[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                     THE FUTURE OF MONEY: WHERE DO 
                       MOBILE PAYMENTS FIT IN THE 
                     CURRENT REGULATORY STRUCTURE? 

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 29, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-142

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 29, 2012................................................     1
Appendix:
    June 29, 2012................................................    17

                               WITNESSES
                         Friday, June 29, 2012

Freis, James H., Jr., Director, the Financial Crimes Enforcement 
  Network (FinCEN), U.S. Department of the Treasury..............     4
Martin, Stephanie, Associate General Counsel, Board of Governors 
  of the Federal Reserve System..................................     5

                                APPENDIX

Prepared statements:
    Freis, James H., Jr..........................................    18
    Martin, Stephanie............................................    32

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of The Clearing House Association L.L.C....    39
    Written statement of the Consumer Financial Protection Bureau 
      (CFPB).....................................................    45


                     THE FUTURE OF MONEY: WHERE DO
                       MOBILE PAYMENTS FIT IN THE
                     CURRENT REGULATORY STRUCTURE?

                              ----------                              


                         Friday, June 29, 2012

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Pearce, 
Luetkemeyer, Huizenga, Canseco; Maloney, Baca, and Scott.
    Also present: Representative Green.
    Chairwoman Capito. This hearing will come to order. Ranking 
Member Maloney is on her way, and she said to go ahead and 
start, so I will start with my opening statement.
    First, I want to welcome the witnesses. This morning's 
hearing marks the final installment in a series of hearings 
that this subcommittee has had on the future of money. In 
March, we held a hearing that served as a primer for Members on 
the current landscape of mobile payments.
    Earlier this week, the ranking member and I had a dinner, 
bipartisan dinner that afforded Members and staff the 
opportunity to learn more about the different technological 
developments in mobile payments. And I for one can say it is an 
exciting future and I wish I had the brain depth to be able to 
invent some of these things myself.
    This morning, we will learn about the current regulatory 
structure for the payment system and how new developments in 
mobile payments can fit into this regulatory structure.
    The past decade has seen tremendous growth and innovation 
to technology that will no doubt influence the payment system 
in this Nation and abroad. We can't really imagine what the 
technology may be 6 years from now. For that reason, it is 
important for this committee to understand the rules of the 
road for mobile payments. Does today's regulatory structure 
provide seamless protection for consumers, easy dispute 
resolution, and protect against money laundering and the 
financing of terrorism, or do we need to make changes and, if 
so, what changes should be made, minor or major?
    This morning, we have two very important voices to talk 
about today's regulatory structure. The Federal Reserve has 
been the expert on the payment system for a long time and the 
Boston and Atlanta Feds combined to do much of the best early 
examination of the promise and potential pitfalls of mobile 
payments.
    While their consumer protection duties were transferred to 
the Consumer Financial Protection Bureau (CFPB) 2 years ago, 
the Fed will continue to be an important player. As witnesses 
at our first mobile payment hearing warned, some of the forms 
of payment available, including those tied to phone bill 
billings, may not fall under current payment law as we 
understand it.
    Meanwhile, the Treasury's Financial Crimes Enforcement 
Network, or FinCEN, prescribes the regulations that help our 
law enforcement agencies fight money laundering and the 
financing of terrorism and is in the best position to tell us 
if any parts of the newer forms of payment might fall outside 
of our current requirements for financial institutions to 
report suspicious activities. We need to make certain we get 
this latter part right. A senior economist at the World Bank 
has warned explicitly that it would be much harder to follow 
the future of money and to establish the sender and receiver of 
money as the transactions move towards anonymity.
    We also have, and I will ask for unanimous consent to 
insert into the record, a statement from the CFPB. Also, I want 
to thank both of our witnesses for their work that they have 
done in preparing for today's hearing and for their years of 
steady government service. In particular, the committee would 
like to thank Director Freis for his more than 5-year service 
as head of FinCEN. That is the longest tenure of anyone in what 
we know is a very difficult job. We are aware that you are 
transitioning to another job and could have declined this 
invitation to testify, so we especially want to thank you for 
coming today.
    Mrs. Maloney. Good morning.
