Judge Sides With PayPal in Lawsuit Regarding e-Wallets
PayPal sued the Consumer Financial Protection Bureau (CFPB) in 2019 over the regulators ruling around digital wallets and reloadable (or prepaid) debit cards. PayPal has won this long running legal battle with a District Judge finding in favor of the fintech company. The case has not been straightforward, and legal opinions have varied at different stages in the procedures.
As with many arguments in the tech sphere, the laws in question are not always as up-to-date with the tech that is being challenged. This can make rulings very complicated and appear arbitrary. Big Tech champions freedom, while the regulators aim to minimize risk.
Latest ruling
Judge Richard Leon dismissed an aspect of the prepaid rule for digital wallets that came into effect five years ago. The CFPB had tried to hold digital wallets to the same disclosure and waiting period rules that apply to physical prepaid cards, but PayPal had pushed back, and this was central to PayPal’s case.
According to court documents, the judge agreed with PayPal in that there was no rational justification for digital wallets to be under the rule’s “short-form” fee disclosure requirements. That rule stated that digital wallet providers and companies offering prepaid services had to state upfront potential fees customers might face. PayPal claimed the rules forced it to make “misleading and confusing” disclosures about its products and services. They had also claimed that the rules had put “unreasonable restrictions’ on consumers to link credit products to PayPal accounts.
The irrepressible rise of eWallets and digital payments
This has been a long battle for PayPal, and it is not the first time that this judge has ruled in their favor in this case. A lot has happened at PayPal since the CFPB tried to assert itself. In 2019, e-wallets overtook credit cards as the top global payment type. With mobile phones key to accessing e-wallets increased superfast broadband penetration can be credited for a large part of its growth.
After PayPal and eBay went their separate ways, PayPal was also the payment partner of choice in a whole variety of online settings. In the USA and Canada, shoppers can use this payment method in almost all online settings. For example, casinos with PayPal are becoming more popular, and you can even use PayPal to pay for holiday bookings through sites like Airbnb. It has become more usual to ask the question,
‘Why can’t I pay with PayPal?” rather than “Can I pay with PayPal.?’
Customers like the simplicity of the service and the security of not having to share any personal details with the vendor.
Legal ping-pong
PayPal’s case against the CFPB has been ping-ponging between the courts. In 2023, Reuters reported that the appeals court had revived the rule over PayPal’s disclosure of upfront fees, but this latest decision has overturned this. Unless one reads the rulings in order, the whole thing can be incredibly confusing.
In January 2021, the CFPB’s prepaid rule was struck down, and the judge said that the bureau had overstepped its authority. However, that was reversed last winter, and the case then went back to the district court.
What does the latest ruling determine?
The latest ruling from March 29th, 2024, claims the CFPB’s short-form disclosure rules are ‘capricious and arbitrary’. The judge declared the regulator did not have sufficient or established foundations for using the same ‘prescriptive regime’ it uses for physical cards for e-wallets. Leon’s opinion was that“digital wallets are not primarily used to access funds or to function as a substitute checking account”.
He went on to note,“They do not require a consumer to preload or prefund an account before they can use it (and indeed, most digital wallet users never carry an account balance).”
“Their underlying business model does not depend on charging usage fees to consumers,” the judge continued. “And they are not available in brick-and-mortar retail locations, instead existing only in the digital space.”
What next?
The CFPB is still running to catch up with this rapidly evolving sphere and has proposed new rules for digital wallet providers. While digital wallets are increasingly popular, many of the companies that provide them are not subject to CFPB oversite.
New rules were announced in November 2023 that would put nonbank financial companies under the same scrutiny as large banks and credit unions. However, digital wallet providers have kicked back against the proposals, arguing that this “one-size-fits-all approach” is heavy-handed and inappropriate. CFPB Director Rohit Chopra claimed digital wallets had become part of the critical infrastructure of the economy and, therefore, needed oversight.
He said, “Payment systems are critical infrastructure for our economy. These activities used to be conducted almost exclusively by supervised banks. Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight.”
Big Tech and fintech companies operating in consumer finance markets often do not conform to the traditional lines that have kept banking separate from commercial activities. The CFPB believes these blurred lines can put consumers at risk, and they want to ensure that users are sufficiently protected. However, Big Tech is not going to give up its freedoms without a fight.
