The Consumer Financial Protection Bureau (CFPB) recently passed new regulations that grant it expansive oversight over digital wallet and payment apps, such as Venmo and Apple Pay, effectively treating these companies as traditional financial institutions. The CFPB’s rule takes a one-size-fits-all approach with a low threshold for covered companies, stifling innovation in digital payments while failing to address consumer harm. The incoming Trump administration should act swiftly to revise the rule.
The final rule has two key shortcomings. First, its blanket regulatory approach fails to differentiate between various types of fintech products. It groups peer-to-peer payment applications, stored-value wallets, pass-through wallets, neo-banks, cryptocurrency exchanges, and money transfer providers together indiscriminately. Applying one overarching regulatory process to products with differing uses, users, and risks results in poor consumer policy and creates confusion for the private sector.
The CFPB’s final rule acknowledges that different financial products “each presents different consumer harms,” but fails to justify its catch-all regulatory approach, focusing instead on its legal obligations under antitrust law. This reasoning misses the point: Different products pose different risks, and the CFPB should regulate each type differently to avoid creating unnecessary red tape. For example, a neo-bank, which offers many of the same services as traditional banks but without physical branches, presents a much higher risk of unfair lending practices than a cryptocurrency exchange, which is more prone to volatility. Regulating a neo-bank and cryptocurrency exchange in the same way ultimately harms consumers, leaving them less informed about the specific risks associated with each type of financial product.
The final rule’s second shortcoming lies in its definition of a “larger participant,” the term the CFPB uses to identify tech companies subject to the new regulation. One of the few changes the CFPB made between the November 2023 proposed rule and the final version was raising the threshold for “larger participant” status from $5 million to $50 million in annual transaction volume, thereby reducing the number of qualifying participants from 17 to 7.
For the seven larger participants, CFPB oversight will include on-site examinations and potential “periodic checks on institution activities,” including calls and meetings. These companies, now subject to extensive regulation, will face a competitive disadvantage compared to unregulated rivals that avoid compliance costs. For instance, the CFPB’s 2015 regulation on ability-to-pay mortgage loans led to a 33.8 percent reduction in approvals for otherwise qualified applicants.
For the ten companies that avoided larger participant status, some may approach the threshold in the coming years. Depending on how the CFPB executes these rules, these companies might preemptively limit their growth to stay below the threshold. Alternatively, they might slow down innovation out of a need to focus on tighter controls on digital payment systems to ensure compliance with impending regulations. If CFPB supervision becomes a valuable asset for larger participants, such as a badge of trust for consumers, startup competitors could lose market competitiveness to larger incumbents.
A dynamic definition of larger participants that accounts for inflation and considers additional metrics beyond transaction volume (e.g., user base, share of market activity, and product type) would be a more effective approach. However, the CFPB declined to adopt this, stating in the final rule that such an approach “would be unnecessary and difficult to administer.” If this approach is deemed too complicated, the CFPB should at least raise the threshold to $100 billion in annual transaction value. In 2022, Zelle transacted $630 billion with an estimated 61.6 million users, while Venmo transacted $244 billion with an estimated 77.7 million users. A $50 million threshold is too low if the CFPB aims to regulate large digital payment providers like Zelle, Venmo, and Cash App.
The incoming presidential administration has made clear that it wants to realign the priorities of CFPB. Given that these rules are still new and not yet implemented, the Trump administration should pause enforcement and use the rulemaking process to revise the CFPB’s larger participant rule for non-bank companies. The revision should include product-specific rulemaking and raise the threshold for what constitutes a larger participant. Doing so would create a balanced framework that safeguards consumers while fostering innovation in the rapidly growing digital payment sector.
