Scholar argues for CFPB regulation of digital wallet companies.
The Consumer Financial Protection Bureau (CFPB) estimates that U.S. consumers store billions of dollars in digital wallets—smartphone applications that store consumer balances outside of banks and allow users to send and receive money. An August 2023 survey found that 53 percent of U.S. consumers prefer to use digital wallets over traditional payment types.
Companies such as Venmo and PayPal that offer digital wallets, however, are not subject to the same supervision and regulation as the traditional banking system, leaving digital wallet consumers potentially at risk of scams and hacking.
In an article in the Yale Journal on Regulation, Raul Carillo a regulatory proposal for the CFPB to regulate the digital wallet industry and protect users.
Carillo discusses how digital wallet companies have acquired similar rights to banks without taking on any corresponding responsibilities. For example, digital wallet companies profit from consumers keeping money in digital wallets, outside of the regulated banking system. Many digital wallet companies engage in practices such as commingling consumer funds and investing consumer balances without sharing the returns with consumers, which banks may not do. And most of the funds stored in digital wallets are not insured by the Federal Deposit Insurance Corporation, leaving consumers without many conventional bank account protections.
In addition, digital wallet users face additional risks to their data security. Data brokers transfer consumer credentials and account information between banks and digital wallet applications. Carillo argues that data brokers store more consumer data than necessary, leaving consumers unaware of how their information will be used and unable to consent to such uses.
Carillo notes that, according to the Pew Research Center, Black and Hispanic consumers are approximately twice as likely as White consumers to have sent money to someone through a payment platform as part of a scam. Black and Hispanic consumers, Carillo notes, are also more likely than White consumers to have had their accounts hacked.
Carillo also discusses findings from Pew Research suggesting that low-income consumers are more likely to be victims of scams and hackers than middle-income and upper-income consumers. Carillo emphasizes identity theft as a harm of digital wallet use that especially impacts low-income consumers and consumers with limited English proficiency, many of whom do not have the resources to combat identity theft.
Carillo argues that the CFPB should prevent digital wallet companies and data brokers from collecting and using more consumer data than they need to transfer funds in compliance with current laws. He notes that the CFPB’s proposed Open Banking Rule requires that digital wallet companies and data brokers only collect and use consumer data that are “reasonably necessary” to service consumers. Carillo argues, however, that the “reasonably necessary” standard is too permissive and may allow data brokers to justify their collection of sensitive consumer information.
Carillo instead argues that the CFPB should only allow digital wallet companies and data brokers to collect consumer information that is “strictly necessary” to each transaction. Carillo proposes an amendment to the Open Banking Rule making it “unfair, deceptive, and abusive” for digital wallet companies and data brokers to collect more information than required.
Carillo’s proposed amendment to the Open Banking Rule aligns with his support of more public governance over consumer banking. As part of an effort to promote CFPB regulation over new forms of consumer banking, Carillo supports requiring digital wallet companies to provide universal access and service to consumers.
Carillo argues that the reliance on private digital wallet companies results from failures of banking policy. Carillo suggests that consumers would not have to rely on companies such as Venmo if banks provided them with ways to transfer funds instantly between accounts.
Accordingly, Carillo supports public digital wallet infrastructure, such as FedNow, an application released by the Federal Reserve System in 2023 that allows consumers to transfer payments instantly from their bank account with government backing. Carillo promotes such measures with the aim of replacing private, unregulated digital wallet companies and eliminating the risks that these companies pose to consumers.
Carillo notes that some scholars argue that private digital wallet companies promote competition and control for individual consumers, but he contends that the risks of uninsured balances and nonconsensual data collection are significant. Carillo concludes by arguing that regulation of digital wallet companies and data brokers will provide faster and fairer banking for consumers.
