Legal and Regulatory Challenges Best Practices for Minimizing Risks and Liabilities With Wireless Financial Transactions

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Mobile Payment Systems: Legal and Regulatory Challenges Best Practices for Minimizing Risks and Liabilities With Wireless Financial Transactions THURSDAY, FEBRUARY 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Duncan B. Douglass, Partner, Alston & Bird, Atlanta Jarrett Helms, McKinsey & Company, Atlanta The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Conference Materials If you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to Conference Materials in the middle of the left- hand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

3 Continuing Education Credits FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: Close the notification box In the chat box, type (1) your company name and (2) the number of attendees at your location Click the SEND button beside the box

4 Tips for Optimal Quality Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial and enter your PIN -when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

5 Mobile Payment Systems: The US Market and Its Legal and Regulatory Challenges Jarrett Helms, Payments Practice Expert McKinsey & Company Duncan Douglass, Partner Alston & Bird LLP CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company and Alston & Bird is strictly prohibited

6 Defining the U.S. Mobile g Payments Market

7 There are numerous forms of mobile payments, we will concentrate on using the mobile device at the traditional point-of-sale Traditional POS Near Field Communication based POS purchases NFC alternatives (e.g., SMS, barcodes, bump, Bluetooth, etc) The use of a mobile device to initiate bill payment or money transfers Other POS Money Transfer & Bill Pay NFC Mobile e- commerce Mobile POS Digital Content Mobile Commerce Payment processing from a mobile device (e.g., card swipe sleeve ) Mobile purchase of digital content (e.g., music, books, games, apps, etc) Mobile purchase of physical goods and services (e.g. shopping via a browser or app) SOURCE: Team analysis McKinsey & Company 7

8 A rich ecosystem of mobile payment services is evolving that will benefit from mobile wallet capabilities Potential mobile wallet applications Alternatives to the traditional card / cash based POS experience (e.g., NFC, bar codes, etc.) Deploying coupons, offers, etc. via mobile device (e.g., location based offers) Enabling online banking and bill payment via mobile device Mobile Incentives Banking and bill pay In-person retail card / cash alternative Mobile Wallet E- Commerce checkout Mobile POS P2P / social EXAMPLES Payment processing from a mobile device (e.g., card swipe sleeve ) Mobile purchase of digital content (e.g., music, books, games, apps, etc) Services that streamline the ability to pay for mobile / ecommerce transactions initiated via mobile SOURCE: McKinsey Payments Practice McKinsey & Company 8

9 Mobile payments themselves are unlikely to generate significant new payments revenues US Mobile Payment Transaction Value 1 Billions % % of merchant terminals that are NFC enabled Cash displacement Existing card-based spend via mobile % 44 BN represents less than 1% of total card spend In general, mobile payments will simply shift the form factor of a card transaction from a plastic card to the mobile device. This does not change the economics of the base transaction 1 includes only NFC based transactions originated in the US 2 Effectively zero volume; mobile NFC pilots may have generated some volume SOURCE: McKinsey US Payments Map, team analysis McKinsey & Company 9

10 So why is there a big fuss over mobile payments? Mobile payments offer more opportunities to attackers than incumbents, threatening direct consumer relationships for issuing banks and providing new revenue streams for entrants Area of change: ILLUSTRATIVE Consumer Card controlled by an issuing bank Merchant Terminal Processor Network Issuer Loaded into E-wallet controlled by any of the following: 1 Optional SOURCE: Team analysis McKinsey & Company 10

11 Integrating digital wallets into mobile devices presents many opportunities to improve customer experience and generate new revenue streams Key opportunities for in-person mobile payments: NFC Example 1 Provide enabled devices 3 Telco s Handset manufactures NFC chip manufacturers Mobile OS developers Develop ad / loyalty platforms Groupon / Scoutmob Issuing Banks Card Networks Mobile components EXAMPLES Transaction flow Consumer NFC Enabled Device e-wallet Coupons / Rewards & Loyalty 1 Contactless Terminal Merchant Payment Processing Merchant offers 1 1 Optional 2 4 Develop e-wallet Telco s Google / Apple Issuing Banks Coupon providers Card Networks PayPal Other 3rd parties Develop POS systems Verifone ViVOtech The mobile payments ecosystem promises a richer shopping experience for consumers, with real-time, contextual information and offers. SOURCE: Team analysis McKinsey & Company 11

