PayPal ruling lifts all digital wallets

A March 29, 2024, ruling by a federal judge ended a four-year debate between PayPal Holdings Inc. and the Consumer Financial Protection Bureau over digital wallet and prepaid card fee structures and disclosures. Judge Richard L. Leon of the U.S. District Court for the District of Columbia agreed with PayPal that digital wallets are materially different than "general purpose reloadable (GPR) cards" and should not be held to the same regulatory standards.

James Huber, partner at Global Legal Law Firm, praised the decision, stating it reflects improved communications between the payments industry and the U.S. government's judicial branch.

"The ruling signifies that Courts are starting to understand the payments space, specifically, the ability to differentiate prepaid cards from digital wallets," he said. "The court held that the CFPB 'ignore[d]' the features of a digital wallet and highlighted that there were many distinctions between the products."

Getting specific

Huber also noted that the court affirmed digital wallets are substantially different than prepaid cards, despite having similar characteristics. For instance, Judge Leon pointed out that digital wallets are financial products that electronically store user credentials and rarely carry balances. Most digital wallet providers do not charge users to open or maintain accounts, Leon noted, adding that prepaid cards typically carry balances and charge a range of service fees.

PayPal alleged that the CFPB ignored these material differences by imposing the same fee disclosures on digital wallets and GPR cards even while acknowledging "significant variations" between the two. The company provided the following three objections in its December 2019, lawsuit:

1. Violation of First Amendment rights: Judge Leon declined to comment on this constitutional objection, due to its far-reaching and complicated nature.

2. Lack of rational justification for subjecting digital wallets to GPR short-form disclosure requirements. The two products are distinct and separate, according to the ruling.

3. Contradiction of the CFPB's claim that the prepaid ruling addresses regulatory gaps for digital wallets. "Even assuming that such a gap existed, the CFPB does not explain why that gap is a problem, except in platitudes about regulatory uncertainty," Judge Leon wrote, adding that the idea that digital wallet providers might one day change their minds about charging consumer fees is an insufficient basis for rulemaking.

Reg E, EFTA

Huber also questioned how the CFPB's proposed rule would fill a gap, especially when the Electronic Fund Transfer Act and Reg. E already cover digital wallets. He cited the following disclosures on the CFPB's website:

"(a) Authority. The regulation in this part, known as Regulation E, is issued by the Bureau of Consumer Financial Protection (Bureau) pursuant to the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.). The information-collection requirements have been approved by the Office of Management and Budget under 44 U.S.C. 3501 et seq. and have been assigned OMB No. 3170-0014.

"(b) Purpose. This part carries out the purposes of the Electronic Fund Transfer Act, which establishes the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer and remittance transfer services and of financial institutions or other persons that offer these services. The primary objective of the act and this part is the protection of individual consumers engaging in electronic fund transfers and remittance transfers."

The CFPB's argument looks like clever lawyering, he further noted, adding that its defeat is a solid win for innovators in the payments space. Specificity facilitates creativity in the tech-driven payments industry, and regulators need to be specific when it comes to payments, he pointed out.

"The court rejected that digital wallets might in the future charge usage fees or share characteristics with prepaid cards, meaning that the CFPB can't issue regulations on where it thinks that a product or industry may go," Huber said.

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