Senate Banking Committee Examines Need to Regulate Mobile Payments

"The bottom line is that as the mobile payment system evolves, it is important for this committee to understand how they work in order to provide proper oversight so that these payments can be secure and convenient,” Johnson said.

"In thinking about regulating mobile payments, I think it’s important to recognize that this is not a one-solution-fits-all-possible-providers type situation,” said Hughes, who teaches banking law and formerly was an attorney in the FTC Bureau of Consumer Protection. Banks, telecom carriers, app providers, intermediary payment processors and merchants “all may have the need for certain protections and rights,” as do consumers, she said. “But it is vital that we not create a situation, and we may have it now, where one form of regulation drives people into unregulated silos or channels of opportunity or where they can go to silos that are less regulated and save a lot of compliance costs,” Hughes said. “If you're going to regulate, you need to think about how to do it in a way that does not reward a certain group of players at the expense of merchants and consumers and competition in general."

The natural reaction is “This is new, we must have to regulate it,” said Thomas Brown, adjunct professor at the University of California-Berkeley Law School. Brown, a former senior counsel to Visa USA, counseled against imposing new regulations on mobile banking. “Let me assure the committee the payment industry and the mobile piece of it is heavily regulated … both at the federal level and the state level,” he said. “Offering a consumer financial services products in this country is a very complicated proposition. We don’t need new rules. To the extent that we want to decrease barriers to entry and increase innovation, I would suggest that Congress attend to the complicated regulatory and licensing issues that exist at the state level.” Privacy concerns also remain, he said: “We know, or we have a sense, that these mobile devices gather a lot more information about us than others ways that we're used to."

Mobile payments offer many advantages including speed and ease of use, and a mobile payment system was quickly adopted by a few merchants, like Starbucks, Hughes said. “Paying for a coffee or a snack could be completed before the foam on a specialty drink disappeared.” Mobile payments also help merchants sell to consumers who don’t have checking accounts or in areas where ATMs are scarce, she said. “The unbanked and under-banked use smartphones right now to make certain kinds of payments because it helps them have access to the marketplace that people who live in metropolitan areas already enjoy,” she said.

But Michael Katz, professor of economics at the University of California, Berkeley, told the committee that mobile payments in general will be adopted only slowly by both retailers and consumers. “America’s consumers are increasingly connected via smartphones, tablet computers and other mobile devices,” said Katz, director of the school’s Center for Telecommunications and Digital Convergence and a former FCC chief economist. “A lot of people have predicted that this is going to lead to a revolution in how people pay when they go into a bricks-and-mortar merchant. … I disagree with those who think it’s going to revolutionize payments.” There will be a revolution, but it won’t be how customers pay, but rather “in the way that merchants interact with their customers,” he said.

Merchants and consumers already have lots of options, from cash to checks to debit cards, Katz said. “Most consumers already have established relationships with payment service providers, and merchants have made substantial investments in equipment and systems and training to support existing payment services,” he said. “If new payment services based on smartphones and tablets are going to compete successfully, they're going to have to offer merchants and consumers additional value in comparison with current options. Cool technology alone is not going to be enough.” Mobile payments will be attractive to merchants only if they lower transaction costs or attract more customers, Katz said.

Mobile payments face a “chicken-and-egg problem,” Katz said. “Specifically, a merchant does not want to bear the expense of changing its checkout process to accommodate a new payment service if there are few consumers who use that service. Similarly, a consumer does not want to sign up for the payment service if very few merchants accept it. But, of course, if everybody waits for everybody else to join first, the new payment service it’s never going to get off of the ground. … There has to be some source of benefit that makes it worthwhile to invest in overcoming the chicken-and-egg problem.” Ease of use alone won’t be enough to drive people to use their cellphones for mobile payments, Katz said. “Is it really that much easier to swipe your phone than a smart card?” he asked. Security and privacy concerns also remain for many consumers, he said. The only real value for merchants will come if mobile payments allow merchants to collect much more information on consumers that they can use to predict consumer behavior and then deliver personalized, real-time messages to the customer, he said.