12 New technologies and functionalities have lead to new purchase & payment related products and applications for the mobile device Hype around mobile payments tends to be blurred together with hype over other mobile based products and services, but some payments applications are coming online Couponing / Rewards Mobile ticketing Location based marketing Mobile POS Transaction based marketing NFC SOURCE: Team analysis McKinsey & Company 12

13 But further convergence among these new applications is likely, and could create a powerful tool for consumers and merchants alike The next generation of payments applications could combine the functionality of several existing mobile products to create a more integrated and compelling product Marketing Money Savings Mobile Payments New Application Location based marketing Budgeting applications + + E-wallet = Transactional based marketing Coupons / Rewards NFC New combined application SOURCE: Team analysis McKinsey & Company 13

14 Driving consumer and merchant adoption is a classic chicken or the egg conundrum you can t get one without the other The two-sided market dynamics in payments have historically made it very difficult to build new payment systems. Mobile is no exception. A network effect is needed. A network effect depends on: 1. Enough consumers using mobile to make it compelling for merchants to adopt 2. Enough mobile enabled merchants to make adoption meaningful for consumers Achieving a network effect for mobile payments is hampered by both real and perceived hurdles: A B C Basic concerns: Failure of contactless cards to achieve adoption Lack of a single standard for mobile payments Low, but growing penetration of smartphones Consumer perception of security Consumer payment preferences and behaviors: The mobile wallet will need to allow for the same basic payment preferences that consumers have today Cost benefits to the merchant: Merchants want to know that enough consumers will demand mobile payments, that it merits upgrading their existing systems, and implementing new marketing programs The most problematic hurdle is simply the lack of a clear value proposition for both merchants and consumers. Mobile payments are not necessarily faster, cheaper, or more reliable; and on their own they may not provide enough value for consumers or merchants to shift payment behavior. To be successful they must partner with other value added products SOURCE: Team analysis McKinsey & Company 14

15 The competitive stalemate over mobile is beginning to thaw or is it? Numerous players are moving forward, but in different directions Company Description Implications A joint venture between AT&T, T-Mobile, and Verizon Wireless Establishes an open mobile wallet via NFC enabled smartphones across all major card networks The Telco response to mobile payments Theoretical reach of 200MM US consumers on the three largest networks Google brought the first consumer available NFC capable phone and wallet to market Hold patent for proximity based searches allowing GPS-based couponing and marketing Developing NFC-based coupons with Ingenico Newly released Android Honeycomb OS leverages tablet computers in addition to regular mobile devices Apple stalled in implementation of NFC into the iphone5 with potential plans to create their own NFC technology in 2012 ipad creates even more demand for micro-payments payments Large base of credit cards from itunes accountholders PayPal takes alternative route to breaking into mobile payments space Recent acquisition of Fig Card to obtain contactless payment terminal alternative via USB device that plugs into POS terminals allowing merchants to accept NFC payments Acquires Where.com, a GPS-based loyalty coupon app Mobile payments with PayPal account more secure Rebuffs a $6 BN buyout offer from Google Growing rapidly with 40 million subscribers currently Partners with CardStar, an iphone app that consolidates and organizes consumers loyalty cards, to offer targeted couponing Global expansion with acquisitions worldwide (e.g. Berlin, Chile, China, India, Japan) SOURCE: Internet, team analysis Google is keen to make sure that they continue to own every form factor for web based searches Google could leverage their patent to potentially ti close out other parties wanting to deliver GPS-based couponing Goes against conventional wisdom that NFC is the agreed upon standard Preexisting database of accountholders gives Apple a significant jump on other e-wallet providers Goes against conventional wisdom that NFC is the agreed upon standard The simplicity /lower cost of the USB device may allow PayPal to gain an advantage Potential to incorporate GPS-based couponing into NFC payments Reach of 98 MM active accounts Partnerships with mobile application companies indicates movement to develop their own mobile wallet Reach of 40 MM global consumers interested in mobile couponing McKinsey & Company 15

