Federal Reserve Finds Existing Regulatory Framework Sufficient To Meet Mobile Payments Challenge

Under the auspices of the Federal Reserve Banks of Boston and Atlanta, the Mobile Payments Industry Workgroup (“MPIW”) recently published a summary of roundtable discussions held in April among the MPIW and federal and state regulators. The roundtable discussions represent a continuation of work by the MPIW that culminated in the Federal Reserve’s March 25, 2011 publication, “Mobile Payments in the United States: Mapping Out the Road Ahead.”  Despite a complex regulatory landscape and constantly evolving payments technologies, the group concluded that no new regulations are required to protect consumers. Rather than representing fundamentally different payment methodologies, these new mobile products and services serve merely as access points to existing platforms.  Current regulatory principles and concepts should be extended to incorporate them, not re-written or expanded.  The MPIW will continue to monitor the mobile payments space and will seek to publish educational materials for stakeholders in order to address the challenges presented by emerging mobile payment systems.

As explained in the summary, the mobile payments regulatory framework is segmented into two tracks: financial institutions and nonbank entities.  State and federal regulators have oversight over the activities of state and federally chartered banks, while the Federal Trade Commission (“FTC”), has traditionally been tasked with enforcement of unfair and deceptive trade practice laws relevant to nonbanks. More recently, the Consumer Financial Protection Bureau (“CFPB”) has taken over consumer protection rulemaking responsibilities for companies providing financial products and services.  Of particular interest for mobile payments is a pending rulemaking for prepaid products.  While many new mobile payment systems employ traditional payment methods such as wire transfers, ACH and credit card networks, new payment services - such as peer-to-peer (“P2P”) remote payments and transfers, and nonbank money transfer services - might appear to present a unique regulatory profile. However, the MPIW agreed that mobile payment technologies have much in common with long-established Internet-based payments.  Mobile payment systems have risk management factors similar to internet-based payment technologies and adoption rates of new mobile payment technologies remain low.  The MPIW declared that existing regulatory guidance should be updated to specifically reference and include mobile payments and that regulators should continue to stay apprised of mobile payment industry developments.  Of particular note is the increasing role of third-party vendors in operating and managing these new systems, and the MPIW highlighted the Federal Financial Institutions Council’s (“FFIEC”) role in clarifying the responsibilities of each stakeholder in the mobile payment ecosystem.

The MPIW emphasized the need for ongoing, in-depth education and analysis of the data privacy and security risks inherent in mobile payments.  The MPIW discussed FinCEN’s role in policing the burgeoning prepaid access market, and sought clarification of the Federal Communication Commission’s (“FCC”) oversight role in the mobile payment space. The summary also underscored the historical role of the FTC in protecting consumers from fraud, abuse, and unfair and deceptive practices in the mobile industry and the need for coordination with the oversight activities of the CFPB. Increasing participation in the mobile payment market by nonbank entities such as online payment providers, social networks, retailers, and money transmitters has led to confusion regarding state and federal licensing regimes, as well as uncertainty regarding the applicability of various federal laws to the services offered by these new market entrants.  Many of these new entrants perceive the patchwork of state and federal regulations as an impediment to innovation.  However, the MPIW highlighted the work of the Conference of Bank Supervisors (“CSBS”) to simplify multi-state money transmitter licensing by expanding the use of the Nationwide Mortgage Licensing System (NMLS) to process money transmitter licensing applications.

In addition, the summary identified the need for expanded regulatory monitoring of:

• End-to-end protection of information shared using new payment technologies such as Near Field Communication (“NFC”), Point-of-Sale (“POS”), barcode-based software applications, and P2P, etc.
• Direct carrier billing payment models
• Possible confusion among regulators and consumers as new payment technologies converge or  evolve to become increasingly interoperable

Finally, the MPIW discussed the perceived conflict between the need for additional analysis of mobile payment products and services targeted at low- and moderate-income consumers and the possible effect of such increased oversight on the mobile payment industry. The MPIW recognized the significant promise of such new technologies for increasing consumer access to the financial system and encouraged government stakeholders to develop a common agenda to support the inclusion of underserved consumers. To that end, the MPIW plans to develop materials to educate regulators on the specific areas of focus when updating existing guidelines, including specific use cases, gap analyses, a glossary of common industry terms, and a survey of existing industry efforts to address mobile payments.