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1 Welcome to PAYMENTS 2015 PAYMENTS 2015 Mobile App: Check-in, access presentations and complete evaluations on the mobile app. Available on itunes and GooglePlay, search PAYMENTS 2015 WiFi: Complimentary Internet access is available in session rooms via the PAYMENTS network, user name and password: opentext CECs: Most sessions count toward continuing AAP accreditation. Learn more about becoming an AAP at the NACHA and RPA booth in the exhibit hall. Join the Conversation on #PAYMENTS2015 1

2 Thank you to our Sponsors 2

3 The Wild, Wild West of Emerging Payments? Duncan Douglass Partner, Alston & Bird LLP

4 Agenda Legacy Payment Methods: Round Legal Peg, Round Legal Hole Functional Overview of Emerging Payment Methods Gaining Prominence Today Regulation of Emerging Payment Methods: Square Legal Peg, Round Legal Hole? Conclusions: Do We Need a Square Legal Hole? 4

5 Legacy Payment Methods: Round (Legal) Peg, Round (Legal) Hole 5

6 Legacy Payment Methods Credit and Charge Cards Visa, MasterCard, American Express, Discover Debit Cards Visa, MasterCard, Interlink, Maestro, PULSE, STAR, NYCE, ACCEL, Jeanie, etc. Signature/offline (dual message) transactions PIN/online (single message) transactions ACH NACHA as rule-writer, Federal Reserve and The Clearing House (EPN) as operators 6

7 Legal Framework Applicable to Legacy Payment Methods Truth-in-Lending Act/Regulation Z Applies in relevant part to any person that issues a credit card and who regularly extends credit to consumers; the term credit card generally includes charge cards A credit card is any card, plate, coupon book, or other singe credit device that may be used from time to time to obtain credit Credit and Charge Cards/transactions are subject to TILA/Regulation Z for consumers/consumer credit 7

8 Legal Framework Applicable to Legacy Payment Methods Electronic Fund Transfer Act/Regulation E Generally applies to any person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services access device means a card, code, or other means of access to a consumer s account... that may be used by the consumer to initiate electronic fund transfers Debit Cards/transactions and ACH transactions involving consumer accounts are subject to EFTA/Regulation E 8

9 Legal Framework Applicable to Legacy Payment Methods Bank Secrecy Act/AML Requirements Financial institutions, including money services businesses (MSBs), are subject to federal requirements regarding the detection and prevention of money laundering and terrorist financing activities State Money Transmitter Laws Govern the activity of non-depository money service (funds transfer) providers like money transmitters, check cashers and currency dealers Typically apply to non-bank entities that take possession of or an interest in funds in the course of performing a service to transfer those funds from one person or entity to another person or entity 9

10 Legal Framework Applicable to Legacy Payment Methods Payment Network/System Rules Credit and debit card networks each have their own rules that govern transactions processed through those networks NACHA promulgates rules that govern ACH transactions 10

11 Functional Overview of Emerging Payments Methods Gaining Prominence Today 11

12 Emerging Payments Methods Digital/Mobile Wallets Staged wallets PayPal; Google Wallet Pass-through wallets Apple Pay; Isis/Softcard Mobile Carrier Billing Person-to-Person Payments (Square Cash, Facebook Friend-to-Friend) Virtual Currency Prepaid Accounts Faster Payments 12

13 Digital/Mobile Wallets Digital v. Mobile Wallet Digital Wallet any electronic wallet capable of storing payment credentials and/or electronic funds (e.g., PayPal) Mobile Wallet any electronic wallet within a mobile device that is capable of storing payment credentials and/or electronic funds (e.g., Apple Pay) Pass-Through v. Staged Wallet Pass-through Wallet a digital wallet in which the payment device/method loaded into the wallet is actually used conduct the overall transaction but the wallet form factor (e.g., mobile device) is substituted for the original form factor (e.g., plastic card) Apple Pay is a passthrough mobile wallet 13

