WASHINGTON— PayPal Holdings Inc. sued a federal banking regulator Wednesday, alleging that its new rule has hampered the company’s ability to offer credit products and has created confusion among users of its popular digital-payment services PayPal and Venmo.
The lawsuit challenges the regulation on prepaid accounts rolled out by the Consumer Financial Protection Bureau in April. While the rule’s primary aim is to improve consumer protection for prepaid payment cards, it also extends to “digital wallets,” any financial products capable of holding cash balances directly on cards or electronic devices.
As a result, the rule brought under its coverage digital-payment tools such as PayPal, Venmo, Alphabet Inc.’s Google Pay, and Square Inc.’s Cash App, despite the industry’s claim that digital wallets are fundamentally different from prepaid cards, which are often sold at grocery and drugstores. Apple Cash, Apple’s payment app similar to Venmo, comes under the rule’s oversight, while Apple Pay, which doesn’t store money, doesn’t.
The regulation imposes complex requirements on issuers to disclose fees and other terms of services, while placing limits on their ability to offer credit products to customers.
“The Bureau’s most basic error was ignoring the critical differences between digital wallets and prepaid products,” PayPal said in its complaint filed with the U.S. District Court for the District of Columbia. “The resulting regulatory regime is fundamentally ill-suited to PayPal digital wallets and is likely to mislead or confuse consumers.”
A CFPB spokeswoman didn’t respond to requests for comment.
The legal fight underscores the challenge of regulating a financial product at a time when technology accelerates the developments of products and services that defy traditional product definitions. And as industry competition intensifies, expanding functions of payment products into areas such as consumer loans and investments becomes essential for companies, industry experts say. It follows years of intense lobbying by PayPal and other digital-wallet providers before the rule’s issuance to exclude their products.
“Having exhausted other options, PayPal is filing suit to end the unsuitable application of the Prepaid Rule and its negative impact on digital-wallet consumers and our business,” PayPal said in a statement. The rule creates hurdles for marketing of credit products as it bans consumers from linking credit products to digital wallets for the first 30 days after they acquire such products.
“This is a case that could have an impact on our members, their business partners and most importantly the customers they serve,” said Brian Tate, chief executive of Innovative Payments Association, a trade group of prepaid-card issuers, while calling for its members to fully comply with the rule until a final court decision is made. The group has also opposed the CFPB rule’s disclosure requirements, but supports its coverage of digital wallets.
General-purpose reloadable prepaid cards allow users to load funds directly to a card without having a bank account. Popular among consumers who don’t have full access to financial products, such cards usually carry a card-network logo such as Visa or Mastercard.
Write to Yuka Hayashi at yuka.hayashi@wsj.com
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