Consumer interest — along with millions of venture capital dollars — suggest now is the time to look more closely at the potential impact of mobile payments.
With that in mind, three experts in the field of payments regulatory institutions visited the U.S. Senate Committee on Banking, Housing, and Urban Affairs, for a hearing to talk about mobile payments and their impact on the nation’s commerce system.
Their messages were in many ways unified. Each of Thomas Brown (an adjunct professor at Berkeley Law and a partner at Paul Hastings), Sarah Jane Hughes (Maurer School of Law, Indiana University) and Michael Katz (Berkeley) agreed that mobile payments won’t replace existing commerce systems tomorrow — and that regulating these systems will almost certainly be a complicated affair.
Obviously, each had much more to say than that. Below, we’ve summarized each expert’s testimony, distilling what you need to know — with links to the full versions thrown in for good measure. But first: added perspective from Mr. Brown, who in his comments to the Senate called for fewer regulations rather than increases to existing policies.
Mobile Is The New Plastic
You don’t have to go any further than your local Starbucks to witness the drastic evolution underway in how we pay for things. The shift in payments from plastic to mobile has gotten the attention of both houses of Congress. The Committee of Financial Services of the House of Representatives has held two hearings on mobile payments. Not to be outdone, the Senate Banking Committee is holding the second in its continuing series of hearings today.
The interest in mobile payments is natural. The marriage of mobile communications with payments is rapidly changing commerce. Jack Dorsey, who after inventing Twitter went on to found the mobile payment start-up, Square, has made it incredibly easy for people to accept electronic payments, and millions of people who make stuff or do stuff (e.g., artists, farmers and contractors) are now accepting payment cards instead of cash. Other merchants are using mobile technologies to change how we shop. Home Depot now lets some of its customers complete their purchases in the aisle. Some merchants are using mobile payment applications to extend the point of sale outside the store. Apple’s Apple Store app (not to be confused with the App Store) lets its customer make their purchases on their iPhones and pick up their purchases in the store without ever having to take out their wallets.
These developments hint at more changes down the road. Smart phones and tablets are rapidly becoming a key point of contact in the relationship between merchants and their customers. Because people tend not to share their smart phones and tablets in the same way that they share PC and laptops, these devices make it possible for merchants to customize their products, services and prices for individual consumers. Although such offers currently take the form of discounts, the future of the relationships may bring something closer to the yield management techniques practices by airlines and rental car companies to the corner store.
Interest in these developments, however, should not yield new regulation. Although it might seem counterintuitive, the mobile payment industry is already heavily regulated because the payment industry of which it forms a small but growing part is heavily regulated. Mobile payment providers, at least those that directly handle consumer funds, face a long list of compliance obligations under regulations promulgated by the usual alphabet soup of federal regulators—e.g., FTC, FinCEN, OFAC, FRB and, the new consumer watchdog, CFPB. Moreover, mobile payment providers, like payment providers generally, face significant licensing burdens at the state level. A company that wants to provide a mobile payment application in the U.S. must generally choose between obtaining licenses from each of the 50 states to support the program or finding a bank to sponsor the application.
If anything, Congress should attend to this last issue. Although state licensing may help to ensure that mobile payment providers handle consumer funds with the appropriate level of care, the existing state licensing regime does not serve this end. Instead, the costs and distractions of obtaining fifty separate licenses simply serve to protect incumbents from innovative upstarts.
Summaries of each expert’s testimony follow:
Thomas P. Brown -ӬAdjunct Professor, Berkeley Law School, University of California; andӬ Partner, Paul Hastings LLP
While some perhaps came into today’s hearing wondering what additional regulations might be needed for mobile payments, Brown argued that existing regulations ought to be reduced.
“In my view, lawmakers should be wary of claims that mobile payments need to be further regulated,” Brown wrote. Instead, he made the case for reforming the current system of payments licenses, where firms are often required to apply for separate licenses in each state.
By reforming the state-by-state licensing system, Brown says regulators could “reduce costs for mobile payment companies, creating a net benefit for the economy.”
Apart from regulatory issues, Brown sees three key features of mobile payments that could also spur economic growth: easier payment acceptance methods for the nation’s small and medium-sized businesses; payments capabilities beyond the retail counter that could improve customer service; and information exchange, which could help merchants set prices more dynamically (much like the airline industry) to facilitate more commerce.
Sarah Jane Hughes – Maurer School of Law, Indiana University
Hughes’ testimony was built around a backbone of five key positives — and five potential challenges — presented by mobile payments.
The pros:
And the cons:
Beyond those bullets, Hughes posed a larger question, the answer to which will be crucial to the future of payments regulation: should all players be subject to one set of rules, or are separate standards needed for each “silo” of providers, e.g., telecoms, app developers, intermediaries? This may be the first step to clarifying the future of mobile payment regulation.
Michael Katz – Sarin Chair in Strategy and Leadership, University of California, Berkeley
Katz kicks off by calling out one mobile payment standard in particular: NFC.
“Many people have predicted that the use of near-field communications (or NFC), a technology which allows consumers to pay by swiping their phones rather than their credit or debit cards, will revolutionize consumer payments at bricks- and-mortar merchants. I disagree,” he writes.
Instead, Katz thinks NFC and mobile’s impact on payments will be evolutionary, rather than revolutionary. In particular, future innovations in how consumers and merchants can communicate and share information, e.g., location data, coupon offers, will drive change (similar to Brown’s testimony in this respect).
But from a regulatory perspective, Katz sees more problems than solutions. “This industry convergence is going to lead to complex regulatory convergence,” he writes, creating something that will be “problematical” for payments overall.
Access the Senate Committee’s website here to download each expert’s full testimony.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More