Alert August 28, 2012

Federal Reserve Bank of Boston Issues Report on Risks Associated With, and Current Regulatory Enforcement of, Mobile Payments

The Federal Reserve Bank of Boston (“FRB Boston”) released a report “The U.S. Regulatory Landscape for Mobile Payments” (the “Report”) examining the gaps in U.S. laws and regulations governing mobile payments.  The Report was the result of a key principle set forth by the Mobile Payments Industry Workgroup (“MPIW”), which includes industry stakeholders such as banks, retailers, and wireless and technology companies.  The Report noted two trends in the mobile payments industry: (1) the use of remote payments and money transfers for person-to-person payments and (2) the growth in non-bank money transfer services that subject companies to state money transmitter licenses and regulatory oversight. Ultimately, the Report found that consumer education is key and that management of third party service providers is critical to the safety and soundness of mobile retail payment systems.

The Report highlights five themes raised in the meetings held by the MPIW: (1) adequacy of the current regulatory environment; (2) education for all stakeholders including regulators, policymakers, and consumer advocacy groups; (3) consumer protection; (4) the impact of new mobile payment entities on regulation; and (5) financial inclusion.  Moreover, the Report identifies risks associated with new mobile payment systems.  For example, new mobile payment entities often fall outside of the regulatory purview because they fail to obtain licensing and registrations as required under state law due to the cost associated with state licensing requirements.  In addition, according to the Report, organizations subject to the Federal Financial Institutions Examination Council’s multiregional data processing service program have the potential to pose a systemic risk to the banking system if, when processing applications for numerous financial institutions, these institutions experience operational or financial difficulties.

Furthermore, noting that the regulatory environment was fragmented between financial institutions and non-bank entities, the Report found that the existing regulatory guidance is sufficient for existing mobile payment services.  However, the Report cautions that regulators need to stay “abreast” of industry trends and developments.  The MPIW plans to develop an outreach program to reach more regulators and policymakers and develop tools to educate regulators on developments in mobile payments. 

Finally, the Report noted that both the Consumer Financial Protection Bureau (“CFPB”) and the Federal Trade Commission have supervisory authority over consumer protection laws.  The CFPB expressed its desire to ensure that “consumer protections advance concurrently with new mobile payment services” especially with regard to clear and easy to understand consumer disclosures, error resolution, and complaint handling.  The CFPB plans to apply its current assessment methodology to review the disclosure practices of mobile payment services.