Analysis by Bloomberg Senior Intelligence Analyst Nathan Dean
Increased Regulatory Scrutiny for Fintech Sector Could Pose Compliance Challenges for Major Tech Firms
The rapidly expanding regulatory oversight of the financial-technology sector is poised to create short-term compliance challenges for companies like Apple, Meta, Google, and PayPal. A forthcoming proposal from the Consumer Financial Protection Bureau (CFPB), expected to be finalized in the second half of the year, could place these companies under the bureau’s jurisdiction and examination authority. In the long term, CFPB oversight could lead to process changes if regulators find current operations in violation of US laws. Additionally, fintechs might face heightened competition from the new real-time payment system, FedNow, which launched in 2023 and enables banks to offer faster processing times. However, the likelihood of a major policy action that significantly alters business practices remains low.
CFPB Proposal May Increase Scrutiny for Meta, Google, and Fintech Firms
With the comment period closed and the CFPB’s constitutionality affirmed, the bureau is likely to finalize its fintech rule in the second half of the year with minimal changes. While the financial services industry broadly supported the proposal, the technology sector warned of potential overreach and consumer harm. Some adjustments, such as redefining a “large participant,” may address concerns for smaller companies.
Our analysis suggests that Meta, Google, and other companies offering digital wallets and payment apps may come under CFPB supervision, leading to increased compliance costs and demands if the 2023 proposal advances. Although the plan appears manageable for the industry, it could spark a debate on whether large fintech firms pose a systemic risk, which could bring additional regulatory requirements such as capital reserves.
Compliance Challenges Loom
If the 2023 proposal is finalized, initial steps would likely involve responding to CFPB inquiries and hosting on-site examinations. This would likely increase compliance spending as companies ensure adherence to US laws regarding data collection and customer finances. Large tech companies like Meta, Google, and Apple have the resources to make necessary adjustments. However, the CFPB might push for changes to business processes, demand customer restitution, or take enforcement actions if they identify areas needing correction.
Potential Systemic-Risk Designations
Should President Joe Biden secure re-election in 2024, there is a possibility that a debate will emerge over whether large fintech firms pose a systemic risk to the US financial system. CFPB Director Rohit Chopra hinted at this in an October 2023 speech. A systemic-risk designation, known as nonbank SIFI, could lead to regulatory measures such as capital requirements to prevent company failures. This process would take years to implement and require extensive study. A re-election of former President Donald Trump could negate this risk.
Outlook for Finalization in 2024
There is a 70% chance of the proposal being finalized in 2024. Although proposals released late in a presidential term typically finalize after the elections, the CFPB considers this a high priority and may expedite the process. The brief comment period indicates the bureau’s urgency, and opposition from the tech industry is unlikely to halt progress. The banking industry’s support suggests feasible tweaks to the proposal.
Focus on Payments and Fintech Scrutiny
The CFPB proposal aims to expand the definition of “large participants” under its examination authority to include tech firms involved in consumer payments. This is seen as a first step towards increased scrutiny of technology companies. In 2021, the CFPB sought information from Apple, Amazon, Meta, Google, PayPal, and Square to understand their handling of customer financial data. The CFPB is concerned that tech companies’ entry into the payments business, and their data monetization practices, might contravene US consumer laws. The proposal applies to companies with over 5 million transactions per year.
Policy Action and Impacted Firms
- Policy Action:
- CFPB Proposes New Federal Oversight of Big Tech Companies and Other Providers of Digital Wallets and Payment Apps, Nov. 7, 2023
- “CFPB Orders Tech Giants to Turn Over Information on their Payment System Plans,” Oct. 21, 2021
- Impacted Firms:
- Fintech companies including Amazon, Apple, Meta, Google, PayPal, and Square
Source: bloomberg.com
