Federal: Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications

The Honorable Rohit Chopra
Director
Consumer Financial Protection Bureau

1700 G Street, NW Washington, DC 20552

Re: Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications CFPB-2023-0053

Dear Director Chopra,

On behalf of The American Fintech Council (AFC), I am submitting this comment letter in response to the Consumer Financial Protection Bureau’s (CFPB or the Bureau) Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications (Proposed Rulemaking).

AFC is the premier trade association representing the largest financial technology (Fintech) companies and the innovative banks that power them. Our mission is to promote a transparent, inclusive, and customer-centric financial system by supporting responsible innovation in financial services and encouraging sound public policy. AFC members foster competition in consumer finance and pioneer products to better serve underserved consumer segments and geographies. Our members are lowering the cost of financial transactions, allowing them to help meet demand for high-quality, affordable products.

AFC has publicly advocated for standards or clear and consistent regulatory frameworks for innovative financial services and products that are appropriate for the size, activity, and risk posed by the entity providing the service. Also, AFC has advocated for a regulatory environment that avoids duplicative or diverging requirements and accurately reflects the nuances of the innovative services being offered.

AFC recognizes and appreciates the unique supervisory function that the Bureau has in the regulatory structure as the only federal agency solely charged with ensuring the protection of consumers engaging with the financial services industry. In principle, AFC agrees with the use of CFPB’s authority to define consumer financial markets in order to bring large nonbank entities under the regulatory perimeter when there is a supervisory gap in the existing regulatory framework. To that end, we believe that previous larger participants rulemakings pursued by the Bureau have created a supervisory regime for the major nonbank entities offering various financial products and services that helps consumers engaging with these products and services by ensuring that consumer protections remain a prominent consideration for nonbank entities offering those products and services. AFC believes that the CFPB’s efforts may also result in the further development of a robust, consumer-protected market for general-use digital consumer payment applications.

However, the Proposed Rulemaking, as written, present concerns related to how the Bureau is defining the entities that constitute a “larger participant” within the general-use digital consumer payment applications market, and the extent that the Proposed Rulemaking applies to certain business models, such as responsible bank-fintech partnerships, that are already subjected to a rigorous supervisory regime. It is with this in mind that we have provided the below recommendations for CFPB’s consideration as it finalizes its Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications.

I. AFC Recommends CFPB Amend its Thresholds in the Proposed Tests for Defining Larger Participants under § 1090.109(b)

The general-use digital consumer payment applications market for which the CFPB seeks to define in its Proposed Rulemaking is a rapidly developing and evolving market. As the Bureau noted in its Proposed Rulemaking, current adoption rates and market trends for general-use digital consumer payment applications show that consumers from across the income spectrum are eager to use these payment applications and that this trend will likely continue in the future. While this market is rapidly growing in size and scale, it should be noted that it still exhibits many of the features of a “market growth stage” as opposed to a “mature market stage” as traditionally understood in the industry lifecycle literature.

Unlike previous larger participants rulemakings, the Proposed Rulemaking does not have the benefit of defining larger participants within a mature market. The data and generally settled expectations of a mature market can prove beneficial for developing sound evidence-based tests for defining larger participants in a given market. AFC recognizes the difficulty properly defining a market that is still within its “growth stage” and therefore cautions that the CFPB’s actions with respect to the proposed larger participant rulemaking could directly impact the ability of a more competitive marketplace to develop. The rapidly developing nature of the market and the importance of allowing newer market entrants to continue to emerge underscores the importance of the Bureau’s work in the Proposed Rulemaking, but also highlights the great need for CFPB to reconsider the threshold tests put forth in the Proposed Rulemaking and ensure that they are adequate for properly determining the true larger participants in the market as it matures.

Under the Proposed Rulemaking, the Bureau establishes a two-pronged test for determining if a nonbank entity would be defined as a larger participant in the general-use digital consumer payment applications market. As proposed, the tests would be if the nonbank entity provided “annual covered consumer payment transaction volume as defined in paragraph (3) of proposed § 1090.109(b) of at least five million transactions” [emphasis added]; and must not be a small business concern based on the applicable Small Business Administration (SBA) size standard listed in 13 CFR part 121 for its primary industry as described in 13 CFR 121.107”.