    Chairwoman Capito. There she is. I thought I heard her 
coming in.
    Mrs. Maloney. I apologize, but we had a Democratic Caucus 
meeting on health care.
    Chairwoman Capito. I recognize the ranking member.
    Mrs. Maloney. I want to thank so much the chairwoman, and 
welcome the Federal Reserve and FinCEN. This is our third look 
at the issue of mobile payments, and I have to commend the 
chairwoman and the committee for holding this series of 
hearings on this new technology, and literally, we have 
cohosted a dinner to look at it and expose the new technology 
to Members of Congress. We saw this earlier in the week and I 
am pleased that we are trying to get out ahead of the issues 
rather than finding ourselves reacting but not being proactive.
    I really think that I would like to put my opening 
statement in the record. Believe me, it is very interesting, 
but I would like to hear the testimony today and have the 
opportunity to ask questions, particularly in the area of 
identity and security and maintaining the security of consumers 
with these new products.
    Thank you. I yield back.
    Chairwoman Capito. I now recognize Mr. Canseco for 2 
minutes.
    Mr. Canseco. Thank you, Madam Chairwoman. The growth of the 
mobile payment industry represents a tremendous opportunity for 
everyone, from consumers and merchants to financial 
institutions and other providers. Mobile payments have already 
proven to be the most significant development in consumer 
payment methods since the move away from checks to debit cards. 
This should bring a great number of benefits, particularly in 
the form of competition and lower costs for consumers.
    Yet, it is essential that policymakers and regulators 
structure a regulatory framework that helps protect the private 
information of mobile users, but also encourages investment and 
innovation within the industry.
    It is very relevant to mention that the last significant 
policy initiative in this area, which was price fixing in the 
debit card market, was the exact opposite of what Congress and 
regulators should be doing, and I hope we have learned from 
that very significant mistake.
    And so, Madam Chairwoman, my hope is that today's hearing 
helps Congress and regulators embrace these new innovations and 
that it leads to a properly constructed regulatory framework 
that works for everybody involved.
    I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Scott for 3 minutes.
    Mr. Scott. Thank you very much, Madam Chairwoman. Let me 
commend you and the ranking member for putting this very 
important and timely hearing together. Certainly, nothing could 
be more timely than the rapid advancement of technology. No 
area is that more profound than the mobile phones we use. We 
basically have become pleasantly captive to the cell phone. And 
we need to make sure that the American people are adequately 
protected from abuses from invasions of identification theft.
    Many people may not know this, but 92 percent all the 
American people now use mobile phones. The pay phone has gone 
by the way. And with that comes all other types of services 
that are connected with it. Many times people have their bank 
accounts, their bank statements on their mobile phones. They 
have medical information, pharmaceutical information, and 
prescription drug information all on their phones. It has 
become an integral part of our physical beings.
    And so, we really have to make sure that adequate 
protections are there, and half of these phones are what we 
call Smartphones, which are capable of processing mobile 
payments, credit card payments. So when you look at the entire 
scope of the significant amount of impact that mobile phones 
have on our entire existence, particularly very vital and 
pertinent information regarding our financial accounts, our 
health care, all very important issues, it is very important 
that we make sure that proper regulations are in place to 
protect the American people, and I look forward to hearing the 
panel.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you, Mr. Scott. With that, I 
believe opening statements are completed, and I would like to 
turn to the panel. Our first presenter is Mr. James H. Freis, 
Jr., Director of the Financial Crimes Enforcement Network 
(FinCEN) at the Department of the Treasury. Welcome.

   STATEMENT OF JAMES H. FREIS, JR., DIRECTOR, THE FINANCIAL 
  CRIMES ENFORCEMENT NETWORK (FINCEN), U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Freis. Thank you, and good morning, Chairwoman Capito 
and Ranking Member Maloney.
    I am Jim Freis, Director of FinCEN, and I am pleased to be 
here today to discuss FinCEN's efforts to establish a 
meaningful regulatory framework for mobile payments and other 
emerging payments methods. My testimony today will focus on 
some of the most important regulatory and analytical work being 
done to prevent criminal abuse of the financial system as 
technological advances create innovative ways to move money.
