Cheatsheet: Why PayPal is suing the CFPB regarding its Prepaid Rule

Photographer: Gabby Jones/Bloomberg

PayPal this month filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) regarding fee disclosure requirements, arguing that the requirements of the CFPB’s Prepaid Rule would hurt its business and confuse customers.

“PayPal supports the mission of the CFPB and regulations that empower consumers to make informed financial decisions,” a PayPal spokesperson told Bank Innovation. “Although well intentioned, the Prepaid Rule was designed primarily for physical prepaid cards and fails to account for the significant differences between those cards and digital wallets.”

The rule, which was implemented in April, requires prepaid card issuers to offer customers upfront information about the fees in an effort to protect consumers against hidden fees. The rule covers digit wallet providers like PayPal, but the company alleges that the fee disclosure requirements are not relevant to PayPal’s digital wallet offerings.

According to the CFPB, the Prepaid Rule aims to help customers find the best card for their needs and protects them in cases when prepaid cards are stolen, lost, or wrongfully charged. PayPal, however, argued that it is not a prepaid card issuer, claiming it’s an online wallet.

The concern for PayPal is that despite the fact that customers connect their credit cards and debit cards to its platform and even hold money inside of their PayPal-branded digital wallets, PayPal’s offerings are considered prepaid cards from the regulator’s perspective.

Having exhausted other options, PayPal said it’s filing suit to end the “unsuitable application” of the Prepaid Rule and the potential negative impact on consumers.

Payments analysts that spoke to Bank Innovation opined that the Prepaid Rule could indeed create confusion for customers and have a negative impact on business.

“Many of those disclosures do not apply to what goes on with [PayPal-owned] Venmo, and PayPal, I think, reasonably argued that they’re confusing,” said David True, partner at Paygility Advisors.

The risk for PayPal, according to True, is that the implementation of the rule may prompt customers to hesitate to use PayPal’s products or stop using them altogether.

Meanwhile, others argued that from a regulation perspective, digital wallets don’t fall under the umbrella of prepaid cards. “A stored value account where a company holds the funds is very different from how digital wallets operate as a storage [vehicle] for other payment mechanisms,” noted Krista Tedder, head of payments at Javelin Strategy and Research.

She added that the CFPB Prepaid Rule doesn’t provide clarity on the requirements for digital wallets. “The CFPB rules for prepaid [cards] do not explain what a digital wallet is,” explained Tedder. “If the intent of the CFPB is to regulate digital wallets, they are required to work with Congress to build legislation that will regulate the technology.”

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