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A fight is brewing over the future of mobile wallets.
On one side is the Consumer Financial Protection Bureau, which believes that the heart of every mobile wallet is a prepaid card.
On the other is PayPal, which believes that mobile wallets are so different that they should not be covered by the Bureau’s 1,600-page prepaid rule. Hanging in the balance are current products like Apple Pay and GPay, and future products like Facebook’s Calibra.
The Bureau recognized that prepaid platforms have driven recent payments innovation when it wrote its expansive Prepaid Accounts rule.
So, the Bureau said prepaid accounts are those “whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, or at automated teller machines, or to conduct person-to-person transfers.” It did exclude traditional checking accounts.
Venmo (owned by PayPal), as a peer-to-peer payment product, fits cleanly into the definition. It also stores funds that can be used at multiple, unaffiliated merchants through their apps. Anyone signing up for a Venmo account will see the disclosures that the Bureau mandates for prepaid accounts.
In its lawsuit, PayPal argues that digital wallets are fundamentally different from general-purpose reloadable prepaid cards because, even though the wallets can store money, consumers can use them without storing funds in them by linking other payment credentials.
With this argument, PayPal seems to be relying on the notion articulated by the Bureau that the “primary function” of a digital wallet is not a prepaid one. However, in its commentary on the rule, the Bureau says:
“The Bureau continues to believe that digital wallets that can hold funds operate in large part in a similar manner to physical or online prepaid accounts—a consumer can load funds into the account, spend the funds at multiple, unaffiliated merchants (or conduct P2P transfers), and reload the account once the funds are depleted. Accordingly, the Bureau believes that consumers who transact using digital wallets deserve the same protections as consumers who use other prepaid accounts.”
Unfortunately for PayPal, this may eliminate room for a “primary-function” argument that the rule doesn’t apply.
But what about mobile wallets like Apple Pay and GPay (Google)? Are they “prepaid accounts?”
Well, Apple Pay fits the definition. According to its site, the wallet can receive funds from other people, hold funds, and be used at multiple, unaffiliated merchants. The Apple Cash Card is provided by Green Dot Bank, and its disclosures follow the Bureau’s prepaid model.
But here’s where things get interesting. Green Dot offers both prepaid and traditional bank accounts, so why not just offer a checking account? In its discussion of the rule, the Bureau says that account structure is not a definitive factor: “[The] Bureau believes that the characteristics that make an account a prepaid account should not be dependent on the product’s back-office infrastructure.”
Another example is GPay, which, I have been assured in informal conversations, is not subject to the Prepaid Accounts Rule. While GPay does not store funds for making payments, it provides P2P services and stores those funds until the user moves them.
P2P transfer is only one function offered by GPay, which holds other payment credentials for shopping. So, GPay also might claim an exemption because its “primary” purpose is not P2P transfers.
The outcome of this lawsuit will determine Google’s ability to make that claim, along with many others. Clearly, and regardless of how it turns out, PayPal’s challenge to the CPFB has begun a high-stakes play.
