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Pocket Policy: Do New Payments Technologies Need New Rules?

By Aaron Klein

Wednesday, December 17, 2014

There is a growing battle between my left pocket, where I keep my phone, and my right pocket, where I keep my wallet. New innovations like Apple Pay and applications like Uber allow me to make payments with only my phone, leaving my wallet sitting in my pocket. Americans are reacting to these new options and changing their purchasing behavior, while policymakers and the financial industry are trying to ensure the payment system evolves along with changing consumer and business habits.

That is why the Bipartisan Policy Center is planning a series of public forums, private discussions and other events over the coming months to examine how regulators will need to adapt to the opportunities created and challenges posed by these new technologies. This Thursday, we’ll kick off the series with a speech by New York Department of Financial Services Superintendent Benjamin M. Lawsky, who has been on the front lines of regulating Bitcoin and other new payment technologies, as well as a panel discussion from consumer, regulatory and industry stakeholders. You can register for the event here.

Of course, changes in how people make payments are not new. Once upon a time, the checkbook was the dominant form of non-cash payment. Now, thanks to credit and debit cards and online bill-pay, checkbooks increasingly gather dust at home. It is important to consider whether new payment mechanisms simply change how we access the existing payment system or whether they create a new system. The answer has significant implications for consumers, who enjoy important legal protections under the current system, and for businesses, which have to decide on investments in new technology and the cost of accessing the payment system.

We may not realize it, but many of the applications on our phones still access and use the same payment system that sits in our wallets. An application like Apple Pay uses a credit or debit card, which means that the transaction is routed through the existing payment system. Think of that payment as another passenger on the train travelling through the rails of the payment network. Whether the transaction boarded the train through swiping a card at a terminal, entering information online or over the phone, or by waving a phone at a point-of-sale terminal, the transactions all ride the same rails.

However, there are some new payment systems which use entirely different rails. Using a virtual currency like Bitcoin puts you on a completely different system of payment authentication and settlement. Amazon, for example, has begun experimenting with charging purchases directly to your cell phone carrier. It can be difficult for consumers to tell which system their mobile or online payment is being routed through.

In a world with multiple payment systems, the one you choose matters because it determines your legal rights, the speed at which you are charged or receive funds, and the costs and benefits that consumers and merchants incur. Most consumers don’t think about these details, in part because credit and debit card users enjoy strong protections embedded in the Electronic Funds Transfer Act of 1978 (EFTA). Many credit and debit card issuers – and even some alternative payment companies – go beyond EFTA requirements, for example offering zero liability for a lost or stolen card, in part to entice consumers to use their products. However, EFTA only covers certain payments including those made through ATMs, automated clearinghouses (such as ACH), and online banking. Just because an innovative payment system uses your phone or another piece of electronics, you should not assume it conveys EFTA’s consumer protections.

As the battle between your phone and wallet unfolds, it will be interesting to see how the payment system evolves. Key questions to consider when thinking about using a new payment technology include:

  • How fast will I receive my funds or be charged?
  • How secure is the system?
  • What consumer protections exist if something goes wrong?
  • How much does it cost me?

The answers to these questions may determine which pocket you reach into.

KEYWORDS: NEW YORK DEPARTMENT OF FINANCIAL SERVICES, BITCOIN, APPLE PAY, AMAZON