The contactless payment functions on Apple and Google smartphones need to be regulated to protect consumer choice and provide a government check on private companies dominating U.S. payment systems, said Rohit Chopra, the director of the Consumer Financial Protection Bureau.
While Google allows competing mobile wallets such as Samsung Pay to operate on Android handsets, Apple has only ever allowed Apple Pay — a restriction that has drawn pushback from banks
"There is real concern that the largest technology firms will be able to erect even more gates and toll booths that will prevent the smallest firms from emerging, raising capital, growing and succeeding, even when they offer superior technology," Chopra said Thursday at the Federal Reserve Bank of Philadelphia's seventh annual fintech conference. "And I think that's going to require us to look at how to regulate it, and really how to think about these private regulations imposed by gatekeepers."
Chopra has often lambasted Big Tech firms, and the CFPB is expected to issue a
In a
"Our country's payment system is essentially infrastructure, and when I mentioned regulations, I'm not just referring to regulations developed by governmental entities; I also mean the regulations imposed by private actors outside of the democratic process," Chopra said. "We know that the existing financial market structure is full of choke points and toll booths imposed by firms and, in many cases, they are acting as mini-governments that can privately regulate markets and distort outcomes, particularly when it comes to payments."
Chris Willis, a partner at Troutman Pepper, noted that the Dodd-Frank Act of 2010 explicitly lists payment processing among the products and services that the CFPB has jurisdiction over. In addition, most products are covered by Regulation E because payments are electronic fund transfers from a consumers' bank account. They also are subject to the general prohibition on "unfair, deceptive or abusive acts and practices," known as UDAAP.
The CFPB "doesn't have to stretch to find jurisdiction over a consumer payment product offered by Apple or Google or Samsung," said Willis. "If they do a larger participant rule, then they can look for all of the consumer compliance issues — disclosures, data sharing, privacy, Gramm-Leach Bliley Act, fees — there's a lot that [the CFPB] can do through that rule."
A larger participant rule would allow the CFPB to conduct supervisory exams of Big Tech firms, and is perhaps the strongest tool the agency has, giving it access to nonpublic financial information. If the bureau finds something that it thinks is inappropriate, it can direct a company to fix the problem or provide remediation to consumers, and the process would remain confidential, Willis said. If an issue remains unresolved, the CFPB could embark on a public enforcement action.
But timing is of the essence and putting the procedure in place to conduct exams will take years. "He's putting into motion a process, but it's not a fast process," Willis said.
If the CFPB moves quickly, the agency could propose and finalize a larger participant rule by late 2024 and begin supervisory exams. An enforcement action typically takes about two to three years, so the earliest consumers could expect a public crackdown is 2027, he said.
The CFPB may consider this issue timely because next month, it is expected to issue a
The rule will set standards that allow consumers to give third-party companies access to bank account transaction data. The rule is required by section 1033 of the Consumer Financial Protection Act, and Chopra said the bureau is evaluating the rapidly-evolving retail payments system to understand how regulatory changes could complement — or potentially disrupt — the transition to open banking.
One key concern is whether the Big Tech firms' restrictions would undermine the potential of open banking.
Timothy Massad, a research fellow at Harvard University's Kennedy School of Government, asked Chopra in a fireside chat whether prodding Apple and Google to allow more apps on their payment systems would obviate the need for government oversight.
"Let's say we somehow create more access. Is that enough?" asked Massad. "Do you think of that as sufficient in terms of the rails for payments?"
Chopra said that one of the reasons U.S. companies have outpaced others in advanced technology is because of the tendency to encourage innovation from startups.
"When you have newer and small firms that have a great product or a great technology and they tend not to get to market, they cannot raise funds [because investors]….want to ask before putting capital in who can stomp you out? Who can block you?" Chopra said. "So we as the regulators, we have to make sure that consumers, businesses and others have rights. There has been a huge role for public governance to make sure that there are some opportunities for things to move fairly and rails that are non discriminatory."
At the same time, the pandemic accelerated the shift from cash to contactless payments, increasing the influence of Apple and Google's mobile wallets. Chopra said he wants to make sure smaller firms can reap the same benefits from the continuing growth of digital payments.
Apple and Google dictate how apps can be downloaded and installed, and can reject or delist any app from their app stores. As contactless payments through mobile devices continue to grow, Chopra said it's important to look at the regulations imposed by the operating systems "that govern the guts of our phones and other wearable devices."
The Big Tech firms currently impose what he considers blockades and obstacles that reduce competition and prevent other, potentially better, technologies from coming to market, according to Chopra. As an example, he cited an antitrust
"In a more open and decentralized payments market, we would expect that there would be a plethora of players leveraging [mobile payment] functionalities," Chopra said, using the many GPS and camera apps as examples of competition in the market. "However, we just don't find this at all. Many popular payment apps cannot directly use" NFC payment capabilities.
Google has been scrutinized by international authorities for allegedly placing self-preferencing conditions on device manufacturers that run on the Android system. Meanwhile, the European Commission has charged Apple with illegally abusing its market power to self-preference Apple Pay. Apple typically has cited security and privacy concerns as the justification for restricting third-party access to its technology. But Chopra said it is not clear that a "blanket NFC access ban" by Apple is necessary.
"There is real concern that the largest technology firms will be able to erect even more gates and toll booths that will prevent the smallest firms from emerging, raising capital, growing and succeeding, even when they offer superior technology," he said.
