The Consumer Financial Protection Bureau is probing the way that Venmo, the digital money-transfer service operated by PayPal Holdings Inc., treats customers whom the company says owe it money for transactions that went awry. In a regulatory filing Friday, PayPal said it had received a "Civil Investigative Demand" from the CFPB "related to Venmo's unauthorized funds transfers and collections processes, and related matters." The company said the CFPB had requested documents and answers to written questions, and that it was cooperating with the regulators. Venmo's debt-collection tactics were the subject of articles in The Wall Street Journal in 2019 and 2020. The company has threatened to dispatch debt collectors on users who overdraw their accounts, even when those users are victims of scams, The Journal previously reported. Venmo continued its aggressive collection efforts during the coronavirus pandemic.
The company "remains deeply committed to its compliance obligations and the company works closely with regulators around the world to adhere to all applicable rules and regulations in the markets in which we operate, " a PayPal spokeswoman said in an email. Already one of the most popular digital-finance apps in the country, Venmo got a boost in the past year as new services, including letting customers direct-deposit their stimulus checks into their Venmo accounts, more than made up for a decline in people using it to split bills at bars and restaurants. Venmo's user base increased 32% in 2020 to nearly 70 million active accounts, PayPal CEO Dan Schulman said in an earnings conference call on Wednesday. About $47 billion was transferred via Venmo in the fourth quarter, roughly a 60% increase from the year before. PayPal expects Venmo to generate nearly $900 million in revenue in 2021.
Transactions appear instantaneous in the Venmo app, but it can actually take a day or more for the money to leave the sender's bank account. Venmo often fronts the payment to the recipient, who can then send the money to others on Venmo or pay a small fee to transfer it to their bank account in a few minutes.
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If a user sends money over Venmo to a scammer who immediately withdraws it, or if a sender's bank stops a transaction before it is settled, Venmo can be left holding the bag. PayPal doesn't disclose the number of Venmo users who carry a negative balance or the amount it says they owe. Across PayPal, though, as of Dec. 31, there were $270 million in negative customer balances that the company didn't expect to be repaid, up from $221 million on June 30, according to a securities filing. PayPal writes off as a loss any negative balances in the month that they become outstanding for 120 days.
The CFPB's request came on Jan. 21, PayPal said in the filing. President Biden was inaugurated the day before. The bureau, which in many ways grew less forceful under the Trump administration, is expected to more strictly enforce consumer protections under the Biden administration. In a separate matter, PayPal received a favorable ruling in December in a lawsuit the company filed against the CFPB in 2019 in Washington federal court. That year, the CFPB instituted a new rule on issuers of prepaid cards that required them to disclose fees and other terms of services, while placing limits on their ability to offer credit products. The CFPB determined the rule applied to some digital wallets, including PayPal and Venmo.
PayPal argued in its complaint that the CFPB's rule hampered its ability to lend to customers and created confusion. In a Dec. 30 opinion, Judge Richard Leon ruled the CFPB exceeded its authority when it mandated the form of disclosures and placed limits on customers' use of credit in prepaid accounts.