CFPB probe of Venmo complicates PayPal's plans

The Consumer Financial Protection Bureau is examining PayPal's Venmo unit over its collection practices — a relatively mundane activity compared to some of the more untamed markets PayPal has begun to explore.

The CFPB launched its probe on Jan. 21, a day after President Joe Biden was sworn into office, and PayPal announced it in a regulatory filing this Friday. PayPal said in its filing that it's cooperating with the CFPB on matters related to how Venmo handles unauthorized funds transfers and collections.

PayPal just completed its best fiscal year ever, boosted not only by the rush to digital payments during the pandemic, but also by rapid adoption of its new cryptocurrency and buy now/pay later (BNPL) offerings.

"The CFPB will take a more aggressive approach to regulating providers of consumer financial services including PayPal and Venmo. And PayPal will have to comply with a bevy of cryptocurrency regulation," said Eric Grover, a principal at Intrepid Ventures.

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Cryptocurrencies are a growing product set for payment companies; PayPal and Square both allow users to buy and sell crypto, and some banks are entering the market through partnerships, such as Vast Bank's work with Coinbase.

The CFPB investigation is a pivot from the agency's more lax approach during the Trump administration. For at least the next four years, the CFPB will likely operate similarly to how it did during the Obama administration, when it grew out of the 2008 financial crisis. Biden's nomination of Rohit Chopra, an Elizabeth Warren protege who helped create the CFPB, gives the bureau a progressive bent.

Venmo in the past has threatened to send debt collectors to users who are overdrawn, even if they are victims of scams. Venmo's user agreement also gives it the right to take funds from other PayPal accounts. PayPal did not respond to an inquiry from PaymentsSource by deadline.

The CFPB under the Biden administration will be focused on consumer rights, with two key priorities being debt collection and scams, said Krista Tedder, head of payments for Javelin Strategy & Research.

PayPal's use of debt collection to recover non-sufficient funds is reminiscent of how banks use the tactic to recover overdrafts for checking and savings accounts, Tedder said. "The way Venmo collects the negative balances will most likely have to be adjusted to meet standards required of financial institutions in similar situations."

BNPL has become more popular during the pandemic, but has also come under scrutiny in several countries, including the U.K., Australia, Sweden and California. Regulators are concerned consumers may use BNPL to buy products they cannot afford and accrue debt that could affect their ability to pay their credit card statements and other obligations. As regulatory activity over BNPL grows, it's likely Biden's CFPB could pressure the practice in the U.S.

As PayPal faces the CFPB probe, it's also scaling back domestic payment processing in India.

India's huge addressable market for digital payments and e-commerce has drawn billions in investments from Western firms such as Amazon, Google, Walmart and the U.S. card networks, which face competition from the Softbank-backed and locally operated Paytm. Google has taken a dominant position in domestic payments in India, controlling more than half of the market with the Walmart-affiliated PhonePe also commanding a large share.

PayPal will stop domestic payments in India over the next several months, according to The Economic Times in India and several other local publications. PayPal also plans to expand cross-border trade for small businesses to tap the local export market.

There's also regulatory challenges in India, given the dominance of the government-run United Payments Interface, which is inexpensive to operate. Walmart and PhonePe in particular have used UPI to expand their payment operations in India.

"With the implementation of the Unified Payment Interface in India, offering internal commerce functions is more complex than in many other markets, and India is overwhelmed with commerce opportunities from other players," said Thad Peterson, a senior analyst at Aite, adding critical mass and scale in that market is a challenge. "By focusing on cross-border in India, PayPal is reverting to its global strength and maintaining their brand in a critical market without the complexity of trying to work in a complex and competitive space."