How PayPal’s Case Against the CFPB Could Spawn ‘Uncomfortable’ Results for Payments Players

It was easy to lose track of it in the midst of all the impacts of the novel coronavirus, but a crucial federal lawsuit filed six months ago still hangs over the payments industry, carrying far-reaching implications for nearly all players. It’s PayPal Holdings Inc.’s  action against the Consumer Financial Protection Agency over the CFPB’s final prepaid rule, and while it very much hasn’t gone away, some experts are worried its eventual resolution could hold very different implications from those they were expecting before PayPal brought its suit.

“We could be facing a different kind of environment by the time the case is rendered than we’re in today,” notes Ben Jackson, chief operating officer at the Innovative Payments Association, a Washington, D.C.-based trade group (Jackson also authors the monthly Payments 3.0 column for Digital Transactions). “That’s kind of what has us uncomfortable. We don’t feel people are talking enough about this case.”

PayPal alleges the CFPB’s 1,600-page prepaid rule, which went into effect in April 2019 after years of wrangling between the agency and the payments industry, wrongly classifies digital wallets such as those PayPal has long offered as prepaid products and so subject to the rule’s restrictions. The payments company also seeks to have the rule quashed as a violation of its free-speech rights under the First Amendment. The suit is before the U.S. District Court for the District of Columbia.

One of Jackson’s concerns is that the court could ultimately invalidate the rule, throwing oversight back to “a hodgepodge of regulations” from a long list of agencies, from the Federal Deposit Insurance Corp. to the Federal Trade Commission to state authorities. Though the IPA has some reservations about the rule, it has the virtue of “centralized regulation of [prepaid] accounts,” Jackson says. Another possible outcome, he adds, is that “Congress writes a new law, potentially handing more explicit power to the CFPB,” presumably not the result PayPal is seeking. Neither the CFPB nor PayPal immediately responded to requests for comment on the status of the case.

A third possible outcome is that the court upholds the rule, which could freeze attempts by payments players to make even minor changes to it, Jackson speculates. “The final rule wasn’t perfect, but the industry said we can live with that,” Jackson notes.

The “adjustments” the IPA would like to see have to do with when consumers can connect a credit account to a prepaid product and with clearer rules concerning disclosure, Jackson says. But the uncertainty surrounding the litigation’s ultimate outcome throws that strategy into a cocked hat. “It’s hard to predict what a court is going to do,” he adds, “I think the case could be counter-productive.”

But Jackson and the IPA are certain about one thing: invalidating the rule entirely would be a bad result. “We worked hard on the rule,” he says. “We don’t want to see the rule thrown out wholesale. There are too many secondary and tertiary effects.” Instead, he suggests, “The ideal outcome would be people sit down and ask how to change the rule to make it fair for everyone.”