    At the outset, I would like to make a distinction between 
mobile banking and mobile payments. Mobile banking involves 
communication and direction from an account holder about their 
account at a depository institution. Mobile payments 
essentially involve the direction of funds outside of a bank 
account to effect payments or other transfers. Let me emphasize 
that both types of activity are subject to relevant FinCEN 
regulations for anti-money laundering and counterterrorist 
financing purposes, either as part of the requirements on banks 
or as part of the requirements on money transmitters.
    Recognizing that payment systems evolve rapidly, FinCEN 
took a comprehensive approach in this area, revising its 
regulations 1 year ago specifically to cover mobile payments 
and other innovations. The rule was developed to be 
technologically neutral and hopefully cover new developments 
for years to come. Specifically, the rule focuses more on the 
underlying activity as opposed to the particular electronic 
communication vehicle. If a mobile phone allows person-to-
person payments or payments that cross borders in or out of the 
country, then the provider must identify the customer, keep 
records of transactions, and have procedures in place to report 
to FinCEN possible money laundering or other suspicious 
activity.
    In furtherance of that, FinCEN's regulations make it clear 
that the acceptance of funds from one person and then the 
transmission of those funds to another person or location by 
any means constitutes money transmission and that any person 
doing business in whole or in part in the United States who 
engages in money transmission, regardless of other business 
lines such as telecommunication services, would likely be a 
money services business subject to FinCEN's regulations, and as 
such must register and comply with all requirements applicable 
to a money transmitter.
    Shortly after publication last year of the final prepaid 
access regulation, and as part of FinCEN's commitment to engage 
in dialogue with the industries we regulate, FinCEN held a 
series of town hall meetings with representatives from the 
prepaid access industry. FinCEN has already released a number 
of pieces of guidance with respect to the prepaid access 
regulation, and we anticipate that additional guidance will be 
forthcoming related to some of the issues raised by industry 
attendees during those town halls, as well as ongoing requests 
for clarification and guidance on the new regulatory framework.
    I would like now to briefly mention some of FinCEN's 
analytical work in the mobile payment space. As part of our 
ongoing support to law enforcement, FinCEN regularly provides 
reference manuals to help better understand the workings of 
various payment mechanisms and to provide steps to utilize its 
understanding in specific criminal investigations. One recent 
such manual focused on mobile payments. In preparing the 
manual, and in subsequent law enforcement outreach, we have 
seen an interesting trend in the mobile payments industry where 
different telecommunication systems and financial mechanisms 
merge and become interwoven in the same overall mobile payments 
transaction.
    For example, a customer might choose to initiate a 
remittance to a physical money service business location, with 
the transaction then being processed through the MSB's internal 
system, the payment of the funds then going to a recipients 
mobile account. Upon completion of the transaction, the 
recipient typically receives a text message notification on 
their mobile phone that indicates the funds have been credited 
to their mobile account.
    This transactional overlap results in multiple 
informational chokepoints that may assist law enforcement's 
efforts to follow the money trails and identify other accounts 
and transactions associated with a given subject. Fortunately, 
FinCEN's prepaid access regulation was specifically designed to 
be flexible and to accommodate new technologies as they emerge, 
but also to capture innovative payment methods currently being 
used by U.S. institutions such as aspects of the scenario I 
just described.
    In the area of new payments methods, the Administration has 
made appropriate oversight of prepaid access products a 
priority, and FinCEN is very encouraged by the progress we have 
made thus far. Moving forward, we are dedicated to continuing 
to build on these accomplishments as we encourage legitimate 
consumer and commercial activity to flourish, but also help 
financial services providers to focus on serving their 
customers, not criminals.
    Thank you for inviting me to testify before you today. I 
would be happy to answer any questions you may have.
    [The prepared statement of Director Freis can be found on 
page 18 of the appendix.]
    Chairwoman Capito. Thank you, Director Freis.
    We will now hear from Ms. Stephanie Martin, who is 
Associate General Counsel for the Federal Reserve Board of 
Governors. Welcome.

