What the Future Holds for Regulating Mobile Payments Marianne Crowe, VP, Payment Strategies, Federal Reserve Bank of Boston John Muller, Vice President, Global Payments Policy at eBay Inc Jackie McCarthy, Director, Wireless Internet Development, CTIA Lauren Saunders, Associate Director, National Consumer Law Center Moderator: Bill Sullivan, Senior Director & Group Manager, Government & Industry Relations, NACHA - The Electronic Payments Association © 2014 NACHA — The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. Content from sources other than NACHA is used with permission and requires the separate consent of those sources for use by others. This material is not intended to provide any warranties or legal advice, and is intended for educational purposes only. What the Future Holds for Regulating Mobile Payments Overview of Mobile Payment Landscape Marianne Crowe Federal Reserve Bank of Boston July 17, 2014 © 2014 NACHA — The Electronic Payments Association. All rights reserved. No part of this material may be used without the prior written permission of NACHA. Content from sources other than NACHA is used with permission and requires the separate consent of those sources for use by others. This material is not intended to provide any warranties or legal advice, and is intended for educational purposes only. The views expressed in this presentation are those of the presenters and do not necessarily reflect the views of the Federal Reserve Bank of Boston or Federal Reserve System. 3 Agenda • Overview of Mobile Payments Landscape • Challenges • Mobile Payments Industry Workgroup • Key Takeaways 3 4 Mobile Definitions • Mobile Payment: Mobile device used to make proximity (point of sale/POS) or remote purchases, transit, digital content, P2P money transfer, online goods and services. Funded via credit or debit card, prepaid account, bank account, charge to mobile phone bill. • Near Field Communication (NFC): Standards-based wireless radio communication to exchange data between devices a few centimeters apart (e.g., mobile phone and merchant POS terminal). • Secure element (SE): tamper-resistant, encrypted smart chip in mobile phone to store and manage access to customer account credentials for NFC/contactless payments. • Host Card Emulation (HCE): Software representing smartcard. Eliminates need for secure element. Routes NFC communications through mobile phone’s host processor and stores and transmits payment card credentials via cloud. • Cloud: Remote server where mobile payment credentials are stored. Payments may be initiated from a mobile app, QR code, or NFC/HCE. 4 5 Drivers of U.S. Mobile Payments 5 Landscape Rapid growth in smartphones and Convergence of mobile apps online, mobile & POS channels Multiple Dynamic, technologies: QR, Incentives – Rapidly NFC, Cloud, HCE, coupons, BLE rewards, loyalty Evolving Mobile Prepaid accounts Increasing role Payments of nonbanks & Landscape Impact of EMV merchants migration e-Commerce Mobile/digital growth via Wallets mobile 5 Mobile Payment Developments 6 2006-2008 2009-2010 2011 2012 2013-2014 Remote Payments - Mobile Browser QR Codes mPOS Merchant Apps SMS & Internet PayPal Here PayPal Text to Buy NFC Mobile Wallet Text Buy It First Mobile Card NFC + Host Card Acceptance/ Emulation (HCE) mPOS NFC + SE Mobile App Stores Mobile Wallet Cloud Digital Wallet Apple Beacon BLE Apple Passbook Android Proliferation of Prepaid Contactless cards mobile Apps NFC iPhone case AmEx Prepaid Account AmEx Bluebird Mobile Bank Account Other? Direct Carrier Billing Green Dot 6 Consumer Adoption of Mobile Payments 7 Slowly Increasing Percentage of Mobile Payment Users • Ubiquity of mobile phone is changing how consumers access and pay 17% – 2/3rds of mobile payment users Mobile Payment Users paid a bill online 15% – 17% of smartphone users made POS mobile payment – 39% QR code – 14% NFC tap at terminal 24% Mobile Payment • Unclear value and security Users (Smartphones) concerns limit adoption 24% – 63% do not make mobile payments due to security concerns 2013, n=2341 2012, n=2291 – 61% see no benefit from mobile Source: Federal Reserve Board, “Consumers and Mobile Financial Services,” payments March 2014 7 Nonbanks Strongly Influencing Mobile 8 Payments Ecosystem • Diverse businesses and industries – MNOs, start-ups and technology solution providers – Merchants and online payment providers • Easy market entry for start-ups • Creating new relationships/partnerships with banks and other businesses • Raising concerns related to security, consumer protection, data privacy, knowledge of payment regulations • Need for enhanced vendor risk management programs 8 9 9 Diversity Creating a Fragmented U.S. Mobile Payments Market 9 10 Much Focus on Wallets