The Changing Face of the Payments System

The Evolving Payments Market

Background

The U.S. payments market continues to shift away from cash and paper checks toward various forms of electronic payments. Credit cards and debit cards are now commonplace, and general purpose reloadable prepaid cards are expanding the overall customer base. For instance, the U.S. Treasury now recommends a prepaid card as a payment option for federal benefit recipients who lack a bank or credit union account, and over two million consumers now utilize this option on a recurring basis.

Beyond cards, the payments market is more dynamic than ever. In some stores, consumers can now pay by simply tapping their phones on the retailer’s payment terminal or by showing a barcode on their smart phone’s screen. Similarly, as e-commerce expands, so do the number of ways to pay online.

Innovation

Our once cash-based society has evolved through checks, into cards, and is now pushing into a digital frontier of virtual “wallets” and mobile platforms. Innovators span the gamut from traditional players doing new things to new players performing similarly traditional functions (e.g., PayPal, Square), while at the extreme end, others are attempting to bypass the existing payments system entirely (e.g., Bitcoin). The common thread is that all of them are continually seeking new ways to assist consumers and businesses in the way they make purchases. Banks—which developed the first credit card in 1958 and have since pioneered technologies like online banking and billpay, mobile banking, and remote check deposit capabilities—continue to push the innovation envelope to improve the banking experience for consumers and businesses. Additionally, several large nonbanks are now active in the payments sector, including PayPal, Walmart, Google, Square, and telecommunications operators such as AT&T, Verizon and T-Mobile. With so much activity, the most successful will be companies that deliver superior benefits to the overall payments ecosystem.

Implications

With marketplace innovation in both payment methods and participants comes important policy issues for Congress and federal regulators to consider. On the one hand, it is important to encourage marketplace innovations that promote consumer convenience, transaction efficiency, competition and overall benefits to the U.S. economy, free of overly inhibiting government regulation. On the other hand, it is also important that adequate protections be built into any regulatory framework so that consumer confidence in the U.S. payments system remains at the level we all currently experience and have come to expect.

Achieving the right balance in this policy debate is important, as it has enormous implications for the U.S. economic system. Accordingly, this paper attempts to identify three key areas in the emerging and mobile payments landscape that we believe deserve policymaker attention:

1. Consumer Protection: Federal law provides numerous protections for consumers when they make electronic payments, such as protection against unauthorized charges and definedprocedures for disputing any charge. With this foundation in place, consumers have come to expect equal protection across all electronic payment types, regardless of the particular product or provider or its status as a bank or nonbank. However, in many cases today (particularly with respect to nonbank participants), regulations for emerging payments are either uneven or not well-defined, with a potential to result in consumer harm, material breaches of privacy and degradation to the current consumer protection scheme.

2. Payment System Integrity: Payments facilitate all forms of commerce, and as a result, the overall stability, efficiency and integrity of the payments system are of paramount importance.In short, the system must “always work.” All participating institutions—whether they are banks, payment networks, telecommunications companies, high tech firms and the like—must maintain necessary controls and be subject to sufficient government oversight to ensure that the integrity of the payments system is never in question. Moreover, payments system providers have become important government partners in enforcing various federal laws meant to combat illegal money laundering, threats to our nation’s cybersecurity, and other important policy initiatives. The degree to which new participants in the payments space maintainadequate controls that facilitate overall payments system integrity remains a critical policy question to explore.

3. Competitive Equity: Banks, retailers, networks and others have all made significant investments in the U.S. payments infrastructure. As these systems have grown and incorporated new technologies, the rules and standards governing them must evolve to accommodate these advances. A common sense of fairness argues that all participants, whether incumbents or new entrants, operate by a similar set of rules and standards. This ensures that all participants have parallel financial incentives to innovate, and eliminates anomalies in the market driven solely by government policies that apply to some players butnot others.

What follows is a brief overview of how the payments market is changing, along with a more in-depth look at each of the key areas outlined above.

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