STATEMENT OF STEPHANIE MARTIN, ASSOCIATE GENERAL COUNSEL, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Ms. Martin. Thank you, Chairwoman Capito, Ranking Member 
Maloney, and members of the subcommittee. Thank you for 
inviting me to appear before you today to talk about the 
regulation of mobile payments.
    The evolution of technologies that enable consumers to 
conduct financial transactions using mobile devices has the 
potential to affect their financial lives in important and new 
ways, including by expanding access to mainstream financial 
services to segments of the population who are currently 
unbanked or underbanked. But with any payment system, including 
a mobile payment system, regulators have two key concerns: one, 
whether consumers are protected if something goes wrong such as 
an unauthorized transaction; and two, whether the system 
provides appropriate security and confidentiality for the 
transmission and the storage of payment instructions and the 
personal financial information of consumers.
    In many mobile payments, at least some parts of the 
transaction are settled through existing payment systems, such 
as card networks, and are subject to the statutes, rules or 
procedures that are already in place. The evolving aspects of 
mobile payments typically are related to new consumer 
interfaces and new payments or settlement arrangements which 
can involve service providers that have not traditionally been 
in the payments business, for example, a telephone company.
    Making payments through nontraditional arrangements may 
change the legal protections related to the purchase, depending 
on the details of the arrangement and the applicable statutes 
and rules.
    There is a legal framework to address the payment 
activities of banks, and Federal bank regulators have the tools 
to ensure that banks offer mobile payment services in 
compliance with the consumer protection provisions of any 
applicable laws or rules, such as the Electronic Fund Transfer 
Act (EFTA). The application of most Federal consumer laws to 
mobile payment transactions is subject to the rulemaking and 
interpretive authority of the Consumer Financial Protection 
Bureau.
    As part of the supervisory process, the banking agencies 
review bank security protections for new payment interfaces, as 
well as for compliance with rules on information security, 
identity theft prevention, and anti-money laundering.
    Many of the questions that have arisen with respect to 
mobile payments, however, relate to the involvement of 
nonbanks. Nonbanks can have a variety of roles in a 
transaction, such as an agent of a bank, a manager of a prepaid 
value program, a money transmitter or a company that bills 
customers for payment transactions. The applicability of 
existing consumer protection laws or security requirements to 
nonbanks generally depends on the nonbank's role in the mobile 
payment and the specific provisions of a particular statute.
    In conclusion, it is difficult to make broad 
generalizations about the applicability of existing statutes 
and rules to mobile payments. This is due to the different 
types of service providers, bank and nonbank, the wide variety 
of payment arrangements and the potential applicability of both 
banking and nonbanking laws to any given arrangement. Given 
recent technological developments in mobile payments, further 
analysis of the adequacy of existing laws may be appropriate in 
order to ensure that consumers are adequately protected.
    At the same time, given the fast-paced nature of changes in 
this area and the potential for significant improvements in 
consumer financial services through mobile payments, further 
fact-finding would aid that analysis and would be helpful to 
ensure that any legislative or regulatory proposals would not 
stifle the very innovations that would benefit consumers 
overall.
    Thank you again for inviting me to appear today. I am happy 
to answer any of the committee's questions.
    [The prepared statement of Associate General Counsel Martin 
can be found on page 32 of the appendix.]
    Chairwoman Capito. I want to thank you both and I will 
begin with my 5 minutes of questioning. I would like to make a 
comment on something, Ms. Martin, you said at the end of your 
statement, because of the dinner that we had last night, I 
think we had five presenters who had a whole range of forward-
thinking mobile payments, some that are currently in the 
system, some that are innovating into the system. And one of 
the concerns that they have and I think we share the concern 
and you did through your comments is that we don't get ahead of 
the curve here regulatorily, with regulation, and stifle the 
innovation and cut off what could be an ease of payment, 
bringing in people who are not in the bank or underbanked. And 
so, the point of this hearing is to really see where are we and 
where do we need to be, not so much where do we as lawmakers 
need to come in and clamp down. I don't think that is an issue, 
but I think it is something to keep our eye on.
