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Interview with Joseph I. Rosenbaum, Partner at Reed Smith LLP, on mobile payments & financial institutions

In a continuation of E-Finance & Payment Law & Policy’s cover story from the January 2013 issue, Simon Fuller speaks to Joseph I. Rosenbaum, Partner at Reed Smith LLP and Chair of the firm’s global Advertising Technology & Media Law practice, who expands his comments from the story on the Winter 2012 report by the Federal Deposit Insurance Corporation on the risks to financial institutions as posed by mobile payments. 


The FDIC outlines risks such as negative consumer experiences affecting the take-up of mobile payments, companies failing to detect fraud and other criminal activity, and credit risk as examples of the primary risks for financial institutions relating to mobile payments. To what extent do you agree with the selection of risks the FDIC has highlighted as being of major concern?  

Although I think the FDIC has done a credible job of examining the types of risks that arise, I am not sure that their analysis does more than repeat prevailing discussions – discussions that similarly surrounded the introduction of ATMs and subsequently online banking and financial transactions. It is important to appreciate that the FDIC insures and seeks to protect the integrity of the financial institutions over which it has responsibility.  In reality, both FDIC supervised and unsupervised financial institutions and a significant number of institutions that would not normally be characterised as financial institutions of any kind, have been involved in mobile payment systems.

 

While new technology often changes the manner in which a particular risk may arise, consumer acceptance (or fear thereof), fraud detection, criminal activity and credit risk are not particularly new concepts in the world of finance. Nor are financial regulators inexperienced in regulating and supervising these areas.  In fact, most are quite astute at imposing their supervisory requirements when necessary.  In my view, a more valuable inquiry, and corresponding contribution, would be to examine the allocations of risk, the emergence of parties involved in mobile payment transactions and the manner in which those risks are or should be regulated or legislated if required.  To illustrate: the advent of ATMs and point of sale devices created not merely networks of financial institutions to afford consumers greater utility and convenience, but spawned transaction processors as intermediaries in the payments systems.  Similarly, mobile technology places wireless carriers, Wi-Fi access points and routers managed by commercial enterprises and even merchants (e.g. Starbucks) in intermediation roles within the stream of payment transaction processing. These entities now bear some responsibility for security and integrity of payments that did not and would not exist, but for the nature of mobile payments.  Should their responsibility (and ultimately the liability of the consumer) be driven by commercial or consumer contract, or is there a need for regulation?  We take these for granted today in the world of credit cards and gift cards, but we should be mindful that these instruments (e.g. the technology) were not regulated when first introduced and it was not for decades after their introduction that US Federal law limited consumer liability for the risk of lost or stolen cards, for example.  In my view, mobile technology continues to change the parties, their industries and the process by which the risks arise and ultimately their allocation, but not really the category of the risks themselves.
 
Do you agree with the FDIC that in general so far ‘less scrutiny has been given to understanding the unique risks and supervisory issues raised by [mobile payments]’ as opposed to the benefits?
 
I certainly agree that the supervisory issues have received far less scrutiny and the FDIC is proper in seeking to raise the profile of those discussions. However, I don’t think it is accurate that the unique risks have not been scrutinised. They have, but perhaps not by the regulatory community.  Clearly, merchants, the participants in the payment card industry, mobile device manufacturers, wireless carriers and even mobile platform licensors (e.g., Apple, Google, RIM, etc.) have paid much attention to the unique and often complex risks posed by enabling mobile payments. The sheer volumes of devices, the potential utility of a variety of technologies embedded in mobile devices – payments can and have been effected with mobile devices using WAP, RFID, Bluetooth, NFC, so-called mobile wallets and even SMS – raise security, fraud and credit risk issues that are among the first areas scrutinised by any participant in the industry that actually hopes to be profitable.  That noted, mobile technology has, to some extent, made it difficult to determine which regulators are responsible for supervising what and whom – in some cases even if an entity is covered or subject to regulation.


What is your view on the coming year for mobile payments? Can we expect 2013 to be the year that NFC really takes off, for example? What does that mean for financial institutions if so?  
 
I’m not sure I am qualified to prognosticate as to the adoption and acceptance of any particular technology. I also know that rates of adoption have and will continue to vary by country and often by utility. Rates of adoption often depend on availability of technology in both the consumer’s device and the merchant or institution with whom the consumer interacts.  

 

Bottom line, I don’t know the answer as to whether 2013 or not, but once it does take off, those financial institutions with secure, NFC-enabled systems are likely to be in a better position than those that adopt a wait and see posture.  Again, if one looks back historically at technologies that have impacted financial institutions, those that have been early adopters have often not only gained experience and capabilities earlier, but have also been instrumental in helping to set standards and risk management profiles that are fine-tuned by the industry going forward.
 
Do you have anything further to add?
 
Only the obvious point that what mobile technology will continue to do in the world of payment systems and finance, is require the banks and financial institutions to face increased competition from non-traditional players in the market.  Once upon a time only banks could issue and process checks. In some countries, pre-authorised debits and paperless payment systems have all but eliminated check writing.  Technology will continue to challenge and to some extent reduce the exclusivity in payment systems, which supervised financial institutions traditionally enjoyed.  Those that are nimble will re-configure, remain attuned to consumer preferences and needs and be successful. Regulators recognising the changing landscape will either focus more on the regulation of the activity and less on the characterisation of the institution, in order to more adequately evaluate and supervise the risks.

Evolution (and every once in a while, a little revolution) can often be refreshing. 


Joseph I. Rosenbaum, Partner at Reed Smith LLP

jrosenbaum@reedsmith.com

 
The FDIC’s report is available at http://www.fdic.gov/regulations/examinations/supervisory/insights/siwin12/mobile.html.

 




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