US consumer finance watchdog faces lawsuit for classifying digital wallets as banks

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The Consumer Financial Protection Bureau (CFPB) in the United States is being sued for regulating digital wallets and payment applications similar to banks. 

Technology trade groups TechNet and NetChoice filed a lawsuit on Jan. 16 to challenge the CFPB’s regulatory approach.

The complaint is based on a rule published by the CFPB in December 2024. This rule expands the agency’s regulatory jurisdiction to ‘general-use digital consumer payment applications,’ targeting big companies including Apple Pay, Google Wallet, PayPal as well as digital wallet providers and non-bank financial service providers.

TechNet, a partnership of technology professionals, and NetChoice, an organization campaigning for internet freedom, argue the CFPB’s action is excessive. They claim that the bureau aims to centralize authority over an innovative sector without showing proof of regulatory deficiencies that justify federal intervention.

Industry expert challenges CFPB’s rule

The CFPB’s rule allows the agency to conduct proactive investigations of payment applications to ensure they comply with federal privacy and fraud laws. The agency also claims that increased control will protect personal information, decrease fraud, and combat illegal banking, in which individuals are illegally denied access to financial services. 

NetChoice’s head of litigation, Chris Marchese, criticized the rule, saying it undermines the rule of law, expands the administrative state, and threatens American consumers and creativity. 

“The CFPB’s unlawful power grab undermines the rule of law, further bloats the administrative state, and puts American consumers and innovation at risk,” NetChoice’s director of litigation, Marchese, said.

The plaintiffs also assert that payment applications are already subject to strict state rules and that federal oversight creates additional impediments for businesses. They argue that this could result in greater consumer costs and fewer options in the digital payments ecosystem. 

CFPB lawsuit filed on the same day the bureau penalized Block Inc.

The lawsuit was filed on the same day that the bureau penalized Cash App’s parent business, Block Inc., for allegedly failing to provide necessary fraud precautions. According to the CFPB, Block sent fraud victims to their banks for transaction reversals rather than resolving the concerns internally. The settlement calls for up to $120 million in compensation and a $55 million fee for the CFPB’s victim relief fund. 

The CFPB’s regulatory efforts go beyond payment apps. On Jan. 10, the government proposed a rule requiring crypto asset service providers to reimburse users for losses caused by cyberattacks or frauds. This rule has not been implemented yet.

The outcome of this court case could have serious consequences for the digital payments industry. If the court agrees with the CFPB, payment applications may face more intricate compliance rules that will further increase operational expenses. If the complainants are successful, it may limit the agency’s authority to oversee developing technologies and leave control to state governments.

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