14 Digital/Mobile Wallets Staged Wallet each transaction takes place in two separate (but related) stages: Funding Stage Wallet operator (acting as merchant/payee) receives funds through an existing payment method (e.g., credit card, debit card, ACH transfer) Payment Stage Wallet operator distributes funds to the ultimate merchant/payee using an existing payment method (e.g., credit/debit/prepaid card, ACH transfer, wire transfer) 14

15 Picture of Pass-through Wallet Copyright MasterCard 15

16 Picture of Staged Wallet Copyright PayPal, Inc. 16

17 Mobile Carrier Billing There are 3 types of mobile payments generally: Mobile wallets may be staged or pass-through, but the underlying funding source is traditional payment mechanism (credit card, debit card, ACH) Mobile purchases using a traditional payment mechanism through a mobile application or mobile web browser Mobile carrier/direct carrier billing wireless carrier permits a customer to purchase products/services from third parties and have the transaction amounts posted to the customer s wireless bill Is mobile carrier billing a unique/new payment type outside the bounds of existing payments laws? 17

18 Mobile Carrier Billing, in Action Copyright Boku 18

19 Person-to-Person Payments Generally function the same as staged wallets it s the identity of the payee that changes (person v. retailer) Include funding stage (debit or charge to payor s funding source) Include payment stage (credit or deposit to payee s account) Example: in Square Cash, the payor provides a debit card number to Square, which Square debits (as merchant) for the funding amount. Square sends the funding amount to the payee through a credit transfer over a debit card network (Visa OCT, MC Payment Transaction), using a debit card number the payee provides to Square 19

20 Virtual Currency What is virtual currency (aka, digital currency) Currency that circulates primarily in digital form; and Unlike fiat currency, virtual currency is not legal tender in any jurisdiction Types of virtual currency Convertible vs. non-convertible Centrally administered vs. decentralized Bitcoin, a decentralized convertible virtual currency, is the paradigmatic example of how a virtual currency protocol/system can operate Users can hold virtual currency in accounts at third parties and direct account providers when to transfer virtual currency to another person s virtual currency account (in a purchase or P2P transaction) Users can hold virtual currency themselves and effect their own transfers of virtual currency directly to recipients/payees 20

21 Prepaid Accounts Prepaid accounts generally include accounts accessible by a card/code/device and that are either pre-funded or capable of being loaded with funds in the future Prepaid card-based prepaid accounts have been around for years Several emerging payment methods could be characterized as involving prepaid accounts Staged digital/mobile wallets that are prefunded (i.e., that receive/hold funds other than as part of a single, twostage transaction) Person-to-Person payment methods (which, as noted above, frequently resemble staged digital/mobile wallets) 21

22 Faster Payments No consensus operational framework has been developed Faster ACH Real-time payments over existing card networks (e.g., ATM/PIN debit networks) Direct exchange between institutions (decentralized transfers) over IP networks using a standardized protocol Real-time messaging/funds posting with delayed settlement Except for direct (decentralized) exchange, most of these proposals look very similar to legacy infrastructures/payment methods 22

23 Regulation of Emerging Payment Methods: Square Legal Peg, Round Legal Hole? 23

24 Digital/Mobile Wallets Pass-through Wallet simply form-factor substitution that retains the character of the original, underlying legacy transaction method Debit card in wallet = debit card transaction subject to debit card network rules and applicable laws (EFTA/Regulation E for consumers) Credit card in wallet = credit card transaction subject to credit card network rules and applicable laws (TILA/Regulation Z for consumers) 24

25 Digital/Mobile Wallets Staged Wallet couples two transactions, each of which individually relies on and retains the character of the original, underlying legacy transaction methods If the funding stage involves a debit card, the funding transaction is a debit card transaction subject to card network rules and applicable laws (EFTA/Regulation E for consumers) If the payment stage involves an ACH transfer (from the wallet provider to the payee), then the payment transaction could be characterized as a commercial ACH transaction subject to ACH Rules and applicable laws or as a consumer prepaid transaction (see Prepaid Accounts below) 25

