The CFPB's latest regulatory agenda signals that it is considering rules to define larger participants in markets for consumer payments, to be published in July 2023. This action, if implemented, would represent a sea change for consumer payments providers, and would result in larger providers being subjected to agency supervision and examination. Any such future rules would likely focus on peer-to-peer payment providers, social media companies that facilitate payments, and digital wallets, among other consumer-facing providers, but seem less likely to target merchant payment processors and similar payments companies.
The CFPB has expressed significant interest in the consumer payments market in recent years. Notably, in October 2021, the CFPB issued a series of orders to collect information on the business of large tech companies operating payments systems. Since then, the CFPB has issued reports on embedded commerce and various other topics that touch on consumer payments. All of these developments appear to be laying the foundation for a larger participant rulemaking.
Under section 1024 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB is authorized to supervise certain nonbank covered persons for compliance with federal consumer financial laws and for other purposes. Under section 1024(a)(1)(B) of the Dodd-Frank Act, for certain markets, the supervision program generally will apply only to "larger participant[s]" in these markets as defined by rule. A rule to define such larger participants in the consumer payment market would facilitate the supervision of nonbank covered persons active in that market.
While the CFPB's planned notice of proposed rulemaking will provide the details, larger participant rulemakings typically identify the covered market (in this case for consumer payments) by describing market-related activities and covered participants, define a process to identify larger participants based on revenue or similar metrics, and set forth a test for assessing which entities are larger participants in that market.
If a larger participant rule is adopted for consumer payments, covered participants will be subject to CFPB supervision and other requirements. CFPB supervision involves various activities, including examinations, risk assessments, compliance management reviews, enforcement actions, and consumer education and outreach. While a CFPB exam is somewhat similar in process to a state regulatory exam, the CFPB often covers a broader range of subjects and operational areas, including a company's general compliance with consumer financial law, the adequacy of its compliance management system, and its process for managing consumer complaints.
Many nonbank payment companies are already subject to state licensing/registration and other substantive requirements governing money services businesses, which typically cover money transmission, prepaid access, and other, similar services. Similarly, many payments companies are subject to supervision in connection with servicing as program managers for supervised banks. At this stage it is not clear how the CFPB would define the scope of the consumer payment market, including whether the definition would match up with state money services and money transmission statutes, or take into account bank partnership regimes already subject to oversight by federal prudential regulators.
The CFPB has defined larger participants in several markets (consumer reporting, consumer debt collection, student loan servicing, international money transfer, and automobile financing) and has previously signaled it was considering defining additional markets for nonbank supervision. A larger participant rule would not necessarily impose new substantive consumer protection requirements or delineate the scope of existing federal consumer financial law. In this regard, nonbank covered persons are generally subject to the CFPB's regulatory and enforcement authority, and any applicable financial consumer law, regardless of whether they are subject to the CFPB's supervisory authority. At a minimum, however, a larger participant rule for consumer payments would likely bring a wide range of companies within the CFPB's supervisory jurisdiction, which would have a significant impact on the industry and how consumer payments companies manage their operations and compliance on a day-to-day basis.