Can Regulators Foster Financial Innovation and Preserve Consumer Protections?September 11, 2020
Between 2010 and 2018, U.S. investments in financial technology, or “fintech,” grew from almost $2 billion to more than $100 billion, with over half of the increase occurring in 2018 alone. Among the ripest spaces in the financial sector for a technology upgrade is payments—the systems that move money between people and institutions—which currently rely on aging infrastructure and often make consumers wait for access to their funds. Payments innovation is important not only to ensure the expediency and safety of everyday transactions, but also to speed the delivery of government benefits or funds to those in need, especially during emergencies, such as natural disasters and the COVID-19 pandemic and resulting recession. As businesses and policymakers seek to promote the development of new payments technologies, the need to also ensure safety and efficiency will present a range of challenges to regulators and traditional financial systems.
Mobile payments, in which consumers conduct transactions from their smartphones, are perhaps the most significant payment innovation since credit cards. In recent years, they have evolved from a novel, sometimes risky tool, into an extension of the mainstream financial system and, increasingly, a primary vehicle through which new payment options are made available to end users. Many consumers already rely on mobile payments for electronic person-to-person (P2P) money transfers—such as between family or friends—and faster payments, which move funds between accounts in an instant, and are now leveraging them as a way to avoid contact with others amid the pandemic. Research from The Pew Charitable Trusts found that, as of 2018, more than half of U.S. adults had made a mobile payment in the past year, though nearly 30% of consumers said that they have avoided mobile payments to protect against loss of funds.
Regulators have responded to the risks of consumer losses by improving protections for most mobile payments. In particular, the Consumer Financial Protection Bureau’s (CFPB’s) Prepaid Rule, which went into effect in 2019, filled key gaps in existing regulation and created a relatively cohesive regulatory structure. Specifically, the rule extended the traditional safeguards that protect debit card users against losses to newer nonbank products, including general purpose reusable (GPR) prepaid cards and most mobile “stored value” accounts, such as mobile wallets and apps that hold funds and enable P2P transfers. Previously, consumers had little or no legal recourse in the event of a loss of funds on these accounts.
Technology advances have made mobile payments increasingly useful and popular, and regulations have become more uniform across payment types. But antiquated financial and regulatory infrastructure means that most payments still take up to three days to transfer the funds between banks and that companies and regulators continue to encounter obstacles when…