Check It Out: The FTC Zeroes in on Mobile Payments

3-29-13_Bryan_Cave.pngBanks have an important role to play in development of mobile banking and mobile payment technologies. Although nearly 45 percent of all mobile phone users have a smartphone, only 12 percent are using mobile devices to make payments, according to a new report from the Federal Trade Commission FTC). The primary reason for not using mobile payments is security concerns (42 percent). 

Currently, the Federal Trade Commission is leading the charge to explore the need for mobile payments regulation. For banks interested in mobile banking, its actions and publications are very instructive.

Over the last two years, the FTC’s actions include: bringing law enforcement actions, obtaining high-profile settlements with Google and Facebook and issuing policy reports for mobile businesses and policymakers.  Although financial institutions are not directly regulated by the FTC in this area, the FTC does regulate all other mobile providers including merchants, payment card networks and payment processors.  Further, the FTC will likely influence and coordinate with other regulators, particularly with respect to data security and privacy.

During a teleconference on February 1, 2013, discussing the FTC report, “Mobile Privacy Disclosures Building Trust through Transparency,” the outgoing FTC Chairman, Jon Leibowitz, called on the industry to adopt strong privacy and data security measures for mobile technologies or face increased regulation. Most recently, the FTC issued a Staff Report on March 8, 2013, entitled, “Paper, Plastic… or Mobile? An FTC Workshop on Mobile Payments,”which outlines a number of key concerns and recommendations for businesses implementing mobile payments:

  • develop clear policies for disputes for fraudulent or unauthorized mobile payments that address:
    • the confusing landscape for consumers when selecting a payment method since each product has a different means, as well as different levels of protection, for disputing payments;
    • the potential need to incorporate FTC Act and potential Consumer Financial Protection Bureau protections.  At this time, unless Regulation E applies to a payment method, Reg E type protections for fraudulent or unauthorized payments are offered on a contractual or voluntary basis only; and
    • mobile “cramming,” where companies place unauthorized charges on mobile phone bills.
  • adopt strong security measures throughout the mobile payment process to:
    • receive, transmit and store financial data using “end-to-end” encryption;
    • incorporate security measures such as dynamic data authentication and separate secure element storage of data to prevent hackers from accessing financial information on mobile devices;
    • comply with federal and state data security laws such as the FTC Safeguards Rule 16 C.F.R. § 314.1 et seq. and the FTC Act prohibition against unfair, deceptive and abusive practices;
    • require strong data security measures by all companies in the mobile payments chain; and
    • implement additional consumer security protections such as second level passwords  and a means to immediately disable apps if a phone is lost or stolen.
  • Implement “privacy by design” as set forth in the FTC’s report “Protecting Consumer Privacy in an Era of Rapid Change,”  including at a minimum:
    • strong privacy practices at every stage of product development covering:

      • reasonable security 
      • data collection limited to the context of consumer interaction with your business (e.g., no geo-location data unless needed)
    • simplified consumer choice:

      • allowing consumers to restrict unnecessary information disclosure
      • discouraging “pre-checked” boxes to obtain consumer consent for the use of data for non-processing purposes
    • transparency regarding data collection, storage and use to strengthen consumer trust.

To enable mobile to reach its full potential, financial institutions can play a lead role, including by responding to the FTC chairman’s call for industry self-regulation and the recommendations noted in the Staff Report.  Taking the security and privacy obligations that already exist under the Gramm-Leach-Bliley Act, with further guidance from sources like the FTC, financial institutions can move the industry forward by developing meaningful mobile disclosures and transparent privacy policies and practices and by requiring similar compliance of their mobile payment service providers.  

Banks should implement, and require their service providers to implement, data security safeguards for sensitive financial information at all segments of the payment chain and allocate responsibilities and liability among them. Banks should develop data breach response plans including notifications and consider purchasing cyber-security insurance.

Linda Odom

Courtney Stolz