Wallet Provider Features • Host Card Emulation (HCE) replaces secure element • NFC to tap & pay at point of sale • Load any credit/debit account • Credentials stored in cloud • Joint venture between AT&T, Verizon and T-Mobile • NFC with secure element in ‘Isis-ready’ SIM card that stores payment credentials • Includes AmEx Serve prepaid account • Mobile phone number & PIN at POS to access PayPal account to pay • Payment credentials stored in cloud • Cloud-based for mobile and online purchases; not POS • Customer can link Visa & other card accounts • Top U.S. merchants; mobile app with QR code to pay at participating retail/grocery stores, restaurants, gas stations 10 Other Mobile Solution Disruptors 11 • Closed-loop prepaid account with reload capability & rewards • 10M+ mobile app users, 5M mobile trans/week • 14% of in-store U.S. transactions from mobile • Small merchant white label mobile network • Link credit/debit to mobile app to get unique QR code • 1M+ users; 5K+ merchants • No interchange. Merchant pays based on incentives, new customer & rewards fees • iTunes digital wallet (575M active accounts, 775k+ mobile apps) has potential to expand to payments • Passbook - cloud-based digital wallet that aggregates merchant QR codes, loyalty, gift cards, movie tickets, boarding passes. NO payments. • Small merchant model with Mobile app & plug-in device to accept credit/debit cards, replace cash and check • As merchant acquirer assumes liability, charge-backs • Customer model – restaurant pre-order, pre-pay 11 12 What Consumers Want in a Wallet • Mobile P2P transfers 26% • Make small purchases with mobile QR code 27% • Set up prepaid account for small purchases, 22% automatically reload from debit or credit card • Pay for purchase with debit, credit or prepaid 25% card account linked to mobile/digital wallet • Store merchant loyalty/rewards cards in mobile 28% wallet • Pay using loyalty points 30% Source: TSYS Survey, October 2013 12 Prepaid Mobile Banking Solutions Gaining 13 Traction • GPR prepaid account with card • Mobile features: New account open, direct deposit, alerts, bill pay, P2P, mRDC, ATM access, cash reload at Walmart; savings • GPR prepaid account card • Mobile features: Alerts, mobile RDC, direct deposit, cash reloads/withdrawals at Chase ATMs and branches • Branchless mobile bank account: Open new account, alerts, mRDC, P2P, bill pay, direct deposit, ATM network, cash deposits at some retail/convenience stores Green Dot Bank • All FDIC-insured. COMMON • Bluebird and Chase Liquid have mobile apps FEATURES • No minimum balances or overdraft fees • Bluebird and GoBank offer aspirational savings tools • GoBank has PFM tool 13 14 Drivers can also challenge U.S. Mobile Payment Adoption Competing technologies Data security and impact merchant privacy decisions EMV migration distraction Lack of Nonbanks cause interoperability disintermediation Low and standards merchant Fragmented acceptance Complex market confuses regulatory consumers structure 14 Multiple Points of Risk Create Security 15 Challenge • Progress requires trust, CUSTOMER transparency & AUTHENTI- CATION cooperation CLOUD & POS • Convergence of mobile MOBILE APPS platforms and multiple parties blurs lines of responsibility and liability MOBILE END • Complexity creates new DEVICE USER opportunities for compromise – Data breach – Data monetization vs. WIRELESS WALLET NETWORK privacy – Use of location-based services NFC, PAYMENT SECURE – Malicious mobile apps TRANSACTION ELEMENT & HCE 15 16 EMV Migration Will Help Reduce Card- Present Fraud But Impacts Mobile Strategy Liability shifts to EMV at non-EMV merchant acquirers Gas Pumps April October October October 2013 2014 2015 2016 2017 Acquirers & Processors Liability Shifts 100% EMV for ATM transactions 16 17 Challenge of a Complex U.S. Regulatory System No one authority or law regulates Federal FDIC payments or Reserve governs m- FTC commerce FCC U.S. Mobile Payments Ecosystem CFPB NCUA CSBS FinCen OCC 17 18 Mobile Payments Industry Workgroup Represents major U.S. mobile payment stakeholders—traditional and emerging payment providers . Financial institutions . U.S. Treasury . Merchants and card networks . Mobile Network Operators . Clearing/settlement . Handset/OS manufacturers organizations . Chip makers . Payment processors . Mobile solution providers . Online payment providers . Mobile carrier trade association . Payment trade associations • Builds consensus on mutual points of value and challenges • Works collaboratively to reach critical mass for secure, efficient retail mobile payment adoption • Helps Fed understand industry role in mobile payments ecosystem 18 Mobile Payment Principles for 19 Successful Adoption Interoperability between mobile/digital