Mobile Payments: Is Plastic Becoming Obsolete?

All signs are pointing to 2013 being “The Year of the Mobile Payments.”  While the usage of mobile payments has seen moderate gains and successes over the past couple of years, widespread adoption by both vendors and consumers has failed to occur – until now.  Many financial service providers, feeling that the start-ups have “dropped the ball” so far, are deciding to enter the arena.  Couple that with companies like Starbucks implementing mobile payment systems from Square in 7,000 of their stores nationwide, and you get an economy primed for the adoption of mobile payments.

Forrester Research Inc. broadly defines a mobile payment as “a transaction in which the transfer of funds is initiated using a mobile phone – excluding the voice function of the device.”  Currently there are three main categories of mobile payments.  The first are mobile proximity payments.  These include in-store or location based payments with a smart phone.  A couple of examples are Square payment systems being used by Starbucks or a vendor using Near Field Communication and a payment processor like Apple’s Passbook or Google Wallet to complete sales.  Next, there are peer-to peer payments.  The clearest example of a peer-to-peer payment is an individual sending another individual money through a mobile device.  And finally, there is mobile remote commerce, which includes all purchases of items or services through a mobile device from an online retailer.

While the definition of a mobile payment remains vague, one thing is clear: merchants can greatly benefit from the use of mobile payments.  The most obvious way is through the lower transaction fees associated with mobile payments.  Current transaction fees for credit/debit card payments are substantial, and reducing these costs can have a significant impact on a merchant’s bottom line.  Additionally, mobile payments assist merchants in capturing native data about end users.  This data capture allows merchants to create powerful marketing strategies and loyalty programs that would be difficult to create and implement with other payment methods.

Unfortunately, because mobile payment usage is still in its infancy, the regulatory environment governing mobile payments is still uncertain.  Mobile payments are a convergence of telecommunications, banking and web services, which results in significant regulatory overlap.  The Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), the Federal Communications Commission and Treasury Department’s Financial Crimes Enforcement Network all could claim an interest in policing mobile payments.  However, in testimony before the House Financial Services Subcommittee, Marla Blow, Assistant Director for Card and Payment Markets at the CFPB, made it clear that primary oversight for mobile payments will fall to the CFPB.  The CFPB is a newer agency established by the Dodd-Frank Act to police financial services and “restrict unfair, deceptive, or abusive acts or practices.”  The relative infancy of the CFPB and the ambiguity of the word “abusive” in its mandate has created apprehension and uncertainty for those who want to implement these systems.  Many companies or individuals may not know they have violated a regulation until the CFPB begins enforcement actions.  Additionally, the CFPB admits that the current regulations the CFPB enforces may not be adequate to address the ever-changing mobile payment space.  New developments in technology are not always anticipated by existing regulations, which will likely cause new regulations to be developed in response.  At a minimum, companies that are beginning to enter the mobile space should become familiar with the potential regulations that may affect them, and any business would be wise to speak to a legal professional about regulations that they should be aware of.

If you have any questions about regulatory or legal concerns for mobile payments, please contact any of the other Retail, Hotel & Restaurant team members.