Payments and Regulations : updated

I would like to start off with a quote from CGAP ( Consultative Group to Assist the Poor) to point out the objectives of regulations.

The only change I would like to point out is that this holds good for all the people and not just the “poor” people.

While the FIs cry about the amount of regulations and policies, some newer players in the payment systems are at an advantage as they do not have to comply with all the regulations. These new payment players have stayed out of “being a bank” (PayPal, Walmart, Google) and have “escaped” some of the regulatory constraints.  At least until the regulatory bodies feel that they need to amend the coverage of these regulations.

With the fast evolution of online and mobile payment systems, the traditional regulations are yet to catch up and ensure that the “rules of the game” covers all the payment instruments and provides an equal and a fair playing field to all the players.

I will get into each of the regulations in a little bit more detail over the course of time, but here is just an overview of the kind of regulations  that cover the payment instruments.

First, let us take a look at the traditional payment instruments – the cash, credit, check, DDA debit and the ACH.

Regulations covering the traditional payment instruments

And now let us take a look at the non-traditional payment instruments (also referred to as “alternate payments” or ”emerging payments”) and how are they covered by the regulations..

In my view, there are 6 different buckets of alternate payments. (Note that it can have different form factors – plastic, mobile, digital as with the traditional instruments.)

Alternate payment types

Let us take a look at how the depository regulations, consumer protection regulations and payment specific laws are applicable to these “alternate payment types”.

1. The Gift card/GPR cards are the closest to the traditional instruments from a regulatory aspect. Some of them provide deposit insurance, while some of them may not. The dispute resolution regulations (such as TILA, FCRA, EFTA, Reg E, etc..) may or may not be provided by all the gift cards. Many of the cards are not clear about the escheatment laws.  Amex stopped selling its gift cards in NJ recently as it did not have proper arrangements to comply with NJ’s new rules on escheatment.

2. With the evolution of digital wallets, companies such as PayPal, Dwolla hold consumers cash (assets) in their accounts. Since those companies do not have a “bank license”, they need not necessarily comply with all the regulations that FIs need to follow for carrying asset accounts. Of course, most of these companies voluntarily provide the protections necessary for building trust in the consumers but there may be a grey area here.

3. Mobile minutes/carrier billing : Since this is not a “credit” account or an “asset”account in the truest sense, companies like BilltoMobile, Boku, Zong (now PayPal) need not follow the TILA, TISA regulations. Each of these companies/products have their own specific dispute resolution, unauthorized transaction/billing resolution policies.. Start up companies need not necessarily have proper payment system integrity systems..

4. The next set of payments include a wide variety of currency – frequent flyer miles, points, credits – that are used for real-world transactions.  They have their own set of expiry policies, transferring policies and inter-conversions.  Consumers really have very less protection be it in validity, dispute resolution, integrity, insurance, etc..

5. Pure digital currencies – such as Bitcoin (with no backing of any fiat currency) – offer very little protections for the consumers. Since governments do not support these currency systems (yet), consumers have ZERO protection.

6. Virtual currencies – those that can be used only for “virtual world” and those that cannot be converted into real currencies have very varied protections. Currencies such as Playspan, Linden dollars, etc fall into this category. Many of the traditional regulations may not be applicable here, but because no regulations exist to protect, consumers are the mercy of the companies that create and run those currencies.

These inconsistencies in the “alternate payment” regulatory requirements cause an unven field to the incumbents and the new players – often putting the incumbents in a disadvantageous spot. At the same time, it is hard for the the regulatory bodies to add/amend the policies at the pace the new payment instruments are evolving.

We, however, need to have an easy forum/platform to track the concerns that consumers face. The CFPB provides such a platform for consumers to track their concerns publicly for the traditional credit card system. They need to extend it for all these “alternate payments” systems too!

You can reach me at This email address is being protected from spambots. You need JavaScript enabled to view it. for more detailed information on these regulations. I am not a lawyer and hence cannot provide legal advice, but can give details enough for a start up company a start on these issues.

UPDATE 1/9/2013 : FDIC has come up with a detailed paper on applicability of current laws/regulations to Mobile payments in this paper – > .



Original author: phanee