On August 4, 2022, the Consumer Financial Protection Bureau ("CFPB") issued a report entitled, "The Convergence of Payments and Commerce: Implications for Consumers," in which it examines the challenges and risks to consumers inherent in the rapidly evolving payment ecosystem and emergence of product offerings that blur the traditional lines of banking and commerce.
In the report, the CFPB identifies three new product categories that have the potential to increase consumers' choices and streamline their experiences by integrating commerce and financial services:
- Super apps. Apps that provide access to a variety of products and services within a single app, thereby minimizing or eliminating the friction created by having to work with several different providers. The CFPB notes that in the U.S., the super app concept is following the "bank in the app" approach and identifies the PayPal wallet as an example of a U.S. super app "bank in an app."
- Buy Now, Pay Later ("BNPL"). An instant loan available at the moment of purchase that allows consumers to split purchases into four equal interest-free installments, with the first installment due at checkout. The CFPB notes that BNPL has emerged as a popular alternative to credit cards, as the application process for the non-interest loans is short and seamless with high approval rates.
- Embedded commerce. The report describes embedded commerce as the incorporation of a payment capability within any area of a social media feed that enables consumers to shop directly on a social media website or app instead of being directed to a retailer's website. The CFPB notes that the "frictionless" transactions that embedded commerce promotes is prevalent on e-commerce websites (e.g., Amazon) and in social media feeds.
While these new capabilities have introduced innovation in the financial services and payment space and can be regarded as "value-added conveniences" that benefit the consumers who use them, the CFPB is concerned that these new technologies may introduce new risks to consumers. The two risks highlighted in the report are:
- Monetization of consumer financial data. The CFPB is concerned that as technology drives closer integration between financial service providers and non-financial companies (e.g., social media and e-commerce companies), companies will have more opportunities to aggregate, monetize, and misuse consumers' financial data. The CFPB is also concerned that the data handling practices of companies and service providers may be opaque to consumers and their data may be used and shared for purposes they did not intend or understand, which can lead to "feelings of powerlessness" and "digital resignation."
- Scale and market power. The CFPB suggests that as the payment ecosystem continues to evolve, it is possible that the emerging business models described in the report (or others) will allow certain companies to quickly gain scale through the engagement of merchants and consumers and aggregate vast amounts of consumer data, which will result in the creation of "a new generation of dominant incumbents."
The CFPB concludes the report by describing the steps it intends to take as part of a "multifaceted effort to promote fair, transparent, and competitive markets for consumer financial services." Specifically, the CFPB plans to:
- Propose rules pursuant to section 1033 of the Dodd-Frank Act in an effort to provide consumers with greater control over their financial data, including their payments and transaction data.
- Assess new models of lending integrated with payments and e-commerce, such as BNPL.
- Seek to mitigate the potential consequences of large tech firms moving into the real-time payments space in the U.S. by considering the experiences of other jurisdictions where the shift toward real-time payments has occurred and evaluating ways to protect consumers and reduce fraud losses incurred by consumers and market participants.
Putting the report in context
The report continues the work the CFPB began last year when it issued market monitoring orders pursuant to its statutory authority under the Dodd-Frank Act to six Big Tech companies (ordering them to turn over information about their payments products, plans, and practices) and five of the largest BNPL providers (ordering them to turn over information on the risks and benefits of fast-growing BNPL loans).
Read together with these orders, the report suggests that the changes occurring across the payment ecosystem have drawn the CFPB's attention. They also signal that under its new director, former FTC Commissioner Rohit Chopra, the CFPB will continue to expand oversight of tech companies as they move into the traditional financial sector and intervene as needed to protect consumers and support its mandate.
Companies operating in the digital commerce ecosystem (and those considering moving into the space) should take steps to ensure that, among other things, their use, aggregation, and monetization of consumers' financial data is fair and transparent and their products and services create value for consumers, merchants, and the financial system.
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