The CFPB's proposed rules targeting fintechs are a boon to big banks

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Last month's Supreme Court decision affirming the funding structure of the Consumer Financial Protection Bureau means that the agency is here to stay. And for consumers worried about unfair practices from Wall Street, that's a good thing. 

The CFPB was established in the wake of the Great Recession to protect Americans from financial exploitation at the hands of financial institutions like big banks.

But in recent years, the CFPB has taken aim at a new target: fintech services. 

CFPB Director Rohit Chopra is trying to repurpose laws originally written to supervise Wall Street and apply them to the very services that offer consumers an alternative to big banks. 

Under the CFPB's proposed rules, PayPal, Apple Pay and Google Pay would all be treated like banks. Even Meta — which processes more cat memes than payments — would be regulated like a bank under the CFPB's proposal.

Dodd-Frank's regulatory hurdles exist for a reason: to keep consumers safe from the financial havoc wrought by big banks. As the Great Recession revealed, safeguarding Americans from Wall Street's worst impulses requires serious oversight.

But PayPal isn't about to cause a financial meltdown, and Amazon Pay isn't going to spark the collapse of the housing market. Still, the CFPB is forging ahead and wielding its regulatory hammer to force square pegs into round holes. 

To make matters worse, the CFPB has failed to establish why there's a need for bank-level scrutiny of tech and fintech services. The consumer watchdog is skipping a crucial step of its own rulemaking process by repeatedly asserting regulatory norms without public consensus, stakeholder input or evidence of consumer harm. 

The CFPB is supposed to establish a risk to consumers before initiating rulemaking. This process typically involves thorough research, public commentary and analysis of potential impacts. When it comes to fintech, the CFPB has continually failed to demonstrate any systemic risk to consumers or our financial system.

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Federal courts have taken note of that failure. 

In April, PayPal won a landmark legal victory against the CFPB, highlighting the precarity of the agency's current strategy. U.S. District Judge Richard J. Leon ruled that the CFPB "had no rational justification" for placing digital wallets under a rule requiring fee disclosures for prepaid card services. 

Judge Leon blasted the CFPB's "arrogance" in applying the prepaid card rule to digital wallets without presenting evidence of consumer harm or even conducting a cost-benefit analysis. Instead, the CFPB acted purely on speculation that PayPal's product could someday be subject to fees similar to those used in prepaid cards.

Before imposing rules that could stall progress and harm consumers, the CFPB needs to show its work. Otherwise, the agency risks drowning consumer-friendly innovations in regulations meant for Wall Street.

It's important to note the irony in the CFPB's stance on fintech. Democrats, including Chopra himself, have long called for more competition in the financial system. Fintech services drove unprecedented competition to the space by disrupting traditional banks and democratizing key financial services. The CFPB now threatens to undercut this progress by targeting Wall Street's primary competitor.

The CFPB should consider why fintech services are so popular with consumers. At the very least, the CFPB should identify clear, evidence-based risks to Americans before implementing new rules. Speculation is not a sound basis for regulation.