Do Mobile Payments Need More Regulation?

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WASHINGTON — For all the angst about heightened regulation in the banking sector, financial policymakers are increasingly turning their attention to a different industry: cell phones.

The parallels between the money and telecommunications businesses are nothing new. But with Washington now taking notice, the level of regulatory tinkering needed for the mobile-payments market has become the subject of intense debate.

"There needs to be some cooperation between the wireless and banking regulatory frameworks, because otherwise we're going to have a mess," said Suzanne Martindale, a staff attorney for Consumers Union.

At one of two introductory hearings on the topic last month, senior Republican Rep. Shelley Moore Capito laid out the technological shifts facing the payments industry in these terms: "We are … on a precipice of some fundamental change in the way money is exchanged between consumers and businesses."

But whether Congress needs to weigh in is the million-dollar question.

To some, new products letting consumers spend money with a text message or simple wave of their phones can be adapted to existing laws governing fund transfers and credit disclosures. To others, the new market poses a maze of unanswered questions about who should regulate the sphere and how.

"There is no one clear regulator who is in charge of all mobile payments. It's very fractured right now," said Martindale, who testified at a March 22 House hearing chaired by Capito, which was followed the next week by a mobile-payments hearing in the Senate. "It's an accident of history that technology moves beyond what's on the books."

Though the volume of mobile payments is not close to other more traditional payment transactions, the technology is exploding. With companies across multiple platforms rolling out new products each week and devices mimicking a wallet capable of processing a transaction at the point of sale, phones may one day replace plastic.

But the two laws relevant to the shifting market far predate these innovations. Currently, electronic transactions are regulated by the Electronic Fund Transfer Act, which includes, among other provisions, safeguards against unauthorized transfers. For mobile payments linked to a card or other credit account, the Truth in Lending Act applies.

Previously, the Federal Reserve Board — which recently published a report about mobile-payment trends — implemented both the EFTA and TILA, respectively, with its Regulation E and Regulation Z. But the Dodd-Frank Act gave authority for both laws to the Consumer Financial Protection Bureau.

Most observers say those existing laws provide a sufficient legal setting for the mobile-payments sphere, since most products are linked with one or multiple credit cards, or other types of regulated consumer accounts.

"Mobile [payments] may have some additional complexities in terms of the layers of players, such as the mobile carrier, which may be subject to its own regulatory framework as a communications provider. … But for the most part, as with any other payment form, it can be conducted within the existing regulatory framework if the provider of the financial service is properly regulated, such as a bank or regulated money transmitter," said Jessica Sklute, special counsel at Schulte Roth & Zabel LLP.

Yet many also agree that some degree of coordination across multiple agencies is necessary. While the CFPB is the chief regulator for monitoring compliance by financial providers of consumer laws, the Federal Trade Commission retains oversight over other consumer products, and telecommunications providers are regulated by the Federal Communications Commission.

"Even though the CFPB is taking over a lot of the consumer protection regulatory responsibilities, this is an area where FTC still has authority. … And the FCC may also have a jurisdictional role here at least with respect to the mobile operators," said Steven Kaplan, a partner at K&L Gates.

The frontier is more uncertain if the market embraces more products where payments are processed without a separate regulated account. "Carrier billing" involves the capability for users to buy goods with their phone through direct charges from their wireless carrier. A common example of this is when users donate to charities by text message.

"To the extent that the user is relying on his or her credit or debit card for a mobile payment, there is a structure already in place for that," said Timothy McTaggart, a partner at Pepper Hamilton LLP. "That may change when newer technologies emerge where either you're going to pay for it through your phone bill or someone has dreamed up some other way that they're going to process the payments.

"There aren't really any lines of communications now between the FCC and the bank regulators. But the market is way ahead of the regulatory framework, and the telecommunications and banking sectors are converging. That may require Congress to draw up some principles."

Some say the principles are already there, they just may not be to the industry's liking.

Current laws grant regulators far-reaching authority to oversee payments. One interpretation is that the leading wireless carriers — if they choose to focus on direct billing for purchases not related to phone service — could possibly fall under TILA and EFTA as they are currently written.

"There can be a surprise given the broad scope of Reg Z and Reg E," said Lawrence Kaplan, an attorney at Paul Hastings.

Frederick Joyce, a partner at Venable LLP, who focuses on telecommunications law, agreed there is little legal guidance on mobile payments products not linked to regulated accounts. He estimated the current market involving carrier billing for purchases of non-hard goods — such as mobile donations or digital downloads — is now in the billions of dollars.

"It's a good example of where the law seems to be fuzzy at best," Joyce said.

Meanwhile, Joyce added, more advanced technology — such as phones equipped to read bar codes — also has no clear regulatory framework.

"Maybe that process involves an account that's linked to your cell phone, or maybe not. … What governs all that? I'm pretty sure most regulators will say, 'You've got me.' There is no FCC law that covers it, period," he said.

While wireless carriers are likely designing services to avoid being identified as credit providers under TILA, Joyce noted, the industry would benefit from some rules of the road, he said. "The market's growing. Somebody is going to have to step forward either in the industry real soon or … this could be the next thing the FTC goes after."

It is too soon to tell if Congress will get serious about considering new legislation, although lawmakers did express interest in whether the regulatory landscape should be clarified.

"Is there one agency? Should there be several? Who's going to regulate this?" Rep. David Scott, D-Ga., said at the hearing before the House Financial Services financial institutions subcommittee, chaired by Capito.

At the subsequent hearing before the Senate Banking Committee, Kenneth Montgomery, first vice president and chief operating officer at the Federal Reserve Bank of Boston, said "clarity of regulatory responsibilities" among various agencies involved "needs to be established early on, with input from the mobile stakeholders."

Speaking about findings from a mobile-payments working group convened by the Fed's Boston and Atlanta districts, Montgomery said, "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."

But with the market still developing, industry experts said the time is not right for any regulatory reforms.

Andrew Lorentz, a partner at Davis Wright Tremaine LLP, said "the laws around carrier billing are nowhere near as sophisticated — with regard to third-party payments — as the credit card regime."

Yet any revisions now, Lorentz added, would have unintended consequences. "I would not say that there is any need for policymakers to get involved in making new policy or rules at the present time," he said. "The market is way too young. There is a major risk they will strangle these innovations right in their cradle."

But others said consumers need clarity to understand the appropriate recourse if something goes wrong during their use of a mobile-payment product.

"In the traditional payment world, if you lose your credit card, you pretty much know who to call. You call your issuing financial institution and say, 'I just lost my credit card,'" said Mark MacCarthy, vice president for public policy at the Software and Information Industry Association who formerly worked for Visa. "In the mobile payment world, if you lose your cell phone and there's a mobile [payment] application on it, I don't think it's clear right now who the consumer should call. For the market to take off they have to know who they have to call."

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Law and regulation