Mobile Payments and Banking

April 2010

Moderator: Welcome to the Federal Reserve Bank of Atlanta's Payments Spotlight podcast. Today, we're joined by Mark Budnitz, a law professor in Georgia State University's college of law. Mark also serves on the advisory group for the Atlanta Fed's Retail Payments Risk Forum. He will be speaking about mobile payments and banking. Mark, thank you for joining us.

Mark Budnitz: It's good to be here.

Moderator: Why don't we start with you giving your general observations on where mobile payments and banking stand in the United States today?

Budnitz: United States companies recently started to vigorously develop mobile financial services. For many years, it seems, these companies watched mobile financial services rapidly expand in some other parts of the world, but it seems they hesitated to develop products here because cell phones weren't so ubiquitous as elsewhere. Consumers seemed satisfied using bank branches and banking online and using their debit and credit cards to make purchases. But over the last few years, overwhelming majority of consumers now use cell phones to talk, and more and more are using their cell phones to access a lot of different applications: to download and listen to music, and find their way using GPS, and tweet, and send e-mail, take and send photos, and so many other everyday kinds of things. So companies providing financial services now realize consumers are probably ready to use their cell phones to access financial services as well, and these companies are experimenting with several types of products.

Financial institutions are trying to figure out which types of services consumers want and how the companies can work together with other parties. Not just financial institutions, but there are software developers, phone manufacturers, telecoms—a wide variety of other kinds of companies—and they all want to figure out how to work together, cooperate, and also how to price the service so they can make a profit but not drive consumers away. Consumers are so use to getting things for free on their cell phones that somehow the companies involved in this have to figure out how to make it work in terms of their business objectives as well.

Moderator: Mark, you have written numerous articles on consumer issues and the electronic payment system, so from a consumer protection standpoint, what are your biggest concerns with the adoption of mobile payments and banking in the United States?

Budnitz: The way I approach this is by stepping into the shoes of a consumer that has a problem. Say you've got a consumer, she tried to pay her rent using her phone but the landlord claims he never received it, or the lender claims it never received the car payment, or the mortgage payment, and the consequences of these people saying they never got the payment are really significant to the consumer. At the very least, the consumer is going to have to pay expensive penalty charges, and at worst the consumer may face eviction, repossession of her car, foreclosure on her house—something really drastic—because what we're talking about here are really very important services.

Financial services are essential for people to be able to use, and use effectively and without major problems. And today, I don't think it's absolutely clear what law applies to many situations. Probably the Electronic Fund Transfer Act applies—the EFTA, a federal statute—and if that law applies the consumer can complain to the financial institution where she has her bank account that she used to pay that bill. But all that statute, the EFTA, all that requires as a general rule is that her bank investigate by examining its own records. It's possible that the payment didn't reach its intended destination because of a problem that occurred somewhere else, not within the consumer's own financial institution. Maybe it's the fault of the payment processor, or the cell phone, the telecom, maybe it's the creditor's bank that caused the problem so the payment was never received by the creditor. What the consumer needs is a law that clearly says to the consumer: All you have to do is complain to your bank, and your bank is responsible for investigating, and your bank has to recredit your account unless it can document that the failure was due to something that the consumer did and not any of the other many parties to the transaction. And that puts the burden on the consumer's bank to conduct an investigation that goes beyond its own records, beyond its own four walls. So, that would be an expansion of the federal statute, of the EFTA, and what it seems to require most of the time. It would have to investigate the whole transaction if it wants to shift liability to someone else. And then, the consumer's financial institution and these other parties can work out through private contracts just who's going to be ultimately stuck with the loss, but it should not be on the consumer, unless it was the consumer's fault.

Other problems consumers may face are unauthorized transactions, payments made in the wrong amount; privacy and security are major concerns, too. Mobile financial services offer companies new avenues for invading privacy. They can collect lots of data, and they can sell that information about consumers to other companies. And it's not just private companies that have new potential methods to invade consumers' privacy; governments are getting involved in all kinds of new ways to take advantage of mobile financial services.

Another concern that I have is how many vital services are being bundled together. If a consumer has a problem with one of those services, that consumer may lose the entire bundle of services. I'll give you an example. A consumer may want to switch telecom companies. Maybe she's lost her job and needs a cheaper service that only another company provides, or maybe she moved to a different place and she can't get good reception where she lives now. The problem is that the telecoms charge what at least consumers regard as exorbitant termination fees. The consumer may not be able to afford the termination fees, so she may be stuck with that telecom that really is not satisfactory. And, if she can't get service from that telecom, then not only does she lose her cell phone service, but that means she's also losing all those bundled services including her mobile financial consumer services, her ability to do her banking using her cell phone. So, that excessive termination fee is one example of another problem that a consumer may have, but the deeper problem of that bundling of so many things onto the cell phone. So those are some of my concerns.

Moderator: As you know, the recent crisis in Haiti has put mobile payments in the spotlight as thousands of individuals were able to use their mobile phone to text pledges in support of the relief effort. In light of this development, what are your thoughts on the growing role of telecoms in payments clearing and settlement?

Budnitz: What happened there was, people making donations to charities to help the people in Haiti used text messages on their cell phones, and the amount of their donation was charged to their phone bill, the phone bill that they receive from the telecom. So this is a wonderful convenience, and it's a wonderful way to support people who are in such desperate need. But on the other hand, the growing role of telecoms in payments clearing and settlement concerns me. When payments are going through financial institutions, we have a well-regulated environment, an established body of laws to work with, and in light of new developments, like mobile financial services, we may have to make modifications and clarifications and maybe some additions to our current laws, but we know what we're dealing with. We have a set of laws that we've had on the books for many years, so we're comfortable with that, and we know how to make the adjustments, and we know who we're dealing with. But telecoms are new to this expanding payments environment. Telecoms have a long history of billing for their own service, so they know how to bill. But that history is not very auspicious. And as more types of payments are added to consumers' phone bills, the role of telecoms bec'omes more and more important.

