Mobile payment technologies have the potential to reach new consumers and provide an array of exciting products to the market. Witnesses before the Senate Banking Committee and the House Financial Services Committee have testified that mobile payment and banking services are well positioned to increase access to financial services for un/underbanked consumers. However, it is crucial that these mobile products have adequate consumer safeguards. This is especially true for nonbank payment service providers, who, by operating outside of the existing payments regulatory regime, may increase risks to consumers and also to the payments system as a whole.

There are several areas where the development of a “shadow payment system” that does not leverage the existing regulated banking infrastructure could negatively impact consumers and merchants and erode the overall integrity of and confidence in the payments system:

Consumer Protection: The increase in less regulated actors developing multiple shadow payment systems results in inconsistent rules and consumer protections – such as merchant payment guarantee and consumer chargeback rights – that leave consumers without a clear understanding of what to do when a payment device is lost or when an unauthorized transaction appears on their bill.

Fraud Prevention: Shadow payment system players collect funds via traditional methods (like a bank account) but then transfer these funds outside of traditionally‐regulated systems. This process bypasses bank and other traditional account provider systems designed to help identify and prevent potential
fraudulent activity in real time.

Data Security and Privacy: Some evolving non‐bank business models present risk of inappropriate use of consumers’ confidential financial information and inadequate disclosure to consumers of how such information is being used. Also, while traditional payment networks have well‐established data security standards, similar standards are not fully established for all emerging shadow payment systems.

Interoperability: Safety and soundness concerns have resulted in ubiquity and interoperability within bank-driven payment systems. Emerging shadow payment networks are not held to the same standards and present the risk of non‐interoperable “islands.” This could force customers to establish relationships with, and to share confidential information with, a multitude of different non‐bank mobile payments providers.

Credit/Liquidity: Non‐bank mobile payments companies are not subject to the same capital, reserve, and examination requirements as banks and may increase credit and liquidity risk in the payments system.

Protection of Deposits: When dealing with banks, customers can clearly identify when funds are FDIC insured. Customers cannot assume that emerging non‐bank payment methods offer FDIC insurance for their funds. This could increase the risk of mass customer withdrawals, similar to a bank run.

BSA/AML: Non‐bank providers of emerging payment systems are not subject to the full range of Bank Secrecy Act (BSA) requirements that protect against the use of payments systems for illicit purposes.

The Clearing House, established in 1853 to bring order to clearing and settlement between banks, is the nation’s oldest banking association and payments company.