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New Regulations Threaten Innovative Methods of Payment

On Wednesday, the Consumer Financial Protection Bureau (CFPB) finalized new rules on certain types of increasingly popular new payment methods. While primarily aimed at prepaid debit cards, the regulations are so broad that they also include new mobile payment options such as Google Wallet, PayPal, Venmo, and potentially many more. The rules effectively seek to regulate all these financial products in much the same manner that credit cards are currently regulated, with all the paperwork and compliance that entails. The new regulations threaten to crush these flexible payment methods simply because the bureaucrats cannot contemplate that a business activity might be better off beyond the reach of the regulators.

In recent years, payment methods outside of traditional bank accounts and credit cards have grown in popularity. Prepaid cards, for example, allow low-income Americans to receive, store and spend their paychecks in much the same way as checking account-linked debit cards, but for significantly less cost in fees. Apps like Google Wallet, PayPal, and Venmo give a convenient payment option to those Americans, such as young people, that cannot qualify for credit cards. All these products have arisen because of the cost of traditional financial products from banks and credit card companies. Costs that are often created by federal regulations, for example, the Dodd-Frank Wall Street Reform Act.

The millions of young and low-income Americans that were driven from the traditional banking system by regulation found a refuge in these newer payment methods that were developed to serve them. Now, though, the federal regulators are coming after these alternatives too. We can hardly expect a different outcome. Like before, these new regulations will lead to higher costs and less availability, harms that will fall upon those very same unbanked Americans which were hit the last time around.

The new regulations attempt to force old banking paradigms onto modern day products. For example, the rules would require that prepaid card companies comply with the same underwriting requirements as credit cards, even though most prepaid cards to not extend credit in any way (because they are prepaid!). Such added compliance will do only one thing: raise the costs of offering prepaid cards. How are unbanked Americans helped by making prepaid cards more expensive or less widely available?

The potential for unintended impacts is even greater on the high-tech end of the spectrum. As Google pointed out last year when it expressed concern about the proposed rules, “overregulation would unnecessarily stifle this emerging market.” Apps like Google Wallet or Venmo are designed for convenience and security, but these new regulations force them to comply with regulations as if they were credit cards. This compliance makes further innovation in mobile payment systems significantly harder, particularly for smaller, non-financial start-ups. The next big idea may have just been outlawed because the CFPB wants to show the American people that they are the boss, not consumers.

While the CFPB’s regulations in this situation are not surprising or unexpected, they highlight yet again the damaging impact of regulation. These new products thrived precisely because they were free of some of the most onerous federal regulations and were therefore cheaper and more flexible options, especially for unbanked Americans. Many of these people will now be back to square one, unable to afford basic financial services. All because the bureaucrats were upset that there was a business model that was succeeding outside of federal micromanagement.