Play podcast: Mobile Payments and Banking (MP3 7:58)
Transcript
Hardly a day goes by without an announcement or press release about a new mobile payments application. Although U.S. consumers have not readily embraced mobile banking and payments services, we must consider legal and regulatory questions if an eventual uptick in consumer adoption is to occur. For example, what are the implications of mobile financial services on consumer protection laws? What are the risks to the consumer, if any, when telecoms and other private companies are involved in payments clearing and settlement?
We explored these issues in our interview with Mark Budnitz, a law professor at Georgia State University's college of law and a member of the Retail Payments Risk Forum's Advisory Group. Budnitz lectures widely on payments systems before groups such as the American Bar Association and specializes in consumer protection with a special interest in electronic payments systems. This interview is our latest installment in the Payments Spotlight series, which features recorded interviews with experts in the payments industry on relevant risk and fraud issues.
Among the topics discussed in the podcast is the increased interest in mobile financial services in the United States. Recent consumer demand for access to smart phone applications that simplify everyday activities has prompted financial institutions to explore offering mobile financial services. Banks and nonbanks are entering this emerging ecosystem. Software developers, phone manufacturers, telecoms, and others are all looking for ways to participate in the mobile payments and banking value chain.
Consumer protection is a consideration with adoption of mobile payments
Budnitz also expressed his concerns about the implications of mobile payments and banking for consumer protection laws. One example he provided was the potential confusion consumers may face when trying to resolve billing disputes. He noted that the Electronic Funds Transfer Act (EFTA) typically covers error resolution for consumer electronic funds transfers involving a financial institution, but it is not always clear what law applies when a telecom or private company is involved in payments processing.
For now, Budnitz said, consumer protection laws generally regulate the consumer-card issuer and the consumer-merchant relationship but not the multiple relationships among consumers, telecoms, nonbank private companies, and others that are potentially present in the mobile payments world. This omission presents a valid consumer concern and explains consumers' hesitancy with fully adopting mobile banking and payments and how that hesitancy has affected the pace of growth in the United States.
Privacy and security concerns take center stage with consumers
Another concern raised with mobile banking and payments is the potential privacy and security risks. As Budnitz described, "Mobile financial services offer companies new avenues for invading privacy." These companies are able to collect data about consumers that they can sell to other companies.
Surveys have shown that security concerns are a major factor inhibiting consumer acceptance of mobile banking. For example, a 2008 Javelin Strategy & Research study on mobile banking security found that 47 percent of consumers surveyed did not use mobile banking because of security concerns. Furthermore, the survey found that consumers' top fear is having hackers steal sensitive banking data (73 percent) despite available mobile encryption and authentication tools.
Addressing gaps in regulatory and legal infrastructure for mobile commerce
As with most innovation, there is a potential that the legal and regulatory infrastructure will lag behind the development of new mobile banking products and services. Budnitz suggested that the federal regulatory agencies should work cooperatively to anticipate new developments and quickly respond. One way they could respond to a problem is with regulation or interagency guidance. However, he cautioned that the agencies must strike the delicate balance of making regulation that is not so specific that it stifles innovation and not so vague that it is easily misunderstood by consumers and businesses.
Consumer adoption of mobile payments in the United States will partly hinge on addressing the lingering concerns that consumers have about data privacy and security. Budnitz contends that having strong consumer laws in place benefits both consumers and the mobile financial services industry. Consumers who have greater confidence in the system will more readily embrace mobile payments, thereby building the demand needed to make it an attractive business investment.
By Jennifer Grier, senior payments risk analyst at the Atlanta Fed