Net neutrality's impact on payments
On Wednesday, a number of prominent internet companies and lobbying groups protested the likely rollback of net neutrality rules by the FCC that were put in place under the Obama administration. The first deadline for public commentary on the proposed changes occurs this coming Monday.
The most immediate concerns are from companies such as Netflix and Facebook that have business models built around consumers having unbridled access to high volumes of streaming data, irrespective of their internet service provider or mobile network operator. However, removing restrictions on companies such as Comcast, AT&T and Verizon could have clear repercussions for the payments industry as well.
It is likely that ISPs and MNOs have not forgotten their ambitions in digital payments. Since the demise of Softcard with its acquisition by Google in February 2015, MNOs have been relegated to that most hated of positions, a “dumb pipe” offering data as a paid utility like water or electricity.
It is unlikely that their collective aspirations have gone away, particularly given the growing opportunities for digital payments outside of the traditional retail store environment. With such ubiquitous access to data via Wi-Fi and cellular networks, it is easy to forget that the data spigots can be opened or closed. Net neutrality regulations impose a framework for preventing this kind of interference and a level playing field for all data traffic.
The payments industry has already gotten a taste of what a non-neutral internet would look like; the TV satirist John Oliver's most recent episode on net neutrality used the telcos' treatment of Google Wallet as a clear-cut example of how powerful companies can use their position to stifle digital rivals.
Removal of these restrictions creates an opportunity for metering and control of access. With internet-connected devices becoming more pervasive in all aspects of our lives and with payments becoming an integral component of these, there is money to be made in whose data gets to go first.
The near future
If net neutrality rules change, the impact is most likely to be felt in emerging technologies rather than legacy infrastructure.
“Most payment transactions between a bank and a processor are on leased lines that are encrypted, not the internet,” says Tim Sloane, VP of payments innovation at Mercator. “Large merchants with centralized payment switches are also almost certainly using leased lines to the acquirer. So the only area where the loss of net neutrality might have an impact is on data transferred between the user and the e-commerce website and the payment data represents a very small fraction of that interaction."
Bitcoin and other nascent cryptocurrencies may have more to fear, as they owe their existence to the internet.
"Degrading net neutrality could have a major impact on cryptocurrencies," says Dan Van Dyke, senior analyst at BI Intelligence. “ISPs could throttle or block nodes, clients and exchange sites. That would be particularly problematic because transaction speed is a big issue as bitcoin scales. Over the past couple of years, it has led to increasing volatility with transaction times. And given there is no centralized authority to shoulder the burden of paying for fast lanes, and because nodes are decentralized, ISPs could easily relegate cryptos to the slow lane and inflate transaction times in the process."
In the world of payments, transaction latency is a deal breaker. Current EMV authorization times at the point of sale are tolerated since most consumers view it as the only option, but in many other UX scenarios, customers would seek alternatives.
For newcomers to the payments scene that have built business models around cloud-based services, the removal of net neutrality restrictions should be a cause for concern because a third party could hold their data speeds for ransom.
Again, this is a bridge yet to be crossed and there are more pressing matters to attend to with payment apps and cloud based services.
“Latency is a concern, but there are bigger concerns today with payment apps such as the lack of a true democratized access to hardware, access and open standards,” says Cherian Abraham, digital payments and commerce executive at Experian PLC.
The long term
An intangible aspect of removing net neutrality restrictions is the unknown impact that this could have on future innovation in payments. Smaller newcomers could suffer at the expense of larger and more powerful companies that have the spending and lobbying clout to influence preferential treatment.
“In general, I believe that openness and neutrality is more positive for competition and innovation,” says Deb Baxley, partner at Paygility Advisors. “Just as startups in the '00s that are huge companies now might not have thrived if the internet had not been neutral, today's fintech startups may suffer from lack of a level playing field.”
For financial services providers, the repercussions could be far-reaching should internet service providers and and mobile network operators be given such an advantage.
“The lack of open internet rules could prove problematic in the future if carriers look to have a bigger presence in the financial services space,” says Safwan Zaheer, director, financial services digital, and U.S. fintech lead at KPMG US. “When you consider the impact it would have on everything from banking to content creation to digital advertising, it’s clear the fallout would be colossal.”