Payments 3.0: The Regulators Will Strike Back

PayPal has won the first round in what is likely to be a long fight with regulators.

On Dec. 30, Judge Richard Leon, of the U.S. District Court for the District of Columbia, handed down a summary judgment in the case of PayPal Inc. vs. the Consumer Financial Protection Bureau. The ruling on its face was narrow, but it could have wide-reaching effects.

In short, Leon granted PayPal’s motion to throw out two parts of the CFPB prepaid accounts rule: the short-form disclosure and the restriction on when prepaid providers could offer their customers credit. His reasoning on both was essentially that the regulations exceeded the scope of the powers granted to the bureau by legislation.

The ruling’s consequences will fall broadly into three arenas: the practical, the legal, and the policy.

Practically, the ruling will not mean much in the near term for most prepaid providers. PayPal likely will stop providing a short-form disclosure on its digital-only products in the short term, and other digital wallet providers may follow suit. While the short-form rule is vacated for all companies, most of them have already printed collateral that includes the short form, so they are not going to redesign, reprint, and recall packaging.

It is worth remembering the original version of the prepaid rule was short, mostly about disclosures for general-purpose reloadable cards sold at retail, and supported by many providers. They thought the Schumer Box-like disclosures would help shoppers compare products (and, of course, all thought their own product would come out on top in those comparisons).

Legally, this case is far from over, according to most experts. The bureau may not appeal immediately as we transition between administrations, but the 60-day window for filing an appeal will last after the transition. The decision circumscribes the CFPB’s power to require specific disclosures and credit restrictions. If the ruling were to stand, other financial services might challenge the regulations that govern their products. So, the regulators will likely appeal because the decision could affect their power.

It is important to note that the decision is a summary judgment, and Leon writes that he did not reach conclusions on a number of issues brought up in PayPal’s suit, including the question of whether the short-form disclosure violates the First Amendment.

Any appeal could work out in a number of ways. The decision could be upheld or overturned. It is also possible that an appeals court would send it back to Judge Leon to consider all the issues and require rulings on all the aspects of the suit.

The Innovative Payments Association would recommend that programs operate as if the rule is in place until the case is finally resolved to avoid being whipsawed between changing requirements. As noted above, for most providers, the logistics would be too great for immediate changes.

Even though the case will not play out immediately, it may have near-term effects in the policy arena. The industry will expect more scrutiny from a Democratically controlled Congress. Both the House Financial Services Committee and the Senate Banking Committee will look at the bureau’s efforts to protect consumers, and this lawsuit will come up. If Congress feels current laws do not give the regulators enough power, they may decide to write new legislation to grant the bureau and other regulators the ability to rein in the industry.

Despite its first-round win, it is too soon to claim victory for PayPal or the payments industry. Compliance teams should add this case to their watchlists and be prepared to explain the good work their companies do.

—Ben Jackson, bjackson@ipa.org