What Are Mobile Payments?

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1 MOBILE PAYMENTS OVERVIEW CSBS Legal Conference August 25, 2011 Cliff Stanford Alston & Bird, LLP What Are Mobile Payments? Payment transactions between two parties initiated by means of a mobile device Contrast: mobile banking Proximity Payments technology embedded in/displayed on the payor s mobile device interfaces with the payee s point-of-sale equipment to initiate payment Customer uses a mobile device containing an embedded NFC chip to make a fast food purchase using installed NFC-equipped POS terminals Customer scans a 2D barcode displayed on the mobile device screen to make a purchase at a coffee shop that supports a mobile gift card program Remote Payments payor uses mobile device to initiate payment without regard to proximity to the payee/point-of-sale Purchase payment: person-to-business transaction using SMS or WAP technology on the mobile device (Examples: SMS to make a vending machine purchase; WAP to purchase goods through a merchant s mobile website) Mobile money transfer: peer-to-peer transfer from one user of the mobile payment system to another system user (Example use of SMS to initiate transfer of funds to another user of the same money transfer service) 1

2 U.S. Lags the Rest of the World Developing world (e.g., India, Kenya, Philippines): Using mobile text messaging/sms g for remittances and P2P money transfers Extensive unbanked populations and lack of banking infrastructure, but widespread mobile phone use Mobile payments can replace risky use of cash Developed World (e.g., Japan, Korea, Singapore): Consumers use mobile phones with NFC chips to pay for transit and/or retail Strong partnerships: mobile network operators, banks, and governments Greater reliance on cash transactions than on cards-- mobile payments can more easily replace Governments have been engaged, providing early regulatory clarity Asian countries lead, but Europeans have experienced some success with mobile purchase payments and mass transit Supply-Side Factors: Why the U.S. Lags Broad, often uncoordinated spectrum of stakeholders involved U.S. banks and wireless carriers have lower market concentration as compared to their overseas counterparts Technological incompatibility across devices and operating systems Security concerns Concern over implementation costs Concern over lack of clear regulatory guidance Demand-Side Factors: U.S. has well-established electronic payments system with numerous existing options to meet consumer needs and U.S. consumers historically i have used cash less frequently Debatable whether mobile payments are meaningfully faster or easier than current payment methods widely-used in the U.S. (e.g., debit) U.S. relies less on mass transit an area where mobile payments has enjoyed success in other developed countries 2

3 Bank-Driven Model Financial institution offers account access through mobile device-initiated transactions Transactions are processed over traditional payment networks/channels Bank typically holds funding account (DDA, line of credit, prepaid account) and uploads traditional credit, debit or prepaid card account number or DDA account identifier to mobile device (which may be a contactless sticker) Full complement of existing payments laws should apply E.g., Bling Nation contactless stickers Mobile Payment Service Provider (MPSP)-Driven Model MPSP offers mobile payment capabilities to its service users (which may include small merchants) Transactions are processed over MPSP s systems MPSP may access existing customer funding source held at/issued by a third party (e.g., a DDA or payment card) or may establish a dedicated funding account If transaction funding accounts are held at traditional financial institutions, regulatory framework should apply in the same way as it applies to payment service providers operating in the internet space today (EFTA/Regulation E; MSB/MT; BSA/AML) If MPSP holds funding accounts (e.g., on a prepaid basis) or extends credit, MPSP should be subject to broader federal and state regulations, similar to those that would apply to a bank or prepaid provider performing similar functions (albeit not prudential oversight) PayPal Mobile; Obopay; Square 3

4 Mobile Network Operator-Driven Model Transactions are processed over the operator s wireless network Charges appear on payor swireless bill and/or are funded d on a prepaid basis Application of regulation varies substantially depending on funding/settlement aspects E.g., BilltoMobile, Zong (ebay) Some Players to Watch ISIS Verizon Wireless, AT&T and T-Mobile joint venture partnered with V/MC/Amex/Discover to enable NFC capability on mobile phones Google Wallet: Citi, MC, First Data, Sprint Square (mobile checkout) Apple??? First Data: trusted service manager concept 4

5 VISA VISA just announced a set of EMV incentives/disincentives in its security requirements and allocation of fraud risks for payments that will likely help drive a move to mobile NFC EMV= a global standard for inter-operation of chip cards (or mobile devices) and capable point of sale (POS) terminals and automated teller machines (ATMs), for authenticating credit and debit card transactions Concept: solve the chicken/egg problem Some Thoughts on Regulation Federal regulators have thus far been reluctant to state whether existing laws governing traditional payment products and services apply to mobile payments; regulatory guidance may provide useful clarification If gaps in regulatory coverage or prudential oversight are found to exist, certain actors in the mobile payments landscape may be disadvantaged and/or unmitigated risk may slow advancement Is regulation of mobile payments principally a consumer protection issue (CFPA)? Are there safety and soundness issues that should be addressed in non-bank driven models? To what extent are mobile payment transactions that rely on traditional retail payments funding sources (DDA, line of credit, prepaid account) subject to the same regulatory requirements as their more traditional predecessors 5

6 Clifford S. Stanford Clifford S. Stanford Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, GA Telephone: (404)