Inc.’s Venmo, Square Inc.’s Square Cash and Dwolla.
In the 1,689-page document, released today, the CFPB makes it clear that it’s expanded the definition of prepaid to include certain Person-to-Person payments, which play a central role in emerging digital and mobile wallets, and some see this as as having a clear chilling effect on innovation.
But a few observers suggest the rule could be a positive for the emerging payments industry.
“It’s clear the CFPB is looking to expand its wings here by extending the prepaid rules to any account that holds funds, which clearly has implications for PayPal, Venmo, Square and others who may have to provide more consumers disclosures, but it doesn’t have any apparent effect on their business models,” said Larry Berlin, a vice president with Chicago-based equities firm First Analysis.
The CFPB’s new focus on P-to-P accounts is a recognition of their growing significance within mobile payments, Berlin said. This oversight could help build consumer trust in the emerging models surrounding P-to-P.
“P-to-P as it’s evolved within digital wallets has been a bit of a hazy area until now, and the CFPB is providing a little clarity that for the first time gives providers some idea of where to go with it,” Berlin said. “Nobody knew exactly what kind of animal P-to-P was in a nonbank digital wallet, and now we’re getting some boundaries.”
The majority of the CFPB’s rule addresses requirements for consumer disclosure and protections around reloadable prepaid cards, a tool widely used by low-income consumers and those without bank accounts. The CFPB notes in its introduction that its final rule also covers nonbank accounts that can be loaded with funds to enable purchases, ATM cash withdrawals and person-to-person transfers, which could mean changes for mobile wallet giants like Venmo and Square whose products hinge on P-to-P.
The CFPB is concerned about protecting consumers’ funds and making sure fees are fair and clearly disclosed, but most P-to-P services don’t have consumer fees, Berlin pointed out.
“So far there is no revenue model for most P-to-P services, so there are no fee issues for Venmo and others like it, and no need for them to deepen the moat to deal with regulations around that,” Berlin said.
Venmo’s only exposure on fees is what it charges merchants who accept Pay with Venmo payments, but that’s not an area the CFPB is concerned with in its new rules, said Berlin.
Paypal’s Venmo and Square did not return calls in time for deadline, but payment industry analysts say they probably were well aware of the potential scope of the regulations, based on comments that addressed P-to-P in the two years leading up to finalizing the rule.
“The biggest effect so far for Venmo, Square and other digital wallet providers coming from the CFPB’s rules is in disclosure,” said Rodman Reef, a principal with Reef Karson Consulting LLC. “The CFPB apparently is going to treat any account that holds money for a period of time as a prepaid account, and that’s something digital wallet providers never had to deal with before, so they will make the appropriate moves. It’s the first day out, so who knows what will happen as these things become reality.”
The Network Branded Prepaid Card Association griped in a statement that the rule fails to "foster innovation" and muddies boundaries and definitions to the point where its oversight now extends to more than 15 different types of prepaid cards and related products. The CFPB set a deadline for Oct. 1, 2017 for companies with products covered by its rule to comply.
Some nonbank digital wallet providers may be challenged by their inclusion in a rule intended for prepaid cards, suggested Ben Jackson, a senior analyst with Mercator Advisory Group.
"Electronic account providers who have developed policies and procedures for disclosures, disputes, and negative balances now need to find a way to adapt those policies and procedures for regulations that are written primarily for accounts that sell plastic cards in a retail environment," he said.
The CFPB provided little detail about exactly how P-to-P providers must handle products, but in a footnote the agency added that according to a Federal Reserve Board survey, 15% of mobile payment users said they used a nonbank like PayPal to fund their payments.
The CFPB also noted that during the public comment period, arguments against its rule covering digital wallets included the fact that digital wallets are primarily used to access payment credentials, not funds, and therefore don’t present the same risks as prepaid cards, such as overdrawing funds from accounts.