Why Apple Pay and other mobile wallet services could be regulated like banks

Mobile payment services are slowly starting to catch on in the United States, with offerings like Apple Pay and a new version of Google’s mobile Wallet app for Apple’s iOS introduced on Monday that lets users send cash out to any bank account and even split a check with friends.

But while the payment services seem simple – just plug in a debit or credit card number, enter your email and scan your phone using a bar code or QR code at one of a growing number of stores, from Kohl’s to the hamburger chain White Castle – one larger question looms over the services: are they replacing traditional banks, and should they be subject to the same types of regulation?

As more retailers and traditional banks continue to roll out support for mobile wallet services, concern about whether they should be regulated is growing, particularly internationally.

“The tech industry has an enormous contribution to make to the modernization and efficiency of the banking industry and give customers the service proposition they want, but there are issues on the way,” said Douglas Flint, chairman of HSBC, Europe’s largest bank, in remarks at the Cass Business School in London on Thursday, Reuters reports.

In China for example, where few people have credit cards, use of mobile payment services has exploded, with many people using services from companies like Tencent and Alibaba – which has 289 million active users every month – as an alternative to paying with cash, The Street reported in June.

But in the US, one financial regulation expert says it’s likely Apple Pay may likely fall under regulation by the Consumer Financial Protection Bureau, the watchdog agency established by Congress in the wake of the 2008 financial crisis.

In a blog post last September, Georgetown Law School professor Adam Levitin wrote that although Apple does not offer its own financial product or service – working through existing credit cards instead – it may be subject to regulation as a “service provider.”

That means federal regulators and state attorney generals could look into any aspect of Apple’s business, because “there is no language saying that the unfair, deceptive, or abusive acts and practices has to have any relationship with the consumer finance business,” Prof. Levitin writes. He did not immediately respond to a request for comment from The Christian Science Monitor.

The financial watchdog began studying mobile banking services in June 2014. Noting that 90 percent of American consumers own a cellphone, a bureau spokeswoman said it was focusing primarily on whether mobile payment services could improve access to banking for low-income consumers who rely on services like check cashing or payday loans instead of a traditional bank branch. She declined to comment on whether the bureau would be considered a "service provider" and directly under its jurisdiction.

But here's how it would work, according to Professor Levitin: Apple Pay does not currently transmit funds directly, (as competing services like PayPal do), which means it is not a “covered person” regulated by the bureau, he notes. But, because the mobile wallet service can transfer funds from a credit card, and the card issuers are regulated, Apple likely qualifies as a “service provider,” a secondary category of institutions under the authority of the financial watchdog.

While Levitin writes that it’s possible that Apple and the CFPB could disagree with his interpretation of the law to include mobile wallet services, the moment represents a watershed, he says. “If my reading is correct, Apple just walked into the very different world of being a regulated entity,” he adds.

The bureau would also look at privacy concerns around the massive amounts of data collected through such services, the CFPB said in a statement. Moira Vahey, the bureau spokeswoman, noted that the agency had filed an enforcement action against PayPal in May, alleging that the company had illegally signed consumers up for its online credit product without their consent.

Outside the US, some banking giants have said they feel regulators will increasingly look at whether tech companies’ software should be regulated further, particularly because of concerns about how customers’ data may be used.

“The richness of financial data is why many tech companies want to get into payment services, and you're all going to have to make choices at some point on how much of your payment flow information you want to share,” Flint, the HSBC executive said on Thursday, according to Reuters.

Further regulation would clarify where the responsibility would fall if a customer’s mobile banking information were to be misused or hacked, he said, noting that in order to avoid the burden of regulation, tech companies offering mobile payments could consider partnering with banks directly. 

It's difficult to tell if Levitin's predictions about further regulation will actually come true. Ms. Vahey, the consumer bureau spokeswoman, declined to discuss whether the agency would pursue further enforcement actions against mobile banking services.

"We will continue to closely monitor developments in the mobile payments space, so that we can identify any emerging consumer protection issues," the CFPB said in a statement when Apple Pay launched in October 2014. "The Bureau’s role is not to choose market winners and losers, but to protect consumers and to make sure that companies offering consumer financial products or services play by the same rules...Rules that apply to plastic card payments also apply to payments with a phone."