Are payment apps really banks? (Hint: yes they are)

The Consumer Finance Protection Bureau was created as part of the Dodd-Frank banking reform law passed after the 2008 financial crisis. It's been a considerable success at . . . protecting consumer finances, claiming billions of dollars in various forms of enforcement action, civil penalties, and consumer savings.

Republicans have hated it from the start, trying repeatedly to kill it off in the courts without success. Today it's in limbo, still in existence but with leaders who have halted its enforcement activities and tried to fire everyone.

But David Dayen points out something interesting. Donald Trump can try to cripple the bureau with hostile leadership, but he can't flatly get rid of the CFPB and will have to fight continuously in court over how far he can legally rein it in. However, Congress can shut down certain regulations completely if they were passed in the final 60 days of the previous term.

There are several enticing possibilities here: capping overdraft fees; removing medical debt from credit reports; open banking; and more permissive changes to bank mergers. But none of those made it to Congress's hit list. Only one new regulation was hated enough to make it: the "larger participant" rule.

Wuzzat? Simple: It gives the bureau authority to regulate payment apps from non-banks like Google, Apple, and—you guessed it, X:

In other words, Republicans are primarily focused on boosting Elon Musk and other Big Tech CEOs as they enter digital payment markets, determined to make managing and transferring money a regulatory-free zone.

It’s no secret that Musk wants to build X into a payment app. The company announced a partnership with Visa in January to support peer-to-peer payment transactions and a digital wallet. X Money would be a candidate for the kind of supervision the CFPB set up for non-bank firms.

Ironically, the larger participant rule is one of the few that banks themselves support. They figure, reasonably enough, that if they're going to be regulated, then by God all those payment app upstarts should be regulated too. And they should be.

But Congress turns out not to care all that much about big banks. At least, not nearly so much as they care about pandering to the likes of Elon Musk and other Silicon Valley startups who think payment apps should be a rule-free Wild West. That's a bad idea. Recent history has been pretty clear about this: it doesn't matter if the word "bank" is on your letterhead. What matters is whether you walk like a bank and quack like a bank. If so, you're a bank whether you like it or not and you need to follow the same rules as banks when it comes to things like leverage, capitalization, and protection of customer funds.

For now, though, Silicon Valley is winning and Republicans want them to keep winning. This will last until some payment app collapses and takes a million customers with it—or so you'd think. But the crypto business also walks and quacks like a bank and has had so many meltdowns and collapses I can barely keep track of them all. However, they remain largely unregulated and are likely to stay that way under Donald Trump and congressional Republicans. So why not payment apps as well, as long as Elon Musk and other powerful figures are lobbying for it?