    I would like to ask a general question. Are there in 
existence now informal or formal agreements between banks on 
the mobile payments issues? Is this a structure that banks have 
formally recognized through specific agreement along the lines 
of mobile payment and conflicted consumer protections that are 
contained within or does it fall within just a general--
    Ms. Martin. I would say for particular new arrangements 
that are using new technologies, usually you see a partnership. 
Often, you see a partnership between a bank and a nonbank 
service provider, sometimes the telephone company would be 
involved. So in a particular mobile payment arrangement, they 
would have contracts and agreements in place as to how that 
will work. But many of these arrangements ultimately get 
funding (into a mobile wallet, for example), using existing, I 
will call them, ``payment rails.'' So a consumer with a virtual 
wallet who wants to put in that wallet a credit card or debit 
card would be funding those credit or debit card transactions 
through the normal card networks.
    Chairwoman Capito. Existing.
    Ms. Martin. Those arrangements and agreements and rules are 
already in place. Is that responsive to your--
    Chairwoman Capito. Yes. I don't know if you have a comment 
on that, if you are aware, and certainly at FinCEN, you are 
looking internationally, too. Are there specialized agreements 
for mobile payments that you are aware of or do they just fall 
within the normal bank-to-bank relationship agreements that are 
already existing?
    Mr. Freis. I would concur with Ms. Martin that if you are 
trying to transfer between different financial institutions, 
then it is largely today reliant on existing bank centric 
networks such as those involving what we commonly know as your 
MasterCard or Visa card for which you need a bank to be an 
issuer of that card relationship. Otherwise, you are talking 
about proprietary systems, so I am going to a specific money 
transmitter and I must be a member of that network.
    Chairwoman Capito. Let me ask you this, too, in your 
statement you were talking about nonbank participants in mobile 
payment, and one of the innovators that we saw was talking 
about being able to have a card that you could swap between 
paying with your Visa debit, for example, or maybe your rewards 
points. That would be something that really wouldn't be 
covered, because that would really be a vendor. Let's say you 
would be using your USAir frequent flier miles or something of 
that nature. Is that something that you all have taken into 
consideration or are looking at? Do you understand what I am 
asking?
    Ms. Martin. I understand that you could have a mobile 
wallet arrangement where you can choose different ways of 
paying for whatever you are purchasing.
    Chairwoman Capito. Right.
    Ms. Martin. And today you have a credit card with flight 
miles on it that is usually redeemable at a specific merchant. 
So I can use my US Air flight miles at USAir. That is typically 
within a very proprietary system. But if I were to use my debit 
card, then I would have to go get the money from my bank 
account, so that would move over payment card network rails. I 
think it is going to depend on what card you pull out of your 
virtual wallet as to what rails that transaction will follow.
    Chairwoman Capito. Right. I think the important thing on 
that is the consumer protection jurisdictions and are they 
covering all sorts of different transactions that may be coming 
over the same virtual wallet.
    Ms. Martin. Right. I think one of the issues is to look at 
the consumer protection laws such as the EFTA and TILA. If is 
there a credit card involved, it is the CFPB that is going to 
have the rule-writing authority under those laws. But it is not 
clear that those laws do apply in each case where a nonbank is 
involved.
    Chairwoman Capito. Right. I think that is the point you 
were making.
    Ms. Martin. Yes. In some cases, those laws were really 
written with a bank-type relationship in mind. And those 
concepts may or may not apply, depending upon what the 
nonbank's role is and how the system is structured.
    Chairwoman Capito. Thank you. Ms. Maloney?
    Mrs. Maloney. First of all, I want to thank both of the 
panelists today for your testimony, and I agree with the 
chairwoman that we certainly do not want to stifle innovation, 
which was part of your testimony, Ms. Martin, as we move 
forward to make sure that consumers are protected and that 
money laundering is prevented and that other things are in 
place.
    As you look at this evolving new technology, I must say in 
terms of privacy and consumer protection, some of the 
technology really identified the person by their voice, by a 
photograph, very detailed ID that would be hard for someone to 
steal your identity, which is regrettably a growing crime in 
America among many of our constituents. I would like to get a 
sense from you because this is not necessarily a bank, it is 
not necessarily--it is like new. Who do you think would be the 
primary regulator? Someone has to be in charge. Which agency 
should take the prime role over mobile payments which are not 
necessarily bank products? And to what extent should the 
banking regulators be involved and coordinate? And who do you 
see as taking the form of the primary regulator, the FCC, the 
FTC, the CFPB, the Federal Reserve, Treasury?
