New nonbank companies entering the payments industry should be subject to the same regulatory oversight and transparency requirements as their financial institution peers, according to a report released by the American Bankers Association.
The June 19 report, "The Changing Face of the Payments System: A Policymakers Guide to Important Issues," argues that the rapid pace of payments technology innovation has created regulatory gaps that threaten to undermine the integrity of the payments ecosystem.
"In order to ensure that all stakeholders in the payments systemincluding consumers, banks and nonbanksare protected from financial, reputational, and systemic risk, all entities providing payment services should be subject to similar standards and cost structures so as to not drive the market to poorly regulated segments," the report reads. "Otherwise, less-regulated entities (i.e., nonbanks) will rush to offer enticing products that skirt the edges of traditional banking regulations, yet often contain terms and conditions that are not in consumers best interests."
In addition to calling for a reexamination of the current regulatory environment, the ABA advocates for increased transparency in transactions conducted with alternative payment methods like digital wallets. Of particular concern to the ABA are digital wallet transactions that identify the wallet provider, rather than the merchant, as well as multiple wallet payments that are aggregated into one transaction from a consumer's account.
"Linking transactions on a one-for-one basis, and ensuring that every transaction is mapped to the actual merchant, would greatly enhance efforts to preserve the overall integrity of the payment system," the report says.
MasterCard plans to charge a fee to digital wallets that list themselves instead of the merchant of record in transactions. Visa's CEO called the fee "totally appropriate," though Visa has no plans to add its own. Discover says it does not plan to "tax" digital wallet providers.
The ABA report was created by the trade association's Emerging Payments Advisory Group, a consortium of 13 banks that began studying the retail payments market this year. The banks contend current digital wallet practices undercut consumer protections, create confusion and hurt fraud detection and prevention efforts.
"For example, what used to appear on a consumers account statement as a $150 purchase from 'ABC Hardware Store' a description likely to jog a persons memory of the transaction could now appear as a $150 transaction from "Wallet Provider X,'" the report says. "Besides the obvious potential for consumer confusion, this approach can undermine banks fraud prevention efforts, since without accurate merchant information, it is more difficult for issuers to detect how a series of transactions looks like suspicious activity and block fraudulent purchases."
Gaps between depository institutions subject to oversight by banking regulators and the new, nonbank entrants that are regulated by the Federal Trade Commission could create weak links in the payments ecosystem that could be exploited by fraudsters.
"It is possible that some companies will focus on delivering a great user experience and give less attention to the 'plumbing' of securing payment card information," the report says. "Yet, if this database is ever compromised, the biggest loser might not be the company with inadequate security, but its users and all of the banks that issued cards to these consumers."
"Today, the seamlessalmost invisibleoperation of the nations payments system is largely taken for granted. But the lessons of history must not be forgotten," the reports continues. "Without proper safeguards the system can break down, particularly as criminals seeking to compromise the system increase their sophistication. As new technologies and payment instruments are introduced, it is crucial to ensure they do not present significant, unnecessary risks."