Unfortunately, as written, the Bureau’s proposed tests to define larger participants under § 1090.109(b) present concerns regarding its functionality and durability as the defined digital consumer payment applications market both in its current state and as it evolves from its market growth stage int a mature market. Fundamentally, the tests to define a larger participant, as proposed, reveal a misunderstanding of the existing general-use digital consumer payment applications market, as well as the economics associated with providing these products and services to consumers and relevant industry trends and forecasts for the use of this technology. Ultimately, this misunderstanding could result in a significantly broader scope than intended by the Proposed Rulemaking in practice, resulting in an undue regulatory burden being shouldered by companies that should not be considered “larger participants” within the general-use digital consumer payment applications market and a disincentive for newer entrants to the market to emerge.

a. Increasing the Annual Transactions Test Threshold § 1090.109(b)(1) Would Help Ensure Historically Excluded Communities Increase their Access to Financial Services

In practice, the Bureau’s 5 million annual transaction threshold is far too low to properly define a “larger participant” within the current market, as well as the market as it matures. Users of general-use digital consumer payment applications are typically not engaging with the applications in a single use manner. According to the Federal Reserve’s consumer diary studies, U.S. consumers make over 100 billion payments a year. 5 million payments is about .005% of the consumer payments market. Even assuming that general-use digital consumer payment applications constitute between 1-3% of the overall consumer payments market (about 1-3 billion payments annually), 5 million transactions still represent a very small fraction of the overall digital payments on an annual basis. Thus, the 5 million transaction threshold seems inadequate for defining a larger participant in the market, because a company could be considered a larger participant under the Proposed Rulemaking but would actually be involved in such a small portion of the market.

Expanding financial services to low- and moderate-income (LMI) communities is especially important for AFC and its members. Unfortunately, the 5 million transaction threshold poses significant issues for companies that want to effectively serve with digital payments applications. As noted by the Bureau, general-use digital payments applications are quite popular among consumers with annual incomes under $30 thousand who have more limited access to digital technology.7 AFC and its members believe that these consumers are especially important to serve, as they have been traditionally excluded from the financial services industry. For companies to serve LMI communities, they must conduct their operations at a significant scale, since these consumers do not typically generate large profits for the company due to smaller transaction sizes and other business factors. In order to cover fixed costs of offering the services, they need to offer the services at a large enough scale to maintain profitability. As noted above, consumer adoption needed to breach the 5 million transactions a drastically low percentage of the U.S. adult population.

Subjecting these entities to a larger participants rulemaking and CFPB oversight would increase the costs, particularly regulatory reporting costs, associated with serving these consumers and disincentivize engagement with these communities.

Given the issues with the threshold of the proposed annual transactions test and its specific issues for increasing access to financial services for LMI consumers, AFC recommends that CFPB increase its annual transactions threshold to allow for proper scalability within the general-use digital consumer payment applications market. Also, AFC recommends that the Bureau consider conducting consistent reviews of the annual transactions test’s threshold to ensure that it does not unnecessarily expand the scope of the Proposed Rulemaking as the market develops. To fulfil these recommendations in practice, the CFPB could amend their threshold from 5 million transactions to a threshold based on the number of transactions completed as a percentage of the whole payments market that would be reasonably high enough to suggest that the entity controlled a significant concentration of the overall market.

b. Increasing the Small Business Concern Test Threshold Under § 1090.109(b)(2) Would Help Ensure That the Proposed Rulemaking Does Not Inappropriately Define Market Participants

Moving to the Proposed Rulemaking’s second test of “small business concern”, the Bureau stated that based on the SBA’s size standard list for the primary industry as described by the North American Industry Classification System (NAICS), general-use digital consumer payment applications would have a small business concern threshold of $47 million in annual receipts. As CFPB noted in its Proposed Rulemaking, it identified 190 nonbank entities that may be subject to the Proposed Rulemaking, but notes that only approximately 17 of these entities would be considered larger participants due to the use of the small business concern test.

