I. Mobile Payment Systems as a New Payment Platforms– What’s New, and What’s Not New?
Several of the participants observed that regulatory decisions in the emerging mobile payments platform will depend largely on the extent to which m-payment systems develop as an independent platform. Georgetown Law Professor Adam Levitin outlined three different models for m-payment systems. First, mobile payment systems could work as an extension of existing payment models by providing another means for transmitting payment authorization information between merchants and consumers. For example, Square, an m-payment system founded by Twitter co-founder Jack Dorsey and recently recognized by Time Magazine as one of the 50 Best Inventions of 2010, allows merchants to directly accept credit card payments through a small device attached to a cell phone.
Second, mobile payment systems could integrate existing payment models with other incentive systems such as merchant advertising or rewards programs. One example: Shopkick is a location-based mobile application designed to enhance the offline shopping experience by providing consumers with loyalty rewards from merchants when they visit physical stores.
Finally, mobile payment systems could function as completely independent payment platforms. This third possibility, which Levitin described as a “game-changer,” might look something like a mobile PayPal, in which transactions are done through a channel completely separate from existing payment systems. Carol Coye Benson, founder of the payments consulting firm Glenbrook Partners, noted that in this way, m-payment systems have the potential to streamline and “decouple” the existing payment model by more directly connecting merchants to consumers. This could create a fundamental shift in the existing power balance between merchants and credit card companies by giving merchants a larger “piece of the pie” in consumer transactions.
II. Consumer Expectations – Benefits & Risks
More than two-thirds of the world’s population has a mobile phone, creating opportunities for payment platforms in both developed and developing nations. In the former, where the market for mobile telephony is mature, mobile payment systems,have the potential to fundamentally shift the existing balance between merchants and payment companies. In the latter, the explosive growth of mobile payment systems like M-Pesa in Kenya, used by approximately fifty percent of the country’s adult population, demonstrate the potential for such systems to transition the unbanked into mainstream financial services.
But there are also risks. M-payment systems have not expanded beyond niche markets in most Western countries. Regulators charged with overseeing mobile payment platforms face the challenge of identifying a framework that ensures an adequate level of consumer protection while allowing for experimentation in a burgeoning industry.
Many of the presentations focused on the connection between regulation and consumer expectations. Should the rules that govern mobile commerce be negotiated through voluntary private contracts, or do we need a regulatory framework that ensures consumer expectations are protected upfront?
Potential consumer benefits from transacting with non-banks offering new, and largely unregulated, m-payment services include access, convenience, and affordability. In developing countries with significant unbanked populations and widespread mobile phone penetration, m-payments can provide a critical means for accessing financial services. Ignacio Mas, representing the Bill and Melina Gates Foundation, noted that twice as many people have mobile phones as bank accounts in Kenya. The thirteen million users of M-Pesa represent seventy percent of Kenyan households, including fifty percent of unbanked and sixty percent of rural households. In developed markets, Near Field Communications (NFC) technology that enables customers to use their phones as credit cards to pay at the point of sale promises the convenience of reducing dependence on plastic. Offering a more affordable means of completing sales is a third consumer advantage; nascent m-payment alternatives to credit card networks could give merchants a means of lowering overhead on transactions. Similarly, U.C. Irvine Professor of Anthropology Bill Maurer stressed the value of m-payment systems to consumers in developing countries. For example, in countries where lower denominations of currency have a very low value, physically storing currency may be impractical but m-payments offer consumers a means of saving small amounts of currency.
While voluntary arrangements between consumers and m-payment providers might best support the growth of the industry, completely ceding oversight to industry self-regulation means that consumer risks may go unaddressed. Osgoode Hall Professor of Law Benjamin Geva suggested that while we have the tools to deal with the development of m-payments, it may be time to revive some ideas about uniform payment law in order to address common issues that exist across payment platforms. Gail Hillebrand of Consumers Union, and Mark Budnitz of the National Consumer Law Center, stressed the need for regulatory standards that ensure consumer trust in the payment system, regardless of the means used for payment. Hillebrand expressed concern that m-payment systems currently operate in a “regulatory vacuum,” and noted that it was not clear how the protections provided by the Truth in Lending Act, the Electronic Fund Transfer Act (Regulation E), and other consumer protection laws would apply to m-payment systems. In the absence of safeguards that exist to varying degrees on other payment platforms, consumers may be vulnerable to processing errors, theft or unauthorized use, and infringement of data privacy, among other risks. Chris Hoofnagle of UC Berkeley Law warned of the risk of lock-in, noting that the two ingredients of m-payments, telecommunications and banking, are both industries that try to “own” the consumer relationship. Thomas Brown of O’Melveny & Meyers LLP urged participants to consider that m-payments may succeed without the bundle of rights consumers associate with credit cards, and that much of that bundle may be superfluous in certain contexts.
In her exploration of governance systems for m-payments, Jane Winn, Professor of Law at the University of Washington, argued that an intermediary approach of co-regulation between the public and private sector could avoid the pitfalls of premature regulation, while ensuring some government oversight to provide baseline consumer protections.
III. Specific Regulatory Models – What’s “Good Enough”?
Building from theoretical discussions about governance, several of the presenters shared empirical observations about the efficacy of various m-payment regulatory approaches based on their experiences in international markets. Professor Joel Ngugi, of the University of Washington Law School, framed the discussion by noting the need to strike the right balance between innovation and regulatory safeguards.
Andrew Bennett, of the Department of Commerce, gave a big-picture report of mobile phone markets, noting that despite the growth of “smart phones” in developed countries, four out of five mobile phones in the world are limited to voice and text capabilities.
Ignacio Mas, delivering the keynote presentation about his experiences with mobile payment platforms in Africa, stressed that the level of regulation employed in the developing world should reflect the context in which the platform is used. Mas noted that, just as a smaller bridge may be appropriate for a smaller river, a lighter-touch and more flexible regulatory framework may be appropriate for m-payment systems in developing markets. Reflecting on M-Pesa, Mas argued that since the amount of money being transferred through the network is quite small, there may not be a practical justification for applying the potentially burdensome regulations governing banking institutions. Still, regulators are imposing strong rules in some contexts, even where dollar amounts are small. For instance, Scott Morris of Trilogy International noted that an m-payment system started in Haiti had to comply with Know Your Customer (KYC) rules, and maintain a 100% reserve to secure funds in the system. KYC rules, in particular, can present a daunting hurdle for introducing an alternative payment system in the developing world.
Others stressed the need for oversight of mobile payment systems, especially in light of lessons learned from the recent fail of financial institutions acting in high-growth, high-risk markets. Maria Stephens of the USAID Bureau for Economic Growth & Trade discussed various risks involved with m-payment systems, and what policies might be responsive to problems such as transaction disputes and the potential for undersecured credit. Stephens suggested that regulators should look to a risk management system, such as the Food and Drug Administration’s Hazard Analysis & Critical Control Points (HACCP) framework used to protect food safety, as a model for addressing the risks presented by m-payment systems.
Closing the conference on a more optimistic note, Dr. Thaer Sabri, of the Electronic Money Association, a European trade association comprised of electronic money issuers, described the relative success of EU regulatory efforts in the m-payment space. Despite a rocky start, Sabri emphasized that revised initial capital and ongoing funds requirements, along with other regulatory changes, have significantly lowered the barrier to entering the EU m-payments market. Sabri expressed enthusiasm about the future of the EU market, but cautioned that there were still challenges in shaping the evolving landscape of m-payment regulations.