    Your comments first, Mr. Freis, and then Ms. Martin. How do 
you see this being regulated? We have to have someone to call 
if there is a problem.
    Mr. Freis. Yes. Thank you for your question. From my 
perspective at FinCEN, we have a great deal of experience in 
working with a range of different financial service providers 
and a range of different agencies to ensure appropriate 
regulation. So for the anti-money laundering counterterrorist 
financing purposes, the principle is any way that you can move 
money, any way that you can intermediate value can be abused by 
a criminal actor. So that is the reason why FinCEN looks at 
this aspect centrally. In the example that I have given whether 
a money transmission is made through a bank, whether it is made 
through a traditional money services business or through new 
providers such as in the mobile payment space we have a common 
interest in making sure that we have done as much as possible 
to mitigate the risk of criminal abuse.
    In so doing, we rely on the Federal banking agencies or 
State regulators and money transmission space, and we found 
that is an important working model just as we do in other areas 
such as insurance, working with the States or with the SEC 
working in the securities industry. Each of them will have a 
primary responsibility with respect to whether it is safety and 
soundness, consumer protection, but our ability to work with 
them is on our single mission of the anti-money laundering 
requirements, I think it is central to avoiding the regulatory 
gaps and the balances they must take that criminals frankly 
would abuse. So I think the model we have, at least for my 
purposes, is working.
    Mrs. Maloney. And Ms. Martin?
    Ms. Martin. I agree basically with what Jim said. I think 
it is an interesting strategic question to think about what 
agency should take ownership of this area. It is such a broad 
area and it covers so many different types of entities, it is 
really hard to point to one agency with the right experience 
and expertise that can cover the gamut. So at least as a first 
step, it certainly seems to me that there should be 
coordination and consultation among all of the agencies you 
named, as well as FinCEN and State regulators, to figure out 
who has what, who is covering what bases, and what gaps there 
are that need to be addressed. And I think you can achieve 
consistent results in that way through interagency discussion 
and coordination.
    Mrs. Maloney. That is true, but finally someone has to be 
in charge. Otherwise, everyone is pointing fingers at each 
other, but building on your question or the statement that you 
had, they were testifying to us or telling us at this dinner we 
had exploring the new technologies that they are out there now, 
tens of thousands of people are already using these products. 
And so, I wanted to know what protections have States or 
actions have States put in place to protect consumers from 
unauthorized transactions and disputed charges to prepaid phone 
deposits or wireless phone bills? I am wondering what actions 
States have taken, if any, in this area?
    Ms. Martin. States do have money transmitter laws, where if 
the entity meets the definition of money transmitter, many 
States have registration requirements and some bonding and 
investment limitations. To that extent, I know States do have 
some laws.
    When you talk about bringing phone companies into the 
equation, perhaps that is something we might want the FCC to 
weigh in on. I am not sure what kinds of protections exist in 
telecommunications law for consumers who are billed for 
particular line items on their bill which might represent a 
payment. I think that is worth some further investigation.
    Mrs. Maloney. My time is up. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Canseco?
    Mr. Canseco. Thank you, Madam Chairwoman. Ms. Martin, we 
often talk about the unbanked in our country. It is noted that 
10 percent of mobile payment users don't have a bank account 
and that roughly 30 million Americans are either unbanked or 
underbanked. So how do you feel the growth of mobile payments 
will affect this group and would they be more or less likely to 
enter the banking system?
    Ms. Martin. It is hard to predict the second question that 
you asked. I think mobile payments present a good opportunity 
for the banked and unbanked to obtain payments services perhaps 
that are more efficient and perhaps even cheaper than what 
their alternatives are today, which may be going to a check 
casher or a money transmitter and paying pretty hefty fees. It 
is also very convenient. As you stated or somebody stated, over 
90 percent of people do have a mobile phone, so it is a very 
ready device for them to enter into the financial system.
