Making Sense of Mobile Payments

In 8 short years, cash and credit cards will be obsolete—or, so say technology experts and stakeholders in a recent survey, anyway. And in the place of crumpled bills, rattling change and countless cards will be one single device: a mobile phone.

When you look at the statistics, it isn’t such a crazy idea. According to a report released last month by the Federal Reserve, about 20% of all Americans used their phones for banking last year, and will continue to do so. Perhaps more telling, a December study by comScore found that 38% of smartphone owners had used their phones to make a purchase, most commonly digital goods like music and e-books and clothing and accessories.

Mobile payment definitely has its perks: it’s quick, convenient and some systems even offer lower credit card transaction fees to merchants. But there are plenty of problems, and one of the largest questions surrounding mobile payments is how they should be regulated.

The debate is already fairly complicated, and it’s only getting started. Last month, the House Financial Services Committee hosted two introductory hearings on mobile payments, which were followed by a hearing in the Senate. The Federal Trade Commission has organized a workshop on the topic at the end of this month. We’ll lay out the key players and issues as simply and concisely as possible.

Current Mobile Payment Options

There are a lot of mobile payment options out there, but a few companies have emerged in strong support of certain systems. Here’s a sampling of the predominant payment options and their backers:

• Dongles:
• Definition: hardware that allows consumers to read credit cards with mobile phones
• Big names: Square, VeriFone, Intuit, PayPal Here
• Mobile apps:
• Definition: Apps that let consumers send, receive or process transactions
• Big names: Venmo, PayPal, American Express Serve
• Near Field Communication (NFC):
• Definition: Contactless data transmission between 2 devices in close proximity
• Big names: Google Wallet, many card issuers including US Bank, MasterCard
• Carrier Billing:
• Definition: Consumers charge their purchases to their phone bill
• Big names: Major carriers like T-Mobile and AT&T, apps like PaymentOne

The Debate Over the Current Legislation

With mobile payments in the US expected to reach $214 billion in gross dollar volume by 2015, there’s a lot at stake, and every big credit card company, wireless carrier and retailer wants a slice of the pie. Besides security, one of the main issues facing the mobile payment market is regulation. It’s still unclear whether current legislation covers the mobile payment market. While some think our current laws are adequate, some believe if new regulations aren’t hammered out soon, the mobile market could become a mobile mess.

Here’s a breakdown of the main arguments.

Viewpoint 1: The current payment laws are fine

Since most products are linked to credit cards or other regulated consumer accounts, some say that mobile payment systems are already covered by existing legislation. The two main laws proponents of this viewpoint highlight are the Electronic Fund Transfer Act, which includes, among other things, safeguards against unauthorized transfers, and the Truth in Lending Act, which requires lenders and creditors to disclose costs and fees.

Jessica Sklute, special counsel at Schulte Roth & Zabel LLP, admits that mobile payments may have some additional complexities due to extra players, such as the mobile carrier. “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,” she said.

Viewpoint 2: The laws should be adapted or new ones should be made

Those in favor of revising the existing laws or writing new ones point to the lack of coordination between key government agencies that regulate the players involved in the mobile payment market. While many consumer protection responsibilities have transferred over to the Consumer Financial Protection Bureau, the Federal Trade Commission still retains a measure of oversight over other consumer products. Meanwhile, the Federal Communications Commission, which supervises telecommunications providers, may also have a stake in regulating the mobile payment sphere. 

“There aren’t really any lines of communications now between the FCC and the bank regulators,” said Timothy McTaggart, partner at Pepper Hamilton LLP. “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.”

Suzanne Martindale, staff attorney for Consumers Union (the publisher of Consumer Reports), has also noted the troubling lack of protections for those who link prepaid cards to mobile payment systems.

“Traditional credit and debit cards have mandatory protections under existing law; however, prepaid cards do not. Mobile payments linked to a prepaid phone deposit or phone bill are especially problematic, because they do not fit neatly into existing legal categories. Wireless carriers may provide voluntary protections, but they are not disclosed in customer contracts.”

“Carrier billing” transactions—like buying a ring tone or donating to a certain cause by texting a “short code” like “REDCROSS”— charge directly to your phone bill, and the guidelines governing them are murky at best. As Martindale points out, customer contracts lack certain protections. If you notice a weird charge on your phone bill, the disputation process is governed solely by the wireless carrier’s voluntarily created policies. (And what does “voluntarily” mean, anyway? Does that imply that these guidelines are optional, and we should thank our carriers for graciously providing these protections?)

Viewpoint 3: The time isn’t right to change or add laws

While those in favor of Viewpoint 2 would most likely advise that we amend the current legislation as soon as possible, others argue that we should wait and see what happens with mobile payments to avoid crushing a burgeoning new industry.

“I would not say that there is any need for policymakers to get involved in making new policy or rules at the present time,” said Andrew Lorentz, partner at Davis Wright Tremaine LLP. “The market is way too young. There is a major risk they will strangle these innovations right in their cradle.”

What’s Next?

The debate’s only starting to heat up, and it’s too soon to determine whether Congress will consider new legislation. Still, some lawmakers already seem eager to tackle the challenge of devising regulations for mobile payment.

“Is there one agency? Should there be several? Who’s going to regulate this?” asked Rep. David Scott at the hearing before the House Financial Services financial institutions subcommittee.

Rep. Shelley Moore Capito said she expects some big changes ahead. “We are, I think, on a precipice of some fundamental change in the way money is exchanged between consumers and businesses,” she said during the House hearing. “There’s a lot for Congress, banks, regulators, retailers, and customers to learn. Most importantly, we want to make sure these payments are safe and secure.”

It will be important to keep up with the debates surrounding the mobile payment market in the months ahead—especially if the experts surveyed in the Pew study are correct in their 8-year prediction. Stay tuned!