Judge Sides With PayPal in CFPB Lawsuit Regarding Digital Wallets

PayPal won a legal victory against the U.S. consumer protection watchdog.

According to court documents cited in a Friday (March 29) Law 360 report, U.S. District Judge Richard J. Leon tossed out an aspect of the so-called “prepaid rule” for digital wallets that went into effect five years ago and became the center of PayPal’s case against the Consumer Financial Protection Bureau (CFPB).

In doing so, the report said, the judge agreed with PayPal that the CFPB “had no rational justification” for placing digital wallets under the rule’s “short-form” fee disclosure requirements.

The rule requires digital wallet providers and other companies offering prepaid services to disclose potential fees their customers might face.

The CFPB did not respond to PYMNTS’ request for comment.

PayPal sued the CFPB in 2019, alleging the regulator dismissed its arguments that digital wallets do not operate in the same way as reloadable debit cards — and that disclosure rules created by the agency require PayPal to make “misleading and confusing” disclosures about its products.

The suit further argued that the rule, which requires disclosure for digital wallets and prepaid debit cards, puts “unreasonable restrictions” on consumers’ abilities to link certain credit products to PayPal accounts.

In January 2021, Leon sided with PayPal and struck down aspects of the CFPB’s prepaid rule, ruling that the bureau had exceeded its authority. However, a D.C. Circuit panel reversed that ruling last winter and sent the case back to the district court.

According to the Law 360 report, Leon’s latest ruling found that the CFPB’s short-form disclosure requirement is arbitrary and capricious because the regulator didn’t have a well-established foundation for placing digital wallets under the same “prescriptive regime” that applies to physical cards.

But unlike other products, “digital wallets are not primarily used to access funds or to function as a substitute checking account,” Leon’s opinion said. “They do not require a consumer to preload or prefund an account before they can use it (and indeed, most digital wallet users never carry an account balance).”

“Their underlying business model does not depend on charging usage fees to consumers,” the judge continued. “And they are not available in brick-and-mortar retail locations, instead existing only in the digital space.”

The ruling comes as the CFPB proposes new rules to govern digital wallet providers, a move that critics have charged as bringing a “one-size-fits-all” approach to payments oversight.

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