    To the extent that banks can offer products that are 
available through that mechanism, that might be a way to get 
people into a bank relationship through a mobile phone that is 
a replacement for a check casher or buying a money order.
    Mr. Canseco. One concern, Ms. Martin, that I have is that 
we adopt a regulatory framework that makes it more costly and 
more prohibitive for market participants to innovate within the 
space. What specific steps should regulators be taking to 
encourage innovation and investment in the mobile payments 
space while also ensuring that data security and enforcement of 
anti-money laundering laws are working?
    Ms. Martin. Yes, the walk on the fine line between 
regulation and not stifling innovation is always a tricky one. 
I think it is important for regulators to set some priorities 
and some key concerns that you would like to see addressed in 
these mobile payment arrangements regardless of how they are 
structured. I mentioned a couple in my testimony; one basic 
consumer protection is security. You might add anti-money 
laundering to that list. So if we can look across all of these 
arrangements and make sure that those key concerns are met, 
then maybe you don't want to drill down into more detailed 
requirements until you see where the market is going to come 
out. So allow people to experiment, innovate with pilot 
programs until some industry best practices are established. 
And then, that might be a time where you see particular 
patterns emerging that you think you should address with more 
regulation. That might be the time to do that.
    Mr. Canseco. Thank you. This next question goes both to 
you, Mr. Freis, and Ms. Martin. Do you believe that 
international standards should apply to mobile payments? And if 
so, what type of coordination is going on between regulators in 
the United States and other countries?
    Mr. Freis. I am happy to address that first. With respect 
to our anti-money laundering counterterrorist financing 
efforts, we have developed international principles in terms of 
expectations as to what the risks are and efforts are to 
mitigate them. We do that at a broad level in terms of 
different products area, including money transmission, not 
things that are specific to the device of mobile payments as 
opposed to other mechanisms for entering the system, and I 
believe that is the right approach, especially based on the 
concern that you just expressed about rapidly evolving 
technology. It is better for us to define the risk and 
expectations of how to mitigate them and not to prescribe one 
specific area.
    By the time we had agreed on any international basis, it 
would already be obsolete in terms of technological advances. 
That is being done on an international basis in particular 
through the Financial Action Task Force. The United States has 
been very active in guiding those developments and pushing 
other countries to work in that area. I can tell you in my own 
work in the development of these prepaid access regulations, 
specifically including mobile phones as I have described in my 
testimony, I very actively engaged with my counterparts, both 
the regulatory side and the law enforcement support side, 
throughout the entirety of this process, sending them copies of 
the documents when we put them out for public notice and 
comment, seeking from them examples of specific cases where 
they might have seen law enforcement abuse to make sure we were 
addressing those specific concerns.
    Mr. Canseco. Thank you, sir. Ms. Martin?
    Ms. Martin. I would agree with that and also add that it 
seems to me that this type of service is so new and rapidly 
evolving that it is a bit early at this point to start thinking 
about international regulatory standards. Generally, those 
kinds of discussions come when systems are more mature and 
principles and best practices have been established, and that 
really hasn't happened yet.
    Mr. Canseco. But we need to start thinking about this.
    Ms. Martin. Oh, yes, I do agree with that.
    Mr. Canseco. Thank you very much. I see that my time has 
expired.
    Chairwoman Capito. Thank you. I would like to ask for 
unanimous consent to insert 2 statements into the record: one 
from the CFPB; and one from The Clearing House Association. 
Without objection, it is so ordered.
    I now recognize Mr. Baca for 5 minutes for questioning.
    Mr. Baca. Thank you, Madam Chairwoman, and Ranking Member 
Maloney for calling this meeting, and I thank the witnesses for 
being here this morning.
    One of the basic goals in reviewing this topic is ensuring 
that the consumers understand the product. I think it is very 
important that they understand the product they are using and 
the risk involved. With the advancement of technology, we have 
seen security threats grow as well. When it comes to electronic 
payments specifically in identification, theft is a real 
concern to a lot of us. What recourse do consumers have when 
they encounter problems with unauthorized charges or the amount 
they are charged is inaccurate? That is a common problem that 
we have, especially people who take advantage of a lot of our 
seniors, and seniors are the ones most vulnerable for this kind 
of problem, even though they get involved in this technology.
