How to regulate payments

By Felix Salmon
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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You say “CSFB” a few times when you mean “CFPB.” Pretty funny goof, though.

Posted by right | Report as abusive

“rates starting at $995 per lookup, and rapidly rising to as much as $14,500.”

Not true. It costs $995 for one *user* to make *unlimited* lookups in the database for a year. If for some reason you need 51+ users performing this task, then it will cost you $14,500 per year. But if you are hiring 51 people to do this kind of verification, presumably costing you half a mil in payroll and office expenses, then you can probably afford the $14,500 fee.

Posted by TFF | Report as abusive

The US Post office is licensed in all states, and reasonably reliable, and looking for business.

Posted by MSM-Reuters | Report as abusive

Is there any evidence that this regulatory mess is a purposely built barrier to entry by incumbents? I’m genuinely asking.

Posted by vv111y | Report as abusive

@right: oops! Thanks, I’m showing my age…

@vv111y, no, I think that’s a bit of a stretch by Greenspan.

Posted by FelixSalmon | Report as abusive

I don’t argue that the entire regulatory mess is purposely built by incumbents–just the California one in particular, though I have a feeling New York isn’t much different. See ll/asm/ab_2751-2800/ab_2789_cfa_20100628 _154447_sen_comm.html. If you can find contact information for The Money Services Roundtable, let me know!

Posted by aarongreenspan | Report as abusive

What no story about the S&P CEO being forced out (typical shoot the messenger story), or the downgrade by Moody’s of Japanese debt?

Posted by FifthDecade | Report as abusive

Electronic Payments will always be heavily regulated by goverments. Almost into the ground. In the U.S. federal revenue is raised mostly on the honor system. I can put my fingers on the exact amounts but I belive far more money is sent to the IRS actively by tax payers via quarterly estimates than is sent in passively by withheld from payroll checks.

U.S. Tax collection is basically an honor system with only the most blatent tax cheats getting caught audited, fined, and for the real dumb ones jailed.

If electronic payments outside the banking system were easy it would immediatly lead to huge problems. Ask any truely successful criminal the hardest part about managing an ongoing racket and it’s almost always physical cash management. The colombians have an easier time getting the coke in than they do the cash out.

A million bucks in $100′s requires a rather large breifcase… and try using a $100 bill in my state (Maine)… I mean the’re basically not legal tender at this point. The feds are killing themselves trying to crack down on criminals using pre-paid debit cards… and in most cases those still need to be physically transported which is a pain.

If you make it truely easy to transfer funds electronically without using banks or western union type agents as a closely monitored interface then you will see an explosion of black market activity and tax evasion.

Posted by y2kurtus | Report as abusive

So despite the fact that the payments industry is very innovative, and innovation is likely to continue, and there are eager innovators already innovating, the innovation needs to stop right now lest any card user pay an extra 23c. Well, the card users don’t pay it, only the people paying cash, and not even them really, because it’s not so easy to figure out where the incidence actually falls, and the card users seem pretty happy with their rewards and nobody’s really complained but a few gas stations that have lousy margins with or without card fees, but anyway who cares, just regulate the thing to death, destroy innovation, and institute a MA/VISA/AMEX monopoly in perpetuity, like they did to the tobacco industry.

Because card fees kill, apparently.

Posted by billyjoerob | Report as abusive

Actually, following your link, the SSA charges $995/yr per *named USER*, not per look-up; this allows an unlimited number of look-ups.

Also, it seems the government HAS a DB of revoked/valid licenses; it just doesn’t make it available to private companies due to privacy concerns, which makes a lot of sense to me.

Are you really sure you want to overhaul all these rules based on one paper ? :)

Posted by okaram | Report as abusive

“Social Security Death Index” for free at n/ssdi.cgi

Posted by lesle | Report as abusive

I think the core issue is the increasing use of rewards cards. Those rewards are paid for with much higher interchange fees which of course are paid for by the merchants. Using interchange fees to pay for basic infrastructure, fraud, the initial float, and a reasonable profit margin makes sense to me. Using them to pay for rewards programs is hard to justify. My understanding is that merchants have to accept all cards, so their prices must reflect the higher interchange fees for rewards cards. Because rewards cards are generally given out to higher income consumers, we have a situation where the poor subsidize rewards for the rich. I’m a capitalist, but I think the current system is flawed.

Posted by CrazyMajority | Report as abusive