ALL IN THE FAMILY DDAS, PREPAID ACCOUNTS, PAYROLL CARDS AND

ALL IN THE FAMILY DDAS, PREPAID ACCOUNTS, PAYROLL CARDS AND PERSON-TO-PERSON PAYMENTS Stephen T. Middlebrook Womble Bond Dickinson IPA Day of Payments August 19, 2020 1

Regulation E as modified by the Prepaid Rule now encompasses a wide variety of products DDAs Payroll Cards Prepaid Accounts Person-toPerson Payments 2

Overview of Regulation E Regulation E implements the Electronic Fund Transfer Act (EFTA) For covered accounts, Reg. E specifies: Disclosure requirements Limitations on liability for unauthorized use Error resolution requirements Additional specific rules for ATM transactions Government benefits Payroll cards Gift cards Additional, more onerous, rules for prepaid accounts 3

Overview of Regulation E Regulation E generally applies to electronic funds transfers to or from: 1. A demand deposit (checking), savings, or other consumer asset account 2. Held directly or indirectly by a financial institution, and 3. Established primarily for personal, family or household purposes 4. The term account includes a prepaid account 4

Definition of Prepaid Account “Prepaid Account” means : 1. Payroll Card Account; 2. Government Benefit Account; 3. An account marketed as prepaid and redeemable at multiple unaffiliated merchants (a GPR card); or 4. An account a) that is issued on a prepaid basis in a specified amount or not issued on a prepaid basis but capable of being loaded with funds thereafter, b) Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, or at automated teller machines, or to conduct person-to-person transfers, and c) That is not a checking account, share draft account, or negotiable order of withdrawal account 5

Definition of Payroll Account Most people think Payroll Card Accounts are a subset of Prepaid Accounts, but is that true? 6

Definition of Payroll Account Payroll Card Account is defined as “an account that is directly or indirectly established through an employer and to which electronic fund transfers of the consumer’s wages, salary, or other employee compensation (such as commissions) are made on a recurring basis, whether the account is operated or managed by the employer, a third-party payroll processor, a depository institution, or any other person.” The definition encompasses all accounts, not just prepaid accounts. Does this mean a DDA marketed through an employer could be a payroll card account which is subject to the Prepaid Rule? 7

Definition of Prepaid Account “Prepaid Account” means : 1. Payroll Card Account; 2. Government Benefit Account; 3. An account marketed as prepaid and redeemable at multiple unaffiliated merchants (a GPR card); or 4. An account a) that is issued on a prepaid basis in a specified amount or not issued on a prepaid basis but capable of being loaded with funds thereafter, b) Whose primary function is to conduct transactions with multiple, unaffiliated merchants for goods or services, or at automated teller machines, or to conduct person-to-person transfers, and c) That is not a checking account, share draft account, or negotiable order of withdrawal account 8

Prepaid Accounts Include Digital Wallets Neither the term “mobile wallet” nor “digital wallet” appears in the text of CFPB’s prepaid regulations. The term “digital wallet” appears once in the Official Commentary. While the Commentary doesn’t say digital wallets are covered by Reg. E, it implies they are because it tells you when the rule does NOT apply to them. 9

Prepaid Accounts Include Digital Wallets The official commentary notes: If a product, such as a digital wallet, is only capable of storing a consumer's payment credentials for other accounts but is incapable of having funds stored on it, such a product is not a prepaid account. However, if a product allows a consumer to transfer funds, which can be stored before the consumer designates a destination for the funds, the product satisfies § 1005.2(b)(3)(i)(D).

Prepaid Accounts Include P2P Transfers The official commentary notes: A prepaid account whose primary function is to conduct person-to-person transfers is an account that allows a consumer to send funds by electronic fund transfer to another consumer or business. An account may qualify as a prepaid account if its primary function is person-to-person transfers even if it is neither redeemable upon presentation at multiple, unaffiliated merchants for goods or services, nor usable at automated teller machines. A transaction involving a store gift card would not be a person-to-person transfer if it could only be used to make payments to the merchant or affiliated group of merchants on whose behalf the card was issued. 11

PayPal Sues CFPB Over Application of Prepaid Rule to its Digital Wallet PayPal sued CFPB on December 11, 2019 challenging the Prepaid Rule 12

PayPal Sues CFPB Over Application of Prepaid Rule to its Digital Wallet PayPal’s lawsuit challenges application of the prepaid rule designed for GPR cards to PayPal’s digital wallet product. Asserts that a digital wallet is materially different a GPR card and should not be subject to same regulations. PayPal specifically objects to disclosure requirements about ATM withdrawals, fees and other matters which it asserts are misleading with regard to its product and only serve to confuse the consumer. 13

PayPal Sues CFPB Over Application of Prepaid Rule to its Digital Wallet PayPal asserts several causes of action: CFPB exceeded its statutory authority under EFTA and TILA CFPB’s failure to consider unique aspects of digital wallets and perform a cost benefit analysis renders the rule arbitrary and capricious The closure requirements violated the First Amendment by forcing PayPal to make unnecessary, irrelevant and misleading statements to its consumers 14

Application of Reg. E to Non-Banks Reg. E applies to accounts held directly or indirectly at a financial institution. “Financial institution” means a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services . Because the definition of “financial institution” includes anyone who holds an account, it provides no meaningful limitation on what accounts are covered. 15

Application of Reg. E to Non-Banks If Reg. E applies to any person that offers an account that provides person-to-person transfer features, what other entities fall within the scope of the rule? PayPal, Venmo? Payroll processors? Wage advance providers? Money transmitters? Virtual currency wallets? Stablecoins? 16

Questions?