CFPB Director Chopra Takes Aim at Digital Wallets, Money Transmitters Post SVB and Signature Failures

Recent statements from Consumer Financial Protection Bureau (CFPB) director Rohit Chopra should serve as a potential warning to non-bank financial service providers that they are squarely in the CFPB’s cross-hairs following the high profile failures of SVB and Signature Bank last month.

In statements to the Washington Post, Director Chopra expressed concern over consumers who store funds with non-bank money transmitters like PayPal, Venmo, and Cash App, noting that such accounts may not be FDIC insured, advising consumers not to keep their money with non-bank entities, and noting that regulation is needed.[1]

On the one hand, Director Chopra’s comments are puzzling as the high-profile failures that serve as the basis for his comments were pointedly not non-bank financial service providers, but were in fact U.S. chartered financial institutions that were presumably subject to the type of more rigorous regulation Director Chopra may seek to impose on non-bank providers. On the other hand, the CFPB has taken increased aim at non-banks under Director Chopra, so it is not surprising that the Director may use the SVB and Signature failures as an additional basis to criticize or increase regulatory scrutiny on non-bank providers.

Regardless, Director Chopra’s statements show a lack of understanding on his part of how non-bank services are regulated, and user funds safeguarded from loss, at the state level. Licensed money transmitters like PayPal, Venmo, Cash App, and others are subject to a complex set of state level regulations that are specifically designed to protect a state’s residents from loss of funds in connection with their use of the money transmitter’s services, including when the money transmitter goes under. These include meeting a state’s requirements for maintenance of company net worth amounts, provision of surety bonds in favor of the state and its residents, and the maintenance of eligible securities or permissible investments equivalent to a money transmitter’s outstanding transmission obligations.[2] In addition, money transmitters are under an obligation to provide regular and, in some cases near constant, reporting to state regulators on the money transmitter’s compliance with the state’s various obligations, including the money transmitter’s financial well-being.

The end-result is that while a digital account maintained with a money transmitter may not qualify for FDIC insurance, it is still subject to a number of important safeguards that help to protect consumers from loss, including in the event of a money transmitter going out of business or suffering some kind of calamitous financial impairment. Thus, the view from Director Chopra that such products are not safe and should not be used by consumers may come as a surprise to both the money transmitters themselves and the state regulatory agencies charged with overseeing them.

Further, many neo bank digital wallets – like Chime, Dave, Albert etc. – are not “money transmitter” based services and instead rely on partnerships with U.S. chartered financial institutions in order to safeguard user funds and provide banking services to accountholders. These neo bank accounts function for all intents and purposes like their traditional demand deposit account counterparts and are usually fully insured by the FDIC on a pass-through basis.

Nevertheless, given Director Chopra’s statements, non-bank providers would do well to monitor the potential for additional regulatory scrutiny or action in connection with their safeguarding of user funds and to prepare talking points and other materials to educate regulators on how funds are safeguarded from loss despite the lack of FDIC insurance.

[1] Nick Robertson, Is your cash safe in digital wallets? CFPB chief says more regulation is needed, The Hill (Apr. 11, 2023), available at https://thehill.com/business/3944401-is-your-cash-safe-in-digital-wallets-cfpb-chief-says-more-regulation-needed/.

[2] See Cal. Fin. Code § 2081, requiring money transmitters licensed in California to maintain eligible securities with a market value of not less than “the aggregate amount of all of [the money transmitter’s] . . . outstanding money received for transmission in the United States.”