How will digital wallets be regulated?

US District Judge Richard J. Leon recently rejected components of the Consumer Financial Protection Bureau’s (CFPB) “prepaid rule.” 

The five-year-old regulation states that platforms offering mobile wallets, P2P payments, and prepaid cards must provide three disclosures before consumers use their products. The regulation is designed to allow consumers to compare the potential costs of competing products, thereby creating downward pressure on the costs of these digital payment tools. 

But in PayPal’s eyes, digital wallets do not serve the same function as reloadable debit cards; the disclosure rules force PayPal to offer “misleading and confusing” statements, PayPal said in its 2019 lawsuit against the CFPB. 

Judge Leon’s recent decision, according to a report by Law 360, suggests Leon agrees with PayPal that the CFPB “had no justification” for subjecting digital wallets to “short-form” fee disclosure requirements as mandated by the prepaid rule. 

But is this the end of the saga? Precedent suggests no.

Last winter, a DC Circuit panel overturned Leon’s January 2021, which had similarly struck down parts of the prepaid rule, sending the case back to the district level. 

We should expect the CFPB to challenge this most recent ruling, because its essence comes down to a core set of questions. First, what is the purpose of digital wallets? To Leon, digital wallets “are not primarily used to access funds or to function as a substitute checking account.

“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),” Leon’s opinion asserted. 

But the CFPB disagrees. Digital wallets can be used similarly as other prepaid products, storing money for payments and transactions, meaning they deserve to fall under the same purview as the other products that are subject to the prepaid rule. 

Second, what is the purpose of digital wallets to the platforms providing them? Here, too, Leon says that their business model does not derive from charging usage fees. 

While these questions remain far from set in stone, the CFPB appears dedicated to warning consumers about their potential risks. Last year, the Bureau issued a consumer advisory stating that users’ money is at greater risk when kept in a payment app, given that wallets are not covered by the FDIC and other failsafes. 

In that sense, even if the explicit regulations of digital wallets may loosen slightly in the coming years, the CFPB—at least in its current form—may attempt to rally public opinion around its idea of digital wallets and their underlying risks.