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  • Frank Tian

Payment Companies in Regulators’ Scope

🇺🇸 US


CFPB recently reminded consumers that funds parked in payment apps are not subject to deposit insurance.


The growth of non-bank payment companies naturally lead to consumer funds parking in the accounts. Essentially these accounts are used like bank accounts, but without deposit insurance.


As money services businesses, these payment companies are not subject to the same level of disclosure requirement as banks. How they can invest customer funds also varies by state.


This is another example that regulation lags the development of financial innovation. Current money services business regulations were designed with companies like Western Union or MoneyGram in mind, traditional firms that did not maintain customers’ funds for more than a few days.


Now you have payment apps pooling billions of dollars of consumer funds with the reach of the Internet, which could park there for an extended time. This leads to extended financial services such as debit cards, credit cards, BNPL loans, international remittances, and crypto asset transactions.


Given recent failures of multiple businesses providing stored-value services, from crypto exchanges to regional banks, CFPB feels obligated to remind consumers not to park large amounts of money in accounts without deposit insurance.


🇨🇦 Canada


Earlier this year, Canada released a draft payment regulation. It asks payment companies to hold end-user funds in regulated FIs, with insurance or guarantees.


The new regulation also calls for registration, adequate reporting, and a comprehensive operational risk plan for each payment company. It is expected to start in 2024.


🇬🇧 UK


The UK concluded a 3-month consultation on payment regulation reform in April. The government sought public comments on how to effectively protect consumers, promote competition, and nurture financial innovation.


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