26 Mobile Carrier Billing Mobile wallets are really another form of digital wallet with same ties to legacy payment methods referenced above under Digital/Mobile Wallets Legacy payment system rules and laws apply to pass-through and staged mobile wallets in the same way as they apply to other types of digital wallets Mobile purchases (through mobile applications/mobile browsers) are simply a way to use a mobile device to present a legacy payment method for a transaction Doesn t even involve form-factor substitution Mobile carrier billing may be unique/new Doesn t leverage legacy payment networks or infrastructure But, it looks/acts very similarly to a legacy payment type: a charge card (subject to TILA/Regulation Z for consumer credit) 26

27 Person-to-Person Payments Frequently leverage the same model as staged digital/mobile wallets (described above) In the Square Cash example, the funding stage is a debit card transaction (subject to card network rules and applicable laws (EFTA/Regulation E for consumer accounts)) and the payment stage is a debit card transaction (subject to card network rules and applicable laws (EFTA/Regulation E for consumer accounts)) 27

28 Virtual Currency Virtual currency does not have a single analogous legacy payment method Intermediated virtual currency accounts have a character very similar to prepaid accounts (just funded with virtual rather than fiat currency) The CFPB has so far declined to draw an express analogy between accounts funded in virtual currency and accounts funded in fiat currency Intermediated virtual currency transactions have a character very similar to money transmitter/money services business activities FinCEN and a number of states have declared a number of virtual currency business activities as subject to the Bank Secrecy Act and/or state money transmission laws Direct transfers of virtual currency (involving no account or transaction intermediaries) most closely resemble the electronic equivalent of cash transactions and do present a unique case 28

29 Prepaid Accounts Other than payroll and government benefit cards, not expressly subject to EFTA/Regulation E (yet!) CFPB released a proposed rule to extend Regulation E to Prepaid Accounts in late 2014 Proposed definition of prepaid account includes reloadable and non-reloadable general use prepaid cards as well as digital/mobile wallets that can store funds Thus, staged wallets capable of storing a balance/holding consumer funds will be subject to the same treatment as other prepaid accounts (resulting in regulatory treatment of the payment stage of a staged wallet transaction on par with other prepaid accounts/transactions) 29

30 Faster Payments As noted, faster payments initiatives may resemble existing infrastructures and transaction types (such as debit card transactions subject to debit network rules and related laws) or may involve construction of new rails that require new rules (although existing laws EFTA/Regulation E) will continue to apply to transactions involving consumer accounts Proposals involving decentralized/direct exchange of faster payments among institutions based on a common protocol have Bitcoin-like characteristics (although these transactions would still be intermediated from the end-user s perspective) 30

31 Conclusions: Do We Need a Square Legal Hole? 31

32 Emerging Payments Simplified Digital/mobile wallet Pass-through wallet = subject to same legal requirements as apply to underlying payment method in the wallet; it s just form factor substitution Staged wallet = funding stage is subject to same legal requires as funding method; payment stage is either a commercial transaction (between wallet provider and retailer) or a prepaid account transaction (entitling the consumer account holder to prepaid account protections, when the CFPB finalizes them) Mobile carrier billing = charge card (subject to some debate) 32

33 Emerging Payments Simplified Person-to-Person Payments = see staged wallet above Virtual Currency = Intermediated accounts = prepaid accounts Intermediate transactions = money transmission Disintermediated accounts/transactions = electronic cash? Prepaid = Prepaid (its own category) Faster Payments = depends, but likely will fit into existing regulatory frameworks, certainly for consumer protection 33

34 Are We in the Wild, Wild West of Emerging Payments? We may be in the west much of the recent technology-driven payments innovation has originated in the west There certainly have been some innovated (perhaps even wild) payments industry developments Emergence of virtual currency Mobile carrier billing Some Faster payments proposals But the legal environment for emerging payments isn t as lawless as some might suggest 34

35 Conclusion Emerging payment methods generally fall within existing legal/regulatory frameworks Providers of emerging payments technologies (particularly those not used to complying with payments regulations) may perceive that their solution is beyond the reach of existing laws/regulations, but most often these perceptions are mistaken No square legal hole required, at least not yet 35

36 Duncan Douglass Alston & Bird LLP One Atlantic Center 1201 West Peachtree Street Atlanta, GA Telephone: (404)

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