16 Backed by major brands, consumer and merchant applications are emerging to test demand for mobile payment technologies at the POS Value proposition Revenue Model Partners Consumer example An e-wallet integrated into a marketing platform which will allow Consumers will be able to store all the documents from their wallets into one mobile app as well as receive, store, and redeem coupons/offers at the POS Additional advertising i and marketing spend Value proposition Revenue Model Partners Merchant example Mobile application that allows users to pay for a restaurant or bar tab using an app on their smartphone Merchants can integrate this payment app with their POS system allowing for more convenient and efficient transactions resulting in increased sales Merchant fee SOURCE: Corporate websites, team analysis McKinsey & Company 16

17 NFC is the front-runner standard for mobile payments, but other alternatives exist, causing marketplace confusion & investment delays Standard Used by Pros/Cons Ease of integration Likelihood of adoption NFC Industry consortium including: Visa, MasterCard, Isis, Microsoft, Sony Pro: Has the most momentum behind it, and is already deployed Con: Necessitates hardware upgrades for the merchant SMS Used globally, but no current US systems Pro: No contactless terminal needed Pro: No smart phone needed Con: Clumsy and slow to use Ultra asonic PayPal Sparkbase Pro: Only needs a USB plug-in, making integration easier Pro: No card information is stored or shared Con: No phone signal, no payment App ple Barc code Amazon Apple Pro: Easiest to integrate of any solution Con: Works best for closed loop accounts Apple has been unclear about their release of an NFC enabled iphone, and there are? rumors that t they may develop an alternate standard. This uncertainty promotes market stagnation?? SOURCE: Team analysis McKinsey & Company 17

18 The scramble for mobile acquisitions has started primarily with e-wallets Valuations of mobile companies are extremely high and large industry players are making the first major moves in the mobile payments arena 4/28/2010: PayPal acquires 5/17/2011: SK C&C USA 6/13/2011: NuWallet FigCard as a means of launches Corfire with mobile introduces mobile payments bypassing NFC hurdles and wallet platform based on NFC solution that allows users to more directly working with technology make online purchases via POS merchants to provide a their mobile devices more streamlined payment efficiently by storing the experience consumers information within the app 7/7/2011: Zong is purchased by ebay in a continuing effort to build PayPal a full scale mobile offering able of competing in the POS April May June July /11/2011: Visa announces plans to launch NFC based mobile wallet to be launched in Fall /26/2011: Release of Google Wallet with Google Offers 5/27/2011: PayPal sues Google indicating similar mobile wallet development by PayPal 6/13/2011: Payfone partners with Verizon Wireless to develop new mobile payment system for Verizon customers enabling online purchases from smartphones, tablets, and PCs through various payment methods. SOURCE: Press releases, corporate websites McKinsey & Company 18

19 The definition of success in mobile payments will change over time, and is dependent on a company s position in the ecosystem Near Term Mid Term Long Term Develop a product Form alliances/ partnerships Establish product in the market space Obtain a consumer base Gain consumer adoption Increase product awareness Improve and continue to develop product Retain dominance in market space by surviving industry consolidation Maintain consumer base with most up-todate couponing services Next 12 months 1-2 years 2 years + Continuum Marketer Success is building market share to drive revenue growth Issuer Success is maintaining close customer relationships, not necessarily driving new revenue SOURCE: Team analysis McKinsey & Company 19

20 Although many players are interested in developing e-wallets, all are constrained by avoiding significant trade-offs with their core businesses Stakeholder Issuers Key Ecosystem Assets Constrained by Players Trusted brands as payment account and instrument providers Maintaining share of wallet stay relevant for every payment Telco s Handset m facturers Mobile OS developers Payments networks Marketing / Advertising platforms UICC / OTA provisioning App preload Supported devices Device feature set (NFC chip) Embedded secure element App store / preload Source code / SDK Application processor Wallet eligibility Existing e-wallet userbase Existing user base (consumers / merchants) / consumer interest Key patents Mobile subscriber market share Driving data revenues Maintaining handset market share Maintaining OS market share to drive application / license revenue Maintaining overall transaction / wallet share growth Need to generate advertising impressions (access to as many networks as possible) Retailers Payment intermediaries Acceptance Existing e-wallet userbase Sales volume Existing e-wallet userbase Maintaining existing user / transaction base SOURCE: Team analysis McKinsey & Company 20

