Behind Washington’s Tougher Stance on Payments

After years of a relatively light touch, federal regulators are turning the Klieg lights on the payment industry. In some cases, their approach has been opaque, which is creating concerns that could stifle innovation.

There’s an old adage inside the Beltway that says, “People Are Policy.” Since entering the Oval Office in 2021, President Joe Biden has been quite vocal about making consumer protections a priority for his administration.

Since then, various federal regulatory agencies such as the Federal Trade Commission, the Consumer Financial Protection Bureau, and the Federal Reserve System, along with the U.S. House Committee on Financial Services Task Force on Financial Technology, have taken the president’s cue and started looking more closely at the payments industry.

A key driver behind this increased scrutiny is that the payments industry is innovating faster than regulators can keep up. Typically, government watchdogs need months, sometimes years, to gather information on new payment products and how they are used by consumers before they can evaluate the risks around them, and the potential harm those risks can cause consumers.

But make no mistake: Washington is racing to catch up. In the 18 months since Biden took office, signs of the administration’s regulatory activism are all over the payments landscape.

The Brightest Spotlight

At the FTC, which is entrusted with overseeing antitrust enforcement, Chairperson Lina Khan has taken aim at big tech companies, many of which have payments divisions. In 2021, the agency released a report examining acquisitions by Google, a unit of Alphabet Inc., Apple Inc., Facebook Inc., Amazon.com Inc., and Microsoft Corp. that did not require reporting to antitrust authorities at the FTC and the Department of Justice under the Hart-Scott-Rodino Act, and whether those acquisitions stymied competition.

The Federal Reserve has opened a discussion with the payments industry about launching a central bank digital currency (“Should CBDCs Be the Next Big Thing?” February) in the United States. The Fed is seeking to learn about the pros and cons of such a move and whether consumers would have confidence in a digital form of legal tender.

On Capitol Hill, the House of Representatives’ Task Force on Financial Technology has turned its attention to mobile banking, buy now, pay later, and other payments concerns.

But the regulatory body that has trained the brightest spotlight on payments is the CFPB. Launched in 2011 to address failures in consumer protection, the agency has grown far more active with the advent of a Democratic administration, issuing a flurry of memos and requests for information to companies across the payments landscape.

Most recently, the CFPB in May created the Office of Competition and Innovation as part of what it describes as “a new approach to help spur innovation in financial services by promoting competition and identifying stumbling blocks for new market entrants.”

The CFPB in October ordered the big tech firms Google, Apple Inc., Meta Platforms Inc. (Facebook), Amazon.com, Block Inc. (formerly Square Inc.), and PayPal Holdings Inc. to turn over information about their payment products, plans, and practices. The order stems from regulators’ concerns about whether consumer data is being gathered in compliance with data-privacy and -protection laws and how that data is being used.

Then, in December, the CFPB opened an inquiry into buy now, pay later loans (page 36), requesting information from five leading BNPL lenders: Affirm Inc., Afterpay Ltd., Klarna AB, PayPal Holdings Inc., and Zip Co.

The requested data relates to the potential for overspending by consumers who rely too heavily on BNPL loans, the potential for these loans to fall outside consumer-protection rules that apply to other lending products, and BNPL lenders’ use of consumer-payment histories, data collection, and data monetization, and the risk BNPL may pose to consumers. The five BNPL lenders had until March 1 to respond.

The inquiry into BNPL was spurred by a letter from Democratic members of the Senate’s Committee on Banking, Housing, and Urban Affairs to CFPB Director Robit Chopra, urging a review the BNPL industry.

Treading Lightly

So what does this flurry of regulatory activism mean for the payments industry? Many industry observers attribute the recent interest in the payments business on the part of regulators to a felt obligation to carry out the Biden administration’s  objectives for consumer protection. Another motivator is a felt need to catch up with payment-industry innovations to ensure proper industry regulation.

“The payments industry is innovating faster than the regulators can keep up,” says Nicole Meisner, attorney, partner, and co-chairman of the Electronic Payments Group at Jaffe, Raitt, Heuer & Weiss, P.C., a Southfield, Mich.-based law firm.

“In my view,” she continues, “the reason for increased regulatory interest is twofold: First, new objectives of the current administration. Second, the natural response to new and emerging products now that a track record exists revealing what the products do, how they are utilized by consumers, and the potential risks and consumer harm they present.”

While the payments industry is no stranger to regulation, concerns are emerging in some circles that regulators’ increased activism will create uncertainty in the market. Enough of
this could cause payments companies to
tread more lightly to avoid incurring expensive litigation or enforcement actions. It could also stymie innovation.

As it stands now, the CFPB’s requests for information from Big Tech and BNPL lenders—including a demand for data from Block Inc. regarding how it handles complaints and disputes related to its Cash App wallet—have left many in the payment industry confused about what the agency’s true intentions are. The CFPB has yet to tip its hand about how it intends to respond to the information it gathers.

“To date, the CFPB has focused rulemaking by issuing memos, orders, and requests for information, but has not issued many formal rulemakings.  This approach creates some degree of uncertainty because it is difficult to discern the broader effects of what the requests actually mean,” says Scott Talbott, senior vice president, government relations for the Electronic Transactions Association.

In some respects, the CFPB’s requests for information are a way for the agency to “regulate from the podium” without issuing a new rule or mandate, industry observers say. That tactic can be effective, because it is likely to prompt some payments companies to tighten consumer protection policies to avoid being targeted by the CFPB.

