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The Evolution of Banking: a Flexible Fiduciary Duties Approach Will Help Better Protect Mobile Banking Consumers

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The Evolution of Banking: a Flexible Fiduciary Duties Approach Will Help Better Protect Mobile Banking Consumers THE EVOLUTION OF BANKING: A FLEXIBLE FIDUCIARY DUTIES APPROACH WILL HELP BETTER PROTECT MOBILE BANKING CONSUMERS Isabel Peres TABLE OF CONTENTS I. Introduction ......................................................................................... 212 II. Background ......................................................................................... 215 A. Current Regulation of Mobile Financial Services ....................... 215 B. What are the Characteristics of the Mobile Financial Industry and the Unique Risks to Consumers ............................................ 217 1. What Exactly Are Mobile Financial Service: Mobile Banking and Mobile Payments .............................................. 217 2. Participants in the Mobile Banking and Mobile Payment Industries ................................................................ 219 3. Unique Risks for Consumers in the Mobile Financial Services Industry ................................................................... 220 a. Third Party Risks ............................................................ 221 b. Malware Threats ............................................................. 223 c. Fraud and Security Risks ................................................ 223 C. Fiduciary Duties and Banks ......................................................... 225 1. The Fiduciary Duty Obligation in a Bank-depositor Relationship ........................................................................... 226 a. Cases Supporting Fiduciary Duties for Banks ................ 227 b. Cases Holding No Fiduciary Duties for Banks ............... 228 III. Analysis ............................................................................................... 229 A. Current Consumer Protection Regulations Applicable to Mobile Financial Services: Why Fiduciary Duties Should Apply to Mobile Banking ............................................................ 230 Isabel Freitas Peres, Esq., University of Illinois College of Law, May 2014. European Master in Law and Economics, University of Bologna/University of Hamburg, October 2012. LL.M, University of Illinois College of Law, May 2010. I thank the JLTP staff for its diligence and dedication to publishing excellent work. I would also like to thank my Note Editors, Corbin Freres and Jeremy Tyrrell, for their guidance and feedback during the writing and editing of this Note. Professor Summer Kim deserves especial praise for her inspiring me to write this Note and for taking the time to share with me her comments and corporate and financial laws knowledge. I wish to thank my family in Brazil for their love, support, and understanding throughout my extensive law school career. Finally, I wish to thank my supporting husband and great friends for their continued support with everything I do. 211 212 JOURNAL OF LAW, TECHNOLOGY & POLICY [Vol. 2015 1. Electronic Fund Transfer Act/Regulation E .......................... 230 2. Unfair, Deceptive, or Abusive Acts or Practices Under the FTC Act or Consumer Financial Protection Act of 2010 ...... 231 3. Gramm-Leach-Bliley Act ...................................................... 232 B. Fiduciaries Duties May Be Found in Traditional Banking Relationships ............................................................................... 233 1. The Rise, Fall and Lessons of Commercial Cotton Co. v. United California Bank .......................................................... 233 2. A Trend to a Full-Blown Fiduciary Duty is Already in Place .................................................................................. 236 IV. Recommendation ................................................................................ 237 A. What Courts Can Do: a More Flexible Fiduciary Duties Approach Should be Applied to Mobile Banking Relationships ............................................................................... 237 B. What Do We Need From Banks: “In Banks We Trust” .............. 238 1. Trust is a Foundation of Banking .......................................... 238 2. Trust and Reliance on Banks Are Reasonable and Justifiable ........................................................................ 240 3. Banks Know that “In Banks We Trust” ................................. 241 4. Conflicts of Interest Between Banks and Mobile Banking Consumers............................................................... 243 V. Conclusion .......................................................................................... 