Feds Peer Into Payments Regulatory Crystal Ball—And Get Headaches

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For whatever consolation it offers, the feds overseeing payments-related regulatory issues are as apprehensive as payment facilitators. As the payments world is undergoing massive change in new and different ways of handling payments—an area where PFs lead—Justice and Treasury top brass are struggling to figure out the right ways to execute oversight.

Indeed, there’s even talk of adopting a European-like saferoom approach, where startups have a limited window to explore and innovate without worrying about regulators cracking down. It’s a saferoom in the sense that no idea is too risky to not be explored, even for a limited period of time. In other words, regulators are toying with the idea of whether it’s sometimes best to not regulate at all.

Let’s start with a potential crackdown over at Justice. The assistant attorney general who now runs the Justice Department’s criminal unit is considering exploring online lending as well as virtual currencies. But the rationale expressed by that assistant attorney general, Leslie Caldwell, is of much greater concern, especially for PFs.

“We see virtual currency as another example of something that there’s inherently nothing wrong with, but there’s a lot of potential for abuses,” she said, in an interview with Reuters.

It’s an interesting comment because it gives us a peek inside the thinking at Justice. Let’s break this down. There’s a difference between something that regulators want to keep an eye on and something that prosecutors want to attack. But when Justice sees “potential for abuses,” they are going to want regulators to set up disclosure rules so that they can watch for—and ideally head off—those kinds of abuses if they start to evidence of one.

Therefore, where Justice sees a “potential for abuse” is where you are likely to see the next set of regulations.

That’s somewhat concerning because at an early stage of payments development—which is where we are right now—the potential for abuse is almost universal. Any time there is a shift in how money is moved—whether from consumers to each other or from consumers to banks or banks to processors or processors to merchants or to/from PFs with any of the above—there is the potential for new fraud.

Indeed, if unscrupulous payments professionals—or even out-right cyberthieves—are involved with a payments change at a sufficiently early stage, there is the potential for putting in place a mechanism that could be used for fraud two years down the road, after a huge number of consumers and payments players have embraced the change.

And that’s exactly what Justice is trying to spot. From the law enforcement perspective, that’s precisely what they should be doing. But from the payments perspective, it’s likely going to mean additional regulatory inquiries at every stage. The newer and more innovative the payments mechanism, the more inquiries are likely.

Even worse, there is the very real potential for regulatory overreach. That’s the likely result of regulators who are not quite sure what they are looking for yet. They see the potential for abuse, but without the particulars of it, they’ll want to try and capture everything and hope to sort it all out later.

That’s the worst-case scenario based on this federal prosecutor’s view. For some more optimistic thoughts, we need to move from Justice to Treasury.

At Treasury, a comments period has prompted discussion of creating a safe timeframe for payments professionals to explore and experiment with new payments methods, according to a CNBC report.

“Financial services technology firm Markit asked the OCC whether companies ‘have appropriate space to breathe, to develop and test innovative solutions without fear of enforcement action and regulatory fines,’ in a letter submitted May 31,” the story noted. “One of the areas where banks and start-ups appeared to agree is on the need for an incubation period for fintech to develop. In its submission to the OCC, Microsoft wrote that there is a need for a U.S. version of the U.K. Financial Conduct Authority’s ‘sandbox’ for up-and-coming technology, but that it will also require collaboration among regulators.”

At a glance, it might seem like the Justice and Treasury examples cited are polar opposites, with Justice pushing much more intrusive regulatory efforts and Treasury considering an area immune to regulatory intrusion. But dig down deeper and they are actually quite similar. Both acknowledge the danger potential in abuse as well as the need to allow innovation to happen.

The Treasury consideration—and that’s all it is at this point—is a laboratory where real consumer money is never at risk and never even at play. Indeed, it’s the perfect place for regulators to visit, but as regulatories per se. They would visit as observers. This way, they can see the various ways these approaches could be implemented. And while the PFs and other payments folk are focused on speed, accuracy and convenience, the regulators can focus on spotting potential areas for fraud.

Interestingly enough, the regulation-free zone could help regulators almost as much as it helps the potential regulated. Anything that advances comprehension on both sides is good.

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