In January of this year, the Federal Reserve System issued a white paper titled “Strategies for Improving the U.S. Payments System.” The white paper notes that current technological developments (including the widespread availability of high-speed data networks, the ubiquity of mobile devices, and the increasing use of real-time commercial transaction processing) are outpacing the functional ability of the payments system to handle electronic payment authorization and processing. In an effort to develop strategies for addressing this growing gap, the Federal Reserve has established a Faster Payments Task Force (“FPTF”). The FPTF, which had its first meeting in June, seeks to engage a wide range of stakeholders to “identify and evaluate alternative approaches for implementing safe, ubiquitous, faster payments capabilities in the United States.”
A key question raised by such an initiative is this: what should the legal and compliance requirements for a modern electronic payments system include, especially in connection with consumer transactions? Current U.S. regulations for electronic fund transfers form a cumbersome patchwork — the rights and obligations of the parties to the transaction vary by the payment method used, and in some cases may change during the course of the transaction as the payment method is converted from one form to another (for example, the time frames within which a consumer may identify and reverse unauthorized or erroneous payments are often very different, depending on the form of payment).
The Consumer Financial Protection Bureau (“CFPB”), which is participating in the FPTF, has just issued a position paper on “Consumer Protection Principles” for faster electronic payments. The CFPB has identified the following as key elements of the legal and compliance framework:
- Consumer control – the consumer, as payor, controls when, and under what conditions, payments will be made from the consumer’s account.
- Data and privacy protection – consumers are provided complete information about the types of data being collected and transferred, and how it may be used.
- Fraud and error resolution – effective and easy-to-use protections are in place to address fraudulent, unauthorized, or erroneous transactions.
- Transparency – real time access is available for transaction status, and appropriate disclosures are made about costs, risks, funds availability, and security of payments.
- Cost – any fees and the true full cost of transactions are fully disclosed.
- Access – the faster payments are widely available and widely accepted.
- Funds availability – faster payments include rapid, guaranteed access to funds by consumers.
- Enhanced security – a system for faster payments includes strong authorization, loss prevention, and error-prevention technologies.
- Strong accountability – commercial participants are accountable for the risks, harm, and costs they introduce to payment transactions, and are incentivized to prevent misuse.
The principles articulated by the CFPB represent a good start towards establishing criteria for electronic payments by consumers, but are very high level. The hard work will come in trying to flesh out the details. For example:
- Will faster payments require direct consumer authorization (where the consumer “pushes” funds to the payee), or will indirect authorization (where the payee “pulls” funds from the consumer’s account) be permitted?
- Will payments made to consumers be required to “come to rest” in an FDIC-insured account?
- Under what circumstances will payors and payees be exposed to losses from unauthorized transactions?
- If the whole point of “faster payments” is faster confirmation of final funds, how will that imperative be reconciled with continued protection against unauthorized or erroneous payments?
Perhaps most importantly, as these and many other questions are answered, will the answers simply be used to ladle another layer of rules, specific to a small subset of “faster payments,” onto the existing regulatory structure? Or, will the answers serve as the foundation for a new set of rules for all electronic payments that apply irrespective of the structure, source of funds, or method of payment? Hopefully, the Federal Reserve’s initiative will offer an opportunity for U.S. regulators to move towards a new, comprehensive regulatory framework for electronic payments.