21 Competitors are adopting varied e-wallet strategies based on current strengths and placement in the market Current and future mobile wallet applications: Examp ple Intermediary Lone Wolf Coalition Open Platform Characteristics: Characteristics: Characteristics: Characteristics: Strategy Continue to provide intermediary processing Leverage existing wallet base to move to POS Move e-commerce capabilities to bricksand-mortar Unique stand-alone platforms Leverage loyal user base to extend rewards platform Drive cross-sell of other products or sell access to others Attempt to consolidate efforts of like parties (issuers, telcoms) Broad reach based on consumer base Keep known quantities in control Create an open wallet for other developers to leverage Broad reach based on smartphone ownership Drive ad or app revenue SOURCE: Team analysis McKinsey & Company 21

22 REGULATION OF MOBILE PAYMENTS IN THE U.S.

23 Mobile Payments Operating Models Bank-Driven Model Financial institution offers account access through mobile device-initiated transactions Transactions are processed over traditional payment networks/channels Funding source is payor s DDA, line of credit or prepaid account with the financial institution 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 Mobile Network Operator-Driven Model Mobile network operator offers mobile payments capabilities for purchases using mobile devices associated with its wireless network Transactions are processed over the operator s wireless network Charges appear on payor s wireless bill and/or are funded on a prepaid basis McKinsey & Company 23

24 Overview As contemplated and piloted to-date, mobile payments initiatives in the U.S. have largely leveraged existing payment and funds transfer methods and operating models The regulatory regime applicable to existing methods and models thus likely governs mobile payments analogues The Regulatory picture becomes less clear in certain operating models that may become prevalent in the future For example, Mobile Network Operator Model where customer purchases of third party goods/services are reflected on the customer s wireless bill Increased involvement of non-banks may pose enhanced regulatory and supervisory challenges McKinsey & Company 24

25 Mobile Device: Just Another Form Factor? In many respects, mobile device-initiated payments are functionally the same as existing payment and fund transfer methods the principal innovation being the new form factor Mobile payment transactions that rely on traditional retail payments funding sources (DDA, line of credit, prepaid account) are likely l subject to the same regulatory requirements as their more traditional predecessors Regulators have not generally provided formal interpretations that existing regulations apply to mobile payments, but the text t and historical i application of those regulations point to this conclusion The recent spate of legislative/regulatory activity applicable to retail payments generally has broad applicability and will likely apply equally to mobile payments (and in some cases do so expressly) McKinsey & Company 25

26 TILA/Regulation Z Applies in relevant part to any person that issues a credit card and who regularly extends credit to consumers primarily for personal, family or household purposes A credit card is any card, plate, coupon book, or other single credit device that may be used from time to time to obtain credit. A mobile device that accesses a line of credit for funding transactions is most likely a credit card for TILA/Regulation Z purposes, and the issuer of the device (and extender of related credit) is most likely a creditor for TILA/Regulation Z purposes McKinsey & Company 26

27 EFTA/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 account means a consumer asset account 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 A mobile device that can be used to initiate electronic fund transfers from a consumer asset account (e.g., a DDA) is most likely l an access device for EFTA/Regulation E purposes and the issuer of the mobile device (and the holder of the account, if different) is most likely subject to the EFTA/Regulation E McKinsey & Company 27

28 Bank Secrecy Act/ AML Requirements Financial institutions, including money services businesses (MSBs), are subject to various requirements designed to detect and prevent money laundering and terrorist financing activities Banks are expressly covered by BSA requirements Many MPSPs are subject to BSA compliance obligations as money transmitters (i.e., MSBs) Mobile network operators, depending on their role in facilitating funds transfers, may also be subject to regulation as MSBs if they satisfy the definition of a money transmitter or operator of a credit card system McKinsey & Company 28

