Alleging Digital Wallets Are Not Prepaid Products, PayPal Sues the CFPB Over Its Prepaid Rule

PayPal Holdings Inc. on Wednesday sued the Consumer Financial Protection Bureau alleging the regulatory agency’s 8-month-old prepaid rule represents a “category error” and a violation of the First Amendment, and should be vacated by the court.

The lawsuit, filed in the U.S. District Court for the District of Columbia, charges that the 1,600-page regulation forces PayPal to make awkward and confusing disclosures to consumers by improperly including digital wallets under its definition of a general purpose reloadable (GPR) card. “[T]he Bureau’s onerous compulsory disclosures require PayPal to prominently feature items that are irrelevant to the core use of its digital wallet offering, such as ‘periodic,’ ‘per purchase,’ ‘customer service,’ and ‘inactivity’ fees,” PayPal’s suit alleges.

By forcing speech in this way, PayPal further charges, the rule violates the U.S. Constitution’s free-speech protections. “[T]he Prepaid Rule is invalid, and may not be enforced against PayPal, because it violates the First Amendment of the U.S. Constitution,” the suit alleges.

PayPal further charges that the CFPB brushed aside its argument that digital wallets, which represent the company’s core product, are fundamentally distinct from prepaid card products. “Contrary to its mission of protecting U.S. consumers … the CFPB unreasonably dismissed PayPal’s evidence and finalized a Rule that treats identically GPR cards and PayPal’s very different digital wallet products.”

Representatives for the Washington, D.C.-based CFPB did not immediately respond to a request for comment on PayPal’s suit. Besides PayPal, other giants in the payments industry that could be affected both by the rule and by the outcome of the litigation include Apple Inc. and Alphabet Inc., both of which offer mobile wallets. Neither company is a party to the suit.

Industry representatives on Wednesday urged caution in response to the PayPal’s allegations. The Washington, D.C.-based Innovative Payments Association, for example, issued a statement urging compliance with the rule while the case unfolds. “While PayPal is not a member of the IPA, this is a case that could have an impact on our members, their business partners and most importantly the customers they serve,” the statement says. “However, until a final decision is reached in this case, we encourage our members to fully comply with the Prepaid Rule.”

PayPal’s case represents what is probably the most serious challenge to the rule since it took effect after years of delay. Created by the Obama Administration in the wake of the 2008-09 financial crisis, the CFPB considered prepaid regulation for years before releasing the first version of its rule in January 2017. The rule then underwent three revisions and two extensions of its effective date before finally taking effect in April.