In practice, the threshold established under the small business concern test proves inadequate for its stated purposes of excluding small entities and functioning “as a reasonable means of defining larger participants in this market”. As proposed, the small business concern test establishes an unreasonably low threshold for nonbank entities operating in the market will not limit the scope of the Proposed Rulemaking to only the largest participants in the market. Further, this threshold does not adequately compensate for the likely rapid growth that will occur in the market due to its stage of development, because it relies on the SBA’s Small Business Size Standards, which are reviewed every 5 years. This practice seems inadequate for recognizing the changes associated with a growing market and for limiting the scope of the Proposed Rulemaking.

In addition, the economics of general-use digital consumer payment applications allow for even relatively small nonbank entities to breach the small business concern test as drafted in the Proposed Rulemaking. For example, Consumers use general-use digital consumer payment applications to conduct a multitude of transactions, including contributing to core cost of living expenses like rent, food, and entertainment, as well as purchasing other necessary goods and services like clothing from merchants that support the use of general-use digital consumer payment applications. Based on recent cost of living data from the Bureau of Labor Statistics, U.S. consumers pay approximately $3,300 per month on the aforementioned expenditures on average. Typically, consumers use general-use digital consumer payment applications as a way to pay expenses informally split between two or more consumers. Assuming two consumers split the core monthly cost of living expenses noted above and used a general-use digital consumer payment application to pay half of their average monthly expenses—which equates to approximately $1,900 on average—it would only take approximately 220 thousand consumers to generate the revenue needed to breach the small business concern threshold.

Further, the Proposed Rulemaking states that the small business concern threshold is based on the revenues of the nonbank entities that provide the general-use digital consumer payment application, as well as all the entities’ affiliates. Many fintech companies offer more than one product or service in the market and generate revenue through each offering. Given this business model, these nonbank entities could easily breach the proposed threshold of the small business concern test, as well as the threshold proposed in the annual transactions test while serving a very small percentage of the population with their general-use digital payment applications.

For these reasons, AFC recommends that the Bureau carefully consider and adequately increase the threshold established under its proposed small business concern test, as well as how this threshold is calculated for nonbank entities. By increasing the small business concern test’s threshold, as well as limiting the inputs that are used to calculate a nonbank entity’s revenue, CFPB can ensure that the small business concern test attains the Bureau’s stated goal of excluding small entities from being defined as a larger participant.

II. AFC Recommends the Bureau Carefully Consider the Application of its Oversight Regime on Regulated Nonbank Entities‍

As noted above, the Bureau identified 190 nonbank entities that would provide general-use digital consumer payments applications and may be subject to the Proposed Rulemaking. AFC recognizes that the business models and level of regulatory oversight vary in the identified market and appreciates the Bureau’s efforts to ensure that the regulatory perimeter is expanded to capture these entities. However, AFC, and its members recognize that those general-use digital consumer payments applications offered by nonbank entities that engage in responsible bank-fintech partnerships already experience substantial direct and indirect oversight through within the existing regulatory structure due to state licensing regimes and their partnerships with banks. It is with this in mind that AFC recommends that CFPB engage in close coordination with other relevant regulators before pursuing additional oversight measures, and that the Bureau clarify the scope and requirements of the Proposed Rulemaking to ensure that nonbank entities already experiencing a robust oversight regime do not face duplicative or diverging regulatory requirements.

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AFC appreciates the opportunity to comment on the CFPB’s Proposed Rulemaking Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications. Ultimately, AFC believes that adoption of the recommendations put forth above will allow CFPB to ensure that it develops a prudent and appropriate regulatory framework that only subjects the truly larger participants in the market to CFPB supervision. Developing a regulatory framework in this manner will ensure that the Bureau is not misapplying its limited supervision resources to smaller entities that present minimal risk to consumers and are adequately supervised based on their risk portfolio and business model. We thank you for your consideration of our comments.

Sincerely,

Ian P. Moloney
SVP, Head of Policy and Regulatory Affairs
American Fintech Council