29 State Money Transmitter Laws Govern the activity of non-depository money service (funds transfer) providers like money transmitters, check cashers and currency dealers Except to the extent that a bank agent exemption may apply, MPSPs and mobile network operators responsible for funds transfers (including P2P transfers and prepaid funding models) may be subject to state licensure McKinsey & Company 29

30 Gramm-Leach-Bliley Act Applies to financial institutions, as broadly defined Privacy Rule requires FI to disclose to customer its policies regarding disclosure of customer s non-public information with affiliates and non-affiliates Safeguards Rule requires FI to develop standards to protect customer information Applicability of GLBA to non-bank mobile payments provider will vary with the model, but should apply to mobile payments entities in parallel to its applicability to providers involved in more traditional payment channels McKinsey & Company 30

31 Dodd-Frank Act Title X - Consumer Financial Protection Act and the creation of the Bureau of Consumer Financial Protection with authority to regulate non-bank providers of consumer financial products and services Financial Products include: Extending credit Issuing stored value or payment instruments providing payments or other financial data processing products... including payments made through an online banking system or mobile telecommunications network Durbin Amendment restrictions on exclusive network arrangements will likely impact all participants in the evolving mobile payments marketplace New coverage of cross-border remittance transfers under the EFTA/Regulation E will impact all mobile-initiated remittances to foreign receivers McKinsey & Company 31

32 New FinCEN Prepaid Access Rules FinCEN s new prepaid access rules characterize all providers of prepaid access as MSBs will pull additional non-bank participants in pre-funded mobile payments schemes under federal supervision for AML compliance FinCEN has defined prepaid access very broadly, to include any electronic device or vehicle, such as a card, code, electronic serial number, mobile identification number or personal identification number. McKinsey & Company 32

33 Review of Mobile Payments Operating Models Through the Regulatory Lens Bank-Driven Model Bank typically holds funding account and uploads traditional credit, debit or prepaid card account number (or account identifier for ACH applications) to mobile device (which may be a contactless sticker) Full complement of existing payments laws should apply in the mobile context MPSP-Driven Model 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 t space today (MPSP may be subject to EFTA/Regulation E and is likely an MSB/MT but should be able to avoid broader regulation because MPSP is acting as a service provider) 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 il functions (albeit not prudential oversight) Mobile Network Operator-Driven Model If transaction funding accounts are held at traditional financial institutions, operator may be subject to certain MSB/MT requirements and may be subject to EFTA/Regulation E requirements (if issuing the access device), but will generally be characterized as a service provider If the operator holds a prepaid funding account, it will be subject to broader federal and state regulation; if the operator posts mobile payment transactions to the customer s wireless bill, the operator may be subject to TILA/Regulation Z or may be subject only to Truth-in-Billing Requirements and related FCC regulation (this point is subject to debate) McKinsey & Company 33

34 Mobile Payments Models May Present Enhanced Regulatory Challenges Compliance concerns Even where non-bank mobile payments providers are subject to federal and state regulations, mobile network operators and MPSPs are often not familiar with payments/financial services legal requirements such as consumer protection laws, BSA/AML obligations (including KYC), state money transmitter laws, and other compliance requirements Credit/liquidity risk concerns Displacement of traditional financial institutions, which are subject to prudential oversight, by non-bank mobile payments companies may increase credit and liquidity risk in the payment system Federal regulatory authorities have been monitoring the mobile payments space but have yet to identify the market is separate or unique from other payment systems McKinsey & Company 34

35 Regulation of Mobile Payments Continuing the Discussion While mobile payments remain in the formative stages in the U.S., consider whether regulators should be encouraged to begin addressing the issue through interpretive guidance Is there a risk that an under-regulated mobile payments system develops in the U.S.? Consider whether the existing (and evolving) regulatory framework is suited to regulate the enhanced role non-banks are playing in mobile payments, particularly l in models that t involve substantial ti disintermediation of traditional financial institutions Is regulation of mobile payments principally a consumer protection issue (CFPB)? Are there safety and soundness issues that should be addressed in non-bank driven models? McKinsey & Company 35

36 Conclusion / Questions

37 For more information, contact: Jarrett Helms Payments Practice Expert Duncan Douglass Partner McKinsey & Company 37