E-commerce has led to a rapid expansion of the options and methods of executing payments.
Each new development brings new technical and legal challenges. An often overlooked challenge is how to allocate responsibilities and minimize risks associated with enabling new payment options. From the legal side, taking time to identify the questions of responsibilities, benefits, and risks at the outset can save everyone uncertainty and headaches when the technology eventually breaks down and/or the unexpected occurs.
One of the realities in any industry is that innovation often comes from the outside. New playerswhether startups built out of someones garage, small companies incubating technologies first conceived in a university, or big companies bringing existing technologies to a new industryof are the driving force behind major new developments. The payments industry is no different: As existing, industry-leading payment providers look to integrate new payment options such as Bitcoin, e-wallet services, charging with a mobile phone or to a customers mobile phone account, or EMVtechnology, they often face the choice of spending years and untold sums trying to catch-up with new technologies, or instead purchasing those services from the innovators in order to be able to offer those services to the payment providers customers in relatively short order.
Whenever two companies partner to deliver a new product or service to end-users, there is a need to define who is responsible for each part of bringing that good or service to the customers, and who receives what economic and non-economic benefit. There are myriad questions that experienced business leaders, and their lawyers, have to answer before the first new product/service is offered to the first customer. Likewise, the two companies should agree at the outset on what could go wrong in the delivery of that good or service, who will be required to respond and how when something does go wrong, and who ultimately will be liable for the costs of that response. If these issues are not carefully considered, negotiated, and agreed at the outset, they will surely become the subject of major disputes if something does go wrong, the unexpected happens, or the relationship ends.
When a larger, established company partners with a startup, there is an added dimension of whether the smaller of the two can handle the magnitude of the risk. While it is tempting for the larger company to presume the smaller innovator will be responsible for the new technology they are bringing to the partnership, as a practical matter, it is likely that the larger company may be left holding the bag if the new technology fails or is compromised and the smaller innovator does not have the financial wherewithal to correct the situation. While the established industry leader could insist on only dealing with companies with well-established financial strength, or instead insist on the smaller company providing substantial financial security, doing so may leave the industry leader without the ability to bring the new technology to its customers. In those circumstances, the industry leaders best choice may be to still contract with the innovator but insist on strict measures of transparency and accountability from the innovator to keep track of, and hopefully avoid, the type of failure by the innovator that could lead to sizeable losses for both partners.
As partnerships are formed to bring new payment technologies to market, participating companies need to carefully consider who will be responsible for what part of delivering the new payment service, who will receive what revenue and other benefits from the delivery of the new payment service to customers, and how will the costs be borne if/when there are failures in the new service.
As payment technologies evolve, there will undoubtedly be innovators leading the development of new and more attractive payment technologies, and many of the payment industry leaders (large banks, established processors, and ISOs) will find it beneficial to contract with the innovators to bring these new payment technologies to their customers. Taking the time at the outside to not just allocate responsibilities and financial benefits of bringing these new technologies to customers, but also to understand and effectively allocate the risks associated with them, will minimize disputes and enable both parties to respond quickly and effectively if something goes wrong or the unexpected occurs.
Dennis M. P. Ehling is a partner at Blank Rome LLP.