Senate Looks at Regulatory Gaps in Mobile Payments

WASHINGTON — The nation's capital is starting to pay attention to mobile payments. Whether that sharpening focus will help or hurt the industry's growth, however, remains an open question.

The Senate Banking Committee held its first hearing Thursday on the issue, focusing on the ways that mobile payment systems are upending existing regulatory schemes. It followed the first-ever congressional hearing on the issue last week in the House.

"If the payment is made through a bank, then the existing set of banking and consumer protection laws apply," Banking Committee Chairman Tim Johnson said. "However, payments made through a text message via a mobile network provider don't fall under banking laws."

A similar point was made by Kenneth Montgomery, chief operating officer of the Federal Reserve Bank of Boston, which has been convening an industry working group on mobile payments for more than two years.

He said that industry participants would like various regulators — from the Consumer Financial Protection Bureau to the Federal Trade Commission to the Federal Communications Commission — to work collaboratively to define the regulatory environment for mobile payments.

"Clarity of regulatory responsibilities among bank and non-bank regulators needs to be established early on, with input from the mobile stakeholders," Montgomery said in written testimony. "While current regulations and rules may cover underlying payment methods, there is confusion because multiple regulatory agencies have responsibility for different aspects of payments and wireless transactions."

During the hearing, Montgomery said that there are well-defined regulations for mobile payments when they are backed by credit cards and debit cards. But other forms of mobile payments — including those backed by prepaid cards, or linked to the customer's wireless phone bill — fall into a murkier realm.

"They're the areas where we need some further collaboration between the regulators," he said.

No one from the FCC, FTC or CFPB testified at Thursday's hearing. And while there was broad agreement that Washington needs to be watching the mobile payments market closely, there were few concrete ideas about what specific actions the regulators should be taking.

One exception was in the area of data privacy, where Montgomery testified that consumers should be allowed to instruct firms not to share their customer information.

"Consumers need to have the option to opt out from information that is being collected about them," he said. "Likewise, as they're using particular services provided by mobile phone and mobile payments, they should be very much informed about what that data is that is being collected."

Sandra Braunstein, director of the Fed's consumer and community affairs division, testified about the results of a consumer survey on mobile payments that the Fed conducted late last year.

The survey of 2,300 respondents found that one in eight people had made a mobile payment in the previous year, usually by making an online bill payment with their mobile phones.

It also found that consumers who use mobile payments are more likely than the rest of the population to be under-banked.

"So it seems that the under-banked are not necessarily under-phoned," Braunstein commented.

She also offered an optimistic view of how mobile phones might make shoppers more prudent with their finances.

According to the Fed's survey, more than two-thirds of mobile banking customers reported checking their account balance or available credit before making large purchases, and they often held off on buying the item as a result of what they found.

Braunstein said that consumers are also beginning to use their mobile phones to scan bar codes in bricks-and-mortar stores, allowing them to price-shop.

"So it's one of those teachable moments, frankly, in financial education," she said.

Democratic Sen. Mark Warner, who was an early leader in the cellular phone business before entering politics, predicted that U.S. mobile payments will explode in the coming years.

Warner argued that Congress used a blunt instrument when it established caps on debit interchange fees at a time when banks were already earning huge revenue from those fees.

He urged regulators to be more forward thinking with regard to the fees that he predicted will emerge in the mobile payments sphere.

"You could end up having a marketplace set a whole bunch of fees that could be hidden, baked into your telecom bill, or baked into your provider bill," Warner said.

Warner's comments sparked an exchange with Republican Sen. Richard Shelby, who warned that heavy-handed government regulation could strangle the growth in mobile payments.

"Innovation will grow it. But we also could choke it to death by regulation and pricing and price fixing, like we did on the interchange fee," Shelby said.

"I agree with you," Warner responded. "We don't want to choke this off with overregulation."