How to regulate payments

August 23, 2011
Finovate conference in New York next month, or any similar event, you'll be surrounded by exciting and aggressive young payments companies.

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If you go to the Finovate conference in New York next month, or any similar event, you’ll be surrounded by exciting and aggressive young payments companies. They have names like Dwolla and Jwaala and Modo and Square, and most of them are going to fail. That’s as it should be: it’s the Silicon Valley way. There are lots of bright ideas floating around, and eventually one or two of them will really gain traction; at that point they’ll be bought or otherwise co-opted by the broader banking industry and will make their way into the mainstream. Meanwhile, the big banks and card companies are slowly rolling out their own products, and of course PayPal continues to do extremely well, with revenues of more than $1 billion per quarter on payment volume of more than $3,500 per second.

Aaron Greenspan is unlikely to be one of the winners in this space: his payments startup, FaceCash, has yet to get off the ground. But his attempts have at least yielded this very interesting paper, which details the rather crazy network of regulations that any payments company needs to navigate. If your idea of fun is navigating a Kafkaesque bureaucratic maze while spending hundreds of thousands of dollars, then I’d highly recommend setting up a payments company. Here’s some of the wonderful facts about payments regulation that Greenspan has turned up:

  • You’ll need to file e-reports with the Financial Crimes Enforcement Network. In order to do this, you’ll need a Windows computer (not a Mac), running Windows 2000 or XP, and Internet Explorer (not any other browser). Plus various unwieldy plug-ins. Secure!
  • In order to check whether a given Social Security number belongs to a dead person — a basic security check — the US Department of Commerce will charge you rates starting at $995 per lookup, and rapidly rising to as much as $14,500.
  • When companies ask for a driver’s license, they currently have no way of checking online to see whether that license is valid.
  • Of the 50 states, not one yet has a web-based license application process.
  • None of the major online payments companies has yet managed to get is licensed in Wisconsin.
  • None of the major phone companies has got licensed in any state, despite the fact that they all want to move into the space in one way or another.
  • Universities’ money-transmission programs, like Harvard’s Crimson Cash and Stanford’s Cardinal Dollars, are also unlicensed. “Consequently,” writes Greenspan, “the presidents, provosts and trustees of every private university in the nation with such programs (which are exceedingly common) are unknowingly committing federal crimes, and could be incarcerated.”
  • Maryland’s license fee is $4,000.00 in even-numbered years, but $2,000.00 in odd-numbered years.

Greenspan concludes, sensibly enough:

It is clear that the federal government needs to spearhead an effort to bring money transmission regulation, or non-bank regulation more generally, under one (and only one) roof. Whether that roof is the Department of the Treasury’s or the Consumer Financial Protection Bureau’s remains to be seen.

That roof should be the Consumer Financial Protection Bureau, since payments are at the heart of consumer finance — but also because the CFPB is housed at the Fed. And where I part ways with Greenspan is that I don’t think that the CFPB should necessarily be letting a thousand flowers bloom, here.

Greenspan has a compelling and impassioned case that change and competition is needed, not least because the current system of interchange fees is much more expensive than it should be. Instead, the CFPB, working closely with Treasury and the Fed, should aggressively encourage payment at par. And in turn, that means it’s going to be very difficult for startups to enter this space: if payments all clear at par, the way that cash and checks and even clearXchange do, then there’s no revenue stream for the intermediary.

So yes, let’s have a massive consolidation of payments licensing laws — they’re a mess right now, and they do precious little good for anybody. But at the same time, let’s think seriously about the public-policy aspect of payments regulation: what’s really in the public’s best interest here? The answer isn’t a balkanization of the payments space into dozens of competitors all chasing scale and fee income. Instead, it’s simple and universally-accepted mechanisms for one person or merchant to pay another person or merchant directly, with neither of them paying on a per-transaction basis for the privilege. That’s far from impossible: in fact, it already exists in most countries around the world. It’s time that it existed here, too.


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