The world is going mobile and dragging banking along with it kicking and screaming. I am something of an anachronism as I still go into the branch once in a while and still worry about using my phone to deposit a check. My adult children, on the other hand, use their phone for everything, including all of their banking. They bounce from store to store paying for everything from Starbucks to bar tabs using their phones without a second thought. Banks that want to capture and hold their business will have to be very good at mobile banking and mobile payments.
One of the biggest hurdles bankers face is that as unprepared as they were, the regulators were equally unprepared and are now playing catch up with regards to mobile payments. The regulatory picture today is fairly muddled with a mishmash of state and federal agencies offering guidance and opinions to mobile payment providers and consumers. There are gaps in the current laws where no regulations apply to parts of the process—and other situations where two or more rules apply to the same part of the process. As mobile banking and payments continue to grow, the regulators will be looking to create a more coherent regulatory structure and coordinate their inter-agency efforts to protect consumers at every stage of the process.
At a forum held by the Office of the Comptroller of the Currency in late June, Jo Ann Barefoot, a senior fellow at Harvard University, outlined the current regulatory situation. She told the packed room at the meeting that “Agencies are going to have to develop ways to work together, to be faster, to be flexible, to be collaborative with the industry. The disruption of the financial industry is going to disrupt the regulators, too. This is the most pervasively regulated industry to face tech-driven disruption. The regulators are going to be forced to change because of it.”
In a white paper released at the forum, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” the OCC noted that “Supervision of the financial services industry involves regulatory authorities at the state, federal, and international levels. Exchanging ideas and discussing innovation with other regulators are important to promote a common understanding and consistent application of laws, regulations, and guidance. Such collaborative supervision can support responsible innovation in the financial services industry.”
While the OCC has noted the massive potential benefits that mobile payments and other fintech innovations can offer to consumers, particularly those who were unbanked prior to the widespread development of mobile banking and payment programs, Comptroller Thomas Curry has cautioned against what he called “unnecessary risk for dubious benefit,” and called for responsible innovation that does not increase risks for customers or the banking system itself. Mobile payments programs that target the unbanked are particularly ripe for abuse and unnecessary risk.
The Consumer Financial Protection Bureau is also heavily involved in overseeing and regulating the mobile payments industry. The bureau noted that 87 to 90 percent of the adult population in the United States has a mobile phone and approximately 62 to 64 percent of consumers own smartphones. In 2014, 52 percent of consumers with a mobile phone used it to conduct banking or payment services. The number of users is continuing to grow at a rapid rate and the CFPB is concerned about the security of user data as well as the growing potential for discrimination and fraud.
CFPB Director Richard Cordray addressed these concerns recently when announcing fines and regulatory action against mobile payment provider Dwolla. “Consumers entrust digital payment companies with significant amounts of sensitive personal information,” Cordray said. “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”
The regulators, like the banks themselves, are latecomers to the mobile payments game. I fully expect them to catch up very quickly. The biggest challenge is going to be coordinating the various agencies that oversee elements of the regulatory process, and it looks as though the OCC is auditioning for that role following the June forum on mobile payments. Cyber security systems to keep customers data and personal information safe and secure is going to be a major focus of the regulatory process in the early stages of the coordinated regulatory efforts.
I also expect the CFPB to focus heavily on those mobile payment providers that were formerly unbanked. These tend to be lower income, less financially aware consumers that are more susceptible to fraud and abuse than those already in the banking system, and the bureau will aggressively monitor the marketing and sales practices of mobile payment providers marketing to these individuals.
The regulatory agencies are starting to catch up with the new world of banking and the mobile payment process will be more tightly controlled going forward.