But it's not just the telecoms. To process the payments—those payments that people made to charities in response to the crisis in Haiti—to process the payments, the charities used private companies to do that processing. Well, what if a consumer sends a text message donating $50 to a relief organization. She gets her bill from the telecom and the telecom bills are for not $50, but $500. Well, what does the consumer do now? How can the consumer figure out who is responsible for the error? It might be the charity, it might be the telecom, it might be that payment processor, and who does the consumer complain to, and who's responsible for correcting the error? I think consumers need regulations that are modeled on those that apply to payments where financial institutions are involved, because if there's substantially different rules for consumers, different rules they have to follow when they have a problem with this kind of a payment that shows up on their monthly bill and did not go through their financial institution, different rules mean that consumers are just going to be very confused: one set of rules when you have mobile financial services using your cell phone and it goes through your financial institution, well, that's one set of rules. But then, if instead the payments on the telecom bill are a different set of rules, or no rules at all, then the consumers can be very confused and won't be able to exercise any rights that she might have successfully. It's just going to be a very complicated situation.

Moderator: Well, that kind of leads me into my last question. We know that laws and regulation typically lag behind innovation. With this in mind, what should be the approach in addressing the potential gaps in the regulatory and legal infrastructure for mobile commerce?

Budnitz: Well, because of my concerns—and there's lots more going on than we've had time to talk about—but because of my concerns, I think that the federal regulatory agencies need to be proactive. They need to try to anticipate new developments, and also, they need to cooperate among themselves. I think it should be the federal agencies that take the initiative instead of the states, because states would have to do it state-by-state, and then you would have very uneven regulation and there would be inconsistencies. That would cause a huge problem for the companies that are involved because this really is a nationwide system that we are talking about. So, these federal regulatory agencies need to get involved, they need to get involved soon, and there's a lot of agencies that are working on this kind of thing. It's the Federal Trade Commission, the Federal Reserve Board, the OCC, the OTS, the FDIC, but also the FCC, the Federal Communications Commission, because they regulate, in some areas, the telecommunications industry. And so all these have to work together in new ways that they haven't worked together before in terms of having effective regulation. When these agencies identify a problem, or they anticipate something that may become a problem, they should quickly respond. And one way that they can respond quickly is through what they call an interagency guidance. Interagency because it's several agencies—all the agencies that have an interest in this—coming out with one uniform guidance so the industries, the companies involved, don't have to try to figure out different types of guidances from different agencies, it's all uniform. That would be the best way to do it if possible. Even with a guidance they have to be careful not to react prematurely, not to act in a way that's going to stifle competition and innovation. We've seen wonderful innovation in this industry, and we don't want to unduly discourage that sort of activity.

But this whole task of regulation takes a lot skill. For example, the regulation can't be so specific that it ties the hands of business so new and better products and services are precluded, but at the same time the regulations can't be so general and vague that business and consumers can't figure out what's allowed and what's not allowed. And so it's a delicate balance between being too specific and being too general, but these are kinds of regulatory issues that the agencies deal with all the time. I have confidence that they're going to be able to do it. And they have that experience in other areas, related areas, for financial services.

But timing is another issue. It's not just how you draft a regulation; it's also the timing. The agencies shouldn't act prematurely before there's confidence there's really a problem, or the likelihood of a problem. But then they shouldn't wait too long, either. So, the timing is a difficult judgment call, but it's one that the agencies have to make in terms of when is the appropriate time to issue regulations. At the every least, regulations should make it absolutely clear that the Electronic Fund Transfer Act applies to mobile financial services when a financial institution is involved. And the regulations should put responsibility for errors and unauthorized use squarely on the consumer's financial institution in terms of who is liable, the consumer or the financial institution. It should not be the consumer. That ensures that the consumers have the right to complain to their financial institutions no matter which company may be at fault. And that would also impose deadlines like the Electronic Fund Transfer Act does now, deadlines for the institution to investigate. And requirements for recrediting the consumers account when the financial institution discovers through the investigation that, yeah, there was a mistake made regardless of who made it. So the burden between the consumer and the financial institution should be on the financial institution.

And consumers also need strong laws giving them error-resolution rights when payments are charged to their phone bills. As we were saying in regard to the Haiti crisis, you've got a new ballgame now where financial institutions may not be involved at all. Laws that adequately protect consumers also help the mobile financial services industry, because if you have strong laws giving protection to consumers in these various areas that I've discussed, then consumers are going to feel confident in using these systems. They're going to enthusiastically embrace mobile financial services because they know there's some protection for them. By having good procedures and safeguards for consumers built into the laws, consumers are going to have more trust in the integrity of that system, and that just helps all the parties because then you get the volume that the companies need to make this a sound business investment.

Moderator: Thanks, Mark, for sharing your insights.

Budnitz: Well, I'm delighted to have this opportunity.

Moderator: Again, we've been speaking today with Mark Budnitz, a law professor in Georgia State University's College of Law. This concludes our Payments Spotlight podcast on mobile payments and banking. On our Web site,, you can read more about the Retail Payments Risk Forum.

Thanks for listening, and please return for more podcasts. If you have comments, please send us an e-mail at