PayPal has filed a motion for summary judgment in its lawsuit against the CFPB seeking to invalidate the Bureau’s prepaid card rule (“Rule”). The Rule became effective on April 1, 2019. The relief sought by PayPal in the lawsuit, which was filed in December 2019 in the D.C. federal district court, includes vacating the Rule and enjoining the Bureau from enforcing the Rule.
PayPal’s primary consumer offering is a “digital wallet.” A digital wallet is primarily used by a consumer to access his or her traditional payment devices (Funding Instruments), such as credit cards, debit cards, and checking accounts in order to allow the consumer to make electronic peer-to-peer transfers of funds or to purchase products from third-party merchants. To use a digital wallet, a consumer links the wallet to the credentials for the Funding Instruments. Once linked, PayPal can complete a transaction on the consumer’s behalf. Significantly, when completing a transaction involving a consumer’s use of the wallet to make a purchase from a merchant, only PayPal accesses the payment credentials for the Funding Instrument selected by the consumer to pay for the purchase. As a result, the consumer does not have to expose his or her full financial credentials to the merchant.
PayPal’s complaint takes aim at the Bureau’s decision when adopting the Rule to impose the same regulatory regime on digital wallets as it imposed on “prepaid cards” or “general purpose reloadable cards” (GPR cards) despite the material differences that exist between the products. Specifically, PayPal targets the Rule’s mandated short form disclosure and its 30-day ban on linking credit products to prepaid accounts.
PayPal’s summary judgment motion tracks the claims made in its complaint. Its principal arguments are:
- The Bureau exceeded its EFTA statutory authority by mandating that digital wallet providers use the fee disclosure form designed for GPR cards. The EFTA directs the Bureau to issue “model clauses for optional use by financial institutions.” The EFTA does not allow the Bureau to require the use of a particular model form.
- Although the Bureau relied on TILA for its authority to promulgate the 30-day ban, TILA does not give the Bureau general authority to restrict consumers’ acquisition or use of credit. TILA is a disclosure statute intended to promote the informed use of credit by consumers. The 30-day ban is a substantive restriction on the use of credit because it restricts digital wallet consumers from linking independently-acquired credit cards to a digital wallet.
- In subjecting digital wallets to a regulatory scheme designed for GPR cards, the Bureau made a fundamental category error that was arbitrary and capricious in violation of the Administrative Procedure Act (APA). The Bureau capriciously ignored key differences between GPR cards and digital wallets by using a one-size-fits-all approach and subjected digital wallets to heightened regulation based on unfounded speculation about consumer risks arising from digital wallets.
- The Bureau failed to perform a cost-benefit analysis with respect to digital wallets as required by the APA, the EFTA, and the Dodd-Frank Act.
- By requiring PayPal to make misleading and inapplicable disclosures to its customers while prohibiting it from offering relevant clarifying information, the Rule is a content-based restriction on PayPal’s free speech rights. The Rule violates the First Amendment of the U.S. Constitution because it does not satisfy either a strict scrutiny or a reasonably-related standard for scrutinizing such restrictions.