Slide 1

Mobile Payments Forum: “Cash, Checks or Cell phone?” Consumer, Fraud and Money Laundering Risks

Judith Rinearson
Partner
Bryan Cave LLP
February 23, 2010
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Slide 2

Are Mobile Payments Riskier for Consumers than Other Products? YES and NO

• Yes
  • Funds accessed through a cell phone or PDA – not a branded credit, debit or prepaid card raises issues "Who’s Holding the Money" "What laws apply"?
  • Linkage between the Mobile Payments and banking system less obvious
  • Where are the Terms & Conditions? Where’s the Expiration Date?
  • What if the cell phone is lost/stolen? How is the consumer protected?

Slide 3

Are Mobile Payments Riskier for Consumers than Other Products? YES and NO

• No
  • It’s simply a payment product in a different form – the underlying payment systems are still there.
  • The money is still held securely at a bank
  • The terms and conditions are provided when a user enrolls
  • Consumers are protected by contract, or by the bank card association rules

Slide 4

Are Mobile Payments More Vulnerable to Criminal Misuse than Other Products? YES and NO

• Yes
  • Funds could be accessed and moved through a cell phone or PDA – not a bank or card account requiring a Customer Identification
  • Cell phones – especially prepaid cell phones that are purchased anonymously and reloaded with cash to pay for “minutes” – have been linked to criminal and terrorist activity
  • Wireless communications can be intercepted, customer data can be breached, without stealing a wallet or breaking into a vault

Slide 5

Are Mobile Payments More Vulnerable to Criminal Misuse than Other Products? YES and NO

• No
  • Telecom carriers note that they often have more information about their customers than many banks
  • Even for prepaid cell phones, carriers can track where customers are and to whom they make calls
  • The funds are never “on the phone” but held at banks
  • Communications are often encrypted to protect against theft
  • Many cell phone payment products are offered jointly with banks
  • Many cell phone payment products just provide a “wallet” that holds an existing credit card issued by a bank with all the same protections.

Slide 6

Who’s Right? It Depends.

• In many respects, these are simply access devices for pre-existing payment products
• On the other hand, these new products offer unprecedented new challenges, functions, and technology
  • Speedier transactions
  • Global functionality
  • New companies and players including carriers and prepaid phone companies

Slide 7

Providing Legal Guidance in an Uncertain Legal Landscape

Where to Start

• Look for guidance from the past
  • Prepaid Cards in a similar space 10 years ago
  • Any payment product that involves non-banks holding and transmitting funds will be scrutinized by state money transmitter regulators
  • Any payment products that involve banks working with non-bank marketers and sponsors will be subject to bank regulators’ scrutiny

Slide 8

Applying lessons learned to Mobile Payments

• Federal laws are important – but the states may move more quickly
• Laws develop to address perceived shortcomings – negative media coverage translates to more legislation
• A few bad apples CAN spoil the barrel
  • A few bad examples of misleading advertising or consumer losses hurts everyone
  • Publicized instances of criminal activity also creates demand for regulation
• Industry cooperation to monitor and react to legislative developments is critical

Slide 9

Applying lessons learned to Mobile Payments

• Understand underlying flow of funds, data flows
• Basis of the entire system: Contracts
  • Carriers
  • Banks
  • Merchants
  • Consumers
  • Payment networks
• Disclosures
  • Critical – linkage to the world
  • Difficult – don’t underestimate

Slide 10

Applying lessons learned to Mobile Payments

• Risks
  • Money laundering and terrorist financing
    • Customer Identification is key
    • No easy way to see whether a cell phone is “just” a phone or includes payment functionality
  • Fraud
    • Waving a phone at a transponder avoids review of cards and signatures – speed helps criminals too
    • Concern about wireless technology and the ability of third parties to access
    • PINs are increasingly involved

Slide 11

Applying lessons learned to Mobile Payments

Existing Laws which are likely to apply

• State laws
  • Abandoned Property
  • “Money transmitter” Licensing
  • Consumer protection – Fair advertising laws
• Federal law
  • Privacy, GLBA and FCC
  • Anti-money laundering laws
  • Banking and deposit-taking
  • Patents, IP issues

Slide 12

Questions and Answers

Judie Rinearson
Bryan Cave LLP
1290 Avenue of the Americas
New York, NY 10104
(212) 541-1135
Email: [email protected]

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