The regulators are coming for Apple Pay

Apple’s mobile payments service, Apple Pay, looks to be on the regulatory hit list; the US Consumer Financial Protection Bureau (CFPB) is putting big tech firms with digital payment platforms under closer scrutiny.

The regulatory power grab extends to 17 services, including Google, Zelle, and Apple, which dominates US mobile payments. Once these proposals are approved, those payment systems will face the same degree of scrutiny as banks. Naturally, tech firms aren’t happy, though the banks are content.

That’s not especially surprising, given the extent to which banks have been losing ground to tech firms entering their business.

In the oldness of time

The roots of this stretch back to around 2008 when trust in the banks collapsed after the global financial crash. Ever since, technology firms have merrily cherry-picked the best bits from the bankers’ profitable buffet, with payments, investments, credit, and even merchant acceptance taking some of the tastiest treats.

Now, it seems the bankers are fighting back, using CFPB regulation as a kind of foil. (It is amusing in recent years to monitor the way concepts like “consumer choice” and “openness” are so frequently weaponized to help preserve failing business models.)

In the eyes of industry incumbents, it seems fair. As they see it, as tech firms prune the heaviest fruit from the big fat money tree that feeds their industry, those firms should at least meet the same regulatory requirements they do.

It’s the old boys’ club culture, one in which if tech wants to join the party, it should play by the rules. This kind of underlines how, like any App Store from any tech firm, banking is a system in which profits are generated by tiny treats taken from every transaction; what distinguishes services is how good the user experience is and how big the bite taken.

Putting customers first

For tech firms it’s about implementing what they know about creating great user experiences. They looked at the monolithic, slow-evolving, traditional banking models and identified some of the many pain points that existed. This was particularly apparent in Apple Card, where Apple and its then partner, Goldman Sachs (they still partner at time of writing), reinvented the credit card — with better designers. It is also visible each time you tap your Apple Watch to pay for public transport.

The thing is, as consumers came to terms with mobile payment services, they also became accustomed to them. Take a look at how people felt about paying for things with their iPhone back in 2014 and compare it with usage data today. Most consumers like the convenience, many feel more secure as they travel without ‘real’ money, and international travel is simpler.

The biggest problem is that services operated by some of the big tech firms do not always deliver the same level of safeguards as traditional services, which means consumers might not always understand the degree to which they sacrifice consumer protection for convenience. That’s the concern CFPB has.

“Payment systems are critical infrastructure for our economy. These activities used to be conducted almost exclusively by supervised banks,” said CFPB Director Rohit Chopra. “Today’s rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight.”

We can work it out?

It’s not terribly hard to imagine the rest:

• Tech firms will argue that it’s the convenience and user experience that makes their services popular. If they are taking over sections of the payment industry that were traditionally in the domain of banks, it’s only because the banks didn’t do a better job in the first place. “Competition,” they could argue, “is a gift to help you change.”
• The Apple/Google-supported Chamber of Progress says CFPB proposals are “more about giving Wall Street a foot up than protecting consumers.”
• “Since we introduced Apple Pay almost a decade ago, customers have been loving how easy it is to make purchases online, in apps, and in stores,” said CEO Tim Cook earlier this year.
• Banks will argue that digital applications have achieved a share of ecommerce payments volume that is similar to, or greater than, traditional payment methods such as credit cards and debit cards, and should therefore be equally well-regulated. 
• The CFPB will argue it only wants to ensure big tech firms adhere to funds transfer, privacy, and other consumer protection laws, and “play by the same rules.”
• The CFPB also seems to want to prevent upstart tech payments companies from gathering and abusing personal financial data. (Apple does less of this, others may not be quite so ethical.) There is a duality to that argument, given the extent to which traditional financial businesses also gather data. And we can already see that Apple is interested in opening up banking data.

An inconvenient truth

I think it’s inevitable given tightening regulation of most large tech companies that mobile payment services will be constrained by these new regulations. That cuts both ways.

You see, once mobile payment services are equally regulated, tech firms can use those same regulatory systems to help them break into new markets. There are banking sectors these firms haven’t yet explored, precisely because of such regulation. But once they become regulated anyway, those hitherto ignored opportunities become more tempting.

When they enter these new spaces (and don’t ignore the growing opportunities to redefine banking in emerging economies as the structural transformation of global business accelerates), tech firms will likely lean into their user experience advantages to broaden the services they provide, leading to an intensification in competition.

The broader market dynamics will continue to favor providers who can most swiftly meet changing needs and innovate in a sector that effectively stayed pretty stale until the tech firms entered the ring.

Unfortunately, to a great extent, those most capable of such change don’t appear to be the banks. These new mobile payment proposals may level the playing field, but don’t change the inherent dynamic. Bankers beware, technology is going to get you and no one will care.

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