244 I. INTRODUCTION Mobile banking is here to stay. The increased popularity of mobile banking made it to Ellen DeGeneres’ talk show when she recollected the time when depositing a check would be accomplished by the following steps: “You had to sign the back of the check, then you had to fill out one of those deposit slips . [t]hen you had to add up all the numbers in your head, then you had to wait in line. Then you got to the front of the line and you had to make small talk with the bank teller . .”1 Mobile finance is a new delivery channel for financial products and services and a growing trend in the United States.2 Customers like Ellen DeGeneres are now using their mobile devices for checking accounts, shopping, and making purchases.3 In fact, mobile payment volumes are expected to reach $214 billion in the next three years, and approximately ten percent of the $2 trillion in cash transactions, involving $25 or less, could soon 1. Sarah Todd, Ellen DeGeneres Stands Up For Mobile Banking, AM. BANKER (Nov. 20, 2013, 1:37 PM), http://www.americanbanker.com/people/ellen-degeneres-stands-up-for-mobile-banking-1063801-1.html. 2. See Penny Crosman, Mobile Banking Activity Continued to Grow in June, AM. BANKER (Jul. 30, 2013, 4:53 PM), http://www.americanbanker.com/issues/178_146/mobile-banking-activity-continued-to-grow- in-june-1060986-1.html (“The adoption rate [of mobile banking] continues to exceed our expectations . Popularity of mobile applications continues to grow in interest and acceptance.”). 3. PwC’s Banking Views: Mobile Payments, PWC LLP, http://www.pwc.com/us/en/banking-capital- markets/banking-views/mobile-payments.jhtml (last visited Apr. 20, 2015). No. 1] MOBILE BANKING CONSUMERS 213 move to mobile.4 While this evolution of technology allows consumers to conduct financial transactions using mobile devices, customers and regulators still expect the same level of consumer protection when using cellphones as they would expect from services at a brick and mortar bank.5 However, this new technology presents different risks than traditional banks. For instance, using mobile phones for financial transactions increases risks related to personal security because the number of intermediaries involved in providing the service increases the likelihood of errors.6 In addition, consumer still face several risks related to wireless carriers still employing outdated encryption technology in the United States.7 Consumers, however, are not alone when it comes to mobile technology. The Federal Trade Commission (FTC) is the independent agency of the U.S. government that protects consumer, by preventing fraud, deception, and unfair business practices.8 The Mobile Technologies unit in the Division of Financial Practices safeguards consumers in the mobile environment.9 This division coordinates mobile enforcement and policy work and develops surveys, reports, and educational materials to highlight mobile practices of concern.10 In a February 2013 report, the FTC noted that while mobile technology benefits consumers, the use of the devices raise a number of potential privacy risks.11 The FTC made recommendations for mobile application providers such as banks that offer mobile banking services, in order to provide “just-in- time [privacy] disclosures,” to require that providers obtain the consent of consumers before sharing sensitive information, and to improve coordination efforts between all parties involved in providing financial services.12 Similarly, a report from the Financial Conduct Authority (FCA), the financial systems regulator in the United Kingdom, raised concerns about the risk of using third parties in providing mobile financial services and about the potential of fraud and security issues in these services.13 According to banking law experts, while consumers demand mobile banking technologies, “banks need to be sure that they meet all their regulatory obligations when providing 4. Id. 5. Robert C. Drozdowski, et. al., Mobile Payments: An Evolving Landscape, FDIC (Jan. 3, 2013), https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin12/mobile.html (“[R]egulatory expectations for managing mobile payments are generally consistent with those associated with other financial services delivered through more traditional channels.”). 6. Id. 7. Eleanor Lumsden, Securing Mobile Technology & Financial Transactions in the United States, 9 BERKELEY BUS. L.J. 139, 142 (2012). 8. About the FTC, FTC, http://www.ftc.gov/about-ftc (last visited Apr. 20, 2015). 9. Div. of Fin. Practices, FTC, http://www.ftc.gov/about-ftc/bureaus-offices/bureau-consumer- protection/our-divisions/division-financial-practices (last visited Apr. 20, 2015). 10. Id. 11. Mobile Privacy Disclosures: Building Trust Through Transparency, FTC (Feb. 2013), www.ftc.gov/os/2013/02/130201mobileprivacyreport.pdf. 12. Id. 13. Mobile Banking and Payments−Supporting an Innovative and Secure Market, FIN. CONDUCT AUTH. 6 (Aug. 2013), http://www.fca.org.uk/static/documents/thematic-reviews/tr13-06.pdf. 214
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