Why PayPal is suing the CFPB over its prepaid card rules

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PayPal — which is rarely thought of as a prepaid card company — has filed a lawsuit against the Consumer Financial Protection Bureau over its rules on prepaid accounts, underscoring the rapid changes in digital financial services and PayPal’s own expanding financial services ambitions in recent years.

The CFPB’s prepaid rule went into effect in April 2019, introducing standards and protections for prepaid cards and digital wallets, which the CFPB classifies as prepaid cards because typically these wallets also store funds.

PayPal, whose digital offerings encompass prepaid cards, complies with the CFPB's rule. But PayPal asserts that the rule ignores how prepaid cards fundamentally differ from digital wallets, triggering several unintended consequences.

At a time when real-time payments and instantaneous availability of funds are becoming the industry standard, the CFPB's rules add confusion that could slow or deter the opening and use of digital wallet accounts, according to PayPal's reasoning.

Specifically, PayPal’s suit claims the prepaid rule will confuse consumers and hamper its ability to market its evolving set of financial services, including credit products.

“PayPal supports the mission of the CFPB and regulations that empower consumers to make informed financial decisions. 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,” PayPal said in an emailed statement after filing the lawsuit on Wednesday.

The lawsuit followed extensive discussions PayPal initiated with the CFPB to resolve looming issues, a PayPal spokesperson said.

While PayPal already clearly discloses digital wallet terms and conditions to consumers, the CFPB’s rule requires PayPal to present consumers with government-scripted disclosures that have little connection to how PayPal presents its services and charges fees, PayPal said in the lawsuit.

PayPal’s digital wallet users receiving the required disclosures often mistakenly believe they are receiving entirely new accounts and services with new fees, creating confusion and frustration, according to the lawsuit

The prepaid rule also impairs consumers’ ability to link some PayPal credit products to their PayPal digital wallets, delaying the availability of funds, PayPal asserted in the suit.

“Having exhausted other options, PayPal is filing suit to end the unsuitable application of the prepaid rule and its negative impact on digital wallet consumers and our business,” PayPal’s statement said.

The CFPB’s prepaid rules, which underwent extensive drafts and amendments before finalization last year, came at a time when prepaid cards had become a key tool for digital banks and retailers, which often use bank-issued virtual prepaid cards to anchor digital wallets.

PayPal asserted in its lawsuit that the CFPB erred in blurring the lines between the more general-purpose reloadable prepaid debit cards, or GPR cards, and digital wallets.

“Unlike GPR cards, digital wallets are not purchased in brick and mortar stores and consumers are not charged fees to open, maintain or access the funds stored there,” PayPal’s suit said.

Digital wallet users typically link existing accounts, including credit cards, to their digital wallets to function as funding sources and move funds from an existing credit or deposit account to a third party, PayPal said in the lawsuit.

The Innovative Payments Association, a Washington, D.C.-based trade association that tracks the prepaid card industry, is watching the case closely.

“While PayPal is not a member of the IPA, this is a case that could have an impact on our members, their business partners and customers,” the organization said in a statement.

PayPal’s move to sue the CFPB isn’t entirely surprising, given PayPal’s aggressive moves in recent years to expand beyond its roots as an online P2P payment mechanism to collaborate and compete with banks and payment card networks.

PayPal has moved to position itself alongside the major card networks as a checkout option through a string of acquisitions, beginning with its 2013 purchase of Braintree, which included Venmo, expanding its reach to e-commerce and brick-and-mortar stores.

Over the past few years PayPal has negotiated with each of the major payment networks for interoperability and inclusion as a checkout option.

PayPal has long offered credit services directly to consumers for purchases and separately offers a cobranded rewards Mastercard issued by Synchrony.

Last month PayPal spent $4 billion — its biggest deal ever — to buy Honey, which has a deals engine that PayPal hopes to integrate with its digital wallet to enhance the shopping experience for users.

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Compliance Prepaid cards Digital payments Mobile wallets PayPal CFPB