“This approach can affect industry behavior quickly without implementing new regulation, which take time to develop and can be challenged legally,” Talbott says. “You can’t challenge a memo in court.”

From the industry’s standpoint, another downside to regulators hinting at or speaking out about tightening regulation is that this can have a cooling effect on startups and other new entrants, according to Jeff Tassey, chairman of the Electronic Payments Coalition.

Despite the new activism by regulators—and a resulting uncertainty about the new regulatory climate—Tassey is confident the payments industry has the resilience to continue developing innovative new products.

“We have seen a steady drumbeat of new payment services continue to emerge despite the activism on the regulatory front,” Tassey says. “Banks are already highly regulated and well-suited to provide many of these new products, and many are in fact doing so or exploring the best ways to do so.”

“The main takeaway,” he adds, “is that the payments industry continues to be highly competitive with new services that cater to consumer demands for payment options.”

Activist Cloth

In accordance with the adage that holds that people are policy, it is important to understand the people entrusted to set and enforce the rules to understand their intentions, industry observers say.

A former law professor and FTC staffer, Lina Khan has long argued that antitrust law needs to be reformed in the wake of big tech’s rise, and has even advocated for the breakup of some big tech companies, such as Facebook and Google. She was appointed by President Biden to shake up the FTC.

Khan’s stewardship of the FTC also comes at a time when politicians on both sides of the aisle, small businesses, and others are pushing regulators to clamp down on big tech. Khan has indicated the FTC’s interest in big tech is centered more on consumer data protection and privacy than on anything else.

But one area where its examination touches on payments lies in whether Apple and Google are steering consumers away from competing third-party apps in their app stores. Among the products in these stores are Apple’s and Google’s respective mobile-wallet apps.

“At this stage, it’s all preliminary, but will Apple and Google be told they are keeping consumers away from third-party apps [in favor of their own] in their app stores?” asks Ben Jackson, chief operating officer at the Innovative Payments Association. “The bipartisan interest in big tech makes it an issue to watch.” (Jackson writes the monthly Payments 3.0 column for Digital Transactions.)

When it comes to payments, the feeling among industry observers is that the FTC will focus on larger, more complex issues, such as antitrust. “The FTC tends to go after larger cases, so we might see them take action on big-tech antitrust issues, but I expect that they will continue to defer the lead to the CFPB on financial services,” says Vanni Parmeggiani, director, open banking and real-time payments, at GoCardless, a specialist in account-to-account transfers.

“Also,” he adds, “based on leading indicators, the CFPB has been more vocal on payments issues, and Biden has been giving them mandates directly.”

Like Khan, CFPB director Chopra is cut from activist cloth. He is described by some payment-industry experts as a regulator who believes deeply in his mission and takes it personally, and who in some respects is a political animal.

“Chopra is a longstanding regulatory activist that takes an aggressive view of regulation,” says Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based consultancy. “The sense is that, under his leadership, the CFPB will become more aggressive and look to expand its powers.”

When it comes to Congress, payments experts agree that it’s unlikely Congress will intercede, given the partisan divide and that mid-term elections are less than five months away. “Congress does not seem to have a lot of appetite for this at the moment, and I do not think it is at the top of the legislative agenda,” Parmeggiani says.

‘Whipsaw Action’

Looking ahead, the best bets for where regulators will focus their attention within payments are BNPL, data privacy and usage, and
fraud protection.

“With the explosion in popularity of buy now, pay later programs, this will be top-of-mind for many regulators. The CFBP has already submitted inquiries to five of the big BNPL providers indicating several areas of concern including consumer accumulation of debt, regulatory avoidance, and data harvesting,” says attorney Meisner.

“Data privacy and usage is also a topic [where] we will likely see an uptick in regulatory efforts,” she continues. “Data privacy in the context of a data breach or unauthorized access is one key aspect, but data usage more generally, such as behavioral targeting and data monetization, are also top concerns.”

It is also possible there will be an uptick in regulatory efforts at the state, Meisner adds.

One point payment experts continually bring up is that while overly broad regulation can stymie innovation, targeted regulation can benefit the payment industry by leveling the playing field to ensure competition among players of all sizes. The CFPB’s Office of Competition and Innovation, for example, could lead a push to make open banking more ubiquitous in the United States, says the IPA’s Jackson.

Having regulations that ensure fair competition could be a huge benefit to merchants, argue some observers. “Merchants see payments dominated by Visa and Mastercard and we feel that kind of domination blocks innovation,” says Doug Kantor, general counsel foe the National Association of Convenience Stores.

“The Justice Department’s lawsuit to block Visa’s acquisition of Plaid opened a lot of regulators’ eyes about [Visa’s] reach into payments and raised questions about whether past acquisitions [by the card networks] should have been allowed,” Kantor says.

If nothing else, the payments industry prefers to have a regulatory environment where regulators understand that payments are complex and where dialog between regulators and the industry is open and regular.

“The industry wants stability when it comes to regulation,” says Jackson. “When regulators move between a relatively hands-off approach to a tougher stance it creates whipsaw action that can be quite problematic, because compliance by itself is hard enough. You can’t solve every issue in payments with one rule.”

This nuance is why it’s necessary for the payments industry to help regulators understand the problem they are attempting to fix and the steps payment companies are taking to protect consumers, Jackson argues. “Because those things are not always self-evident to regulators,” he says.