Lawmakers, Legal Experts Weigh Case For Mobile Payments Regulation

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

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," Suzanne Martindale, a staff attorney for Consumers Union, says.

At one of two introductory hearings on the topic last month, senior Rep. Shelley Moore Capito, R-W.Va., 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, testifying at a March 22 House hearing Capito chaired, 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. Many industry observers agree it will not be overnight (see story). 

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," says 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," says 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," says 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."