    I open it up for either one of you to respond.
    Ms. Martin. To the extent a mobile payment results in a 
debit through a checking account or a charge to a credit line 
that is covered by the EFTA or TILA, both have error resolution 
procedures which would kick in for consumers.
    Mr. Baca. How would they be informed, because they may be 
covered but they want to recoup their money and that is part of 
the problem. What is the time in delay between the time 
something occurs and the time that their account is reimbursed, 
because that means money lost, and a lot of them are on a fixed 
income?
    Ms. Martin. Right. Under EFTA, the existing timeframes are 
set forth in the statute and should be disclosed to consumers 
in the bank disclosures as well. I believe an investigation has 
to take place within 10 days. If the investigation is not 
concluded by that time, the consumer has to be reimbursed while 
the investigation continues. But in many cases, it gets 
concluded before 10 days are up.
    Mr. Baca. Would the consumer be informed of the process of 
what is going on within that period of time?
    Ms. Martin. I can get back to you on that.
    Mr. Baca. If they don't know, they don't know you are doing 
anything--
    Ms. Martin. The consumer initiates the process, and then 
they should be advised of what the process is.
    Mr. Baca. ``Should be'' and ``doing it'' are two different 
things.
    Ms. Martin. The other point that I wanted to make is that 
it is not clear that those laws apply in all cases where a 
nonbank is involved. I do know that some nonbank payment 
providers have incorporated Reg E, EFTA-like, error resolution 
procedures into their rules and their user agreements. It is 
not quite the same thing as having those error resolution 
procedures applied to them by rule, but they are trying to use 
those procedures within their own arrangements.
    Mr. Baca. Okay. Let me ask another question, along these 
same lines. Consumers sometimes find miscellaneous or added 
charges tacked onto their monthly bills. We used to see this a 
lot with credit cards. Obviously, this has caused a lot of 
consumers to dispute charges. How consistent are the mobile 
payments dispute resolutions policies of the various wireless 
providers? And should Federal regulators pursue a minimal 
national standard?
    Ms. Martin. The wireless provider consumer dispute 
resolution process would be something I think that the FCC 
would weigh in on. That is really outside my area of expertise 
or knowledge. That would have to do with if you get billed on 
your phone bill for a payment that is wrong, what are your 
rights? And I think that merits some further investigation and 
fact-finding.
    Mr. Baca. And then consumers have expressed concern with 
practice--oh, my time has expired. I am sorry.
    Chairwoman Capito. You actually have 58 seconds left, but 
we have just been called for a vote, so I am going to go to Mr. 
Luetkemeyer because he is the next questioner. And then when he 
completes his call, we will decide what the will of the 
committee is if we want to come back. We have two votes.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman. And thank you 
for the briefing the other night on mobile payment systems. It 
was quite instructional, and after the meeting I told my staff 
that I am going to have to get rid of my rotary phone and get 
in the 21st Century here.
    So thank you for being here this morning and I have just a 
quick couple of follow-up questions relating to what my 
colleague, Mr. Canseco here, asked with regard to international 
standards. Ms. Martin, you made the comment that you are going 
to wait until the market is mature before you actually get into 
the middle of a regulatory promulgation here and that is kind 
of after the horse is out the door if you are going to take 
that approach. I would think you would want to work with those 
entities that are producing these new innovations and find ways 
to curtail abuses of those right off the bat. I was surprised 
at that comment.
    Ms. Martin. My remark there was directed specifically 
towards international standards.
    Mr. Luetkemeyer. International standards are what I am 
concerned about.
    Ms. Martin. Generally when we work on international 
standards in other contexts, this occurs when we have some 
rules and thoughts in place about how that market is regulated 
here. All I am saying is that I think we need to do further 
investigation domestically before we start talking 
internationally.
    Mr. Luetkemeyer. Are you familiar with the CFPB's proposed 
rule dealing with international wire transfer services?
    Ms. Martin. I didn't hear the first part.
    Mr. Luetkemeyer. Are you familiar with CFPB's proposed rule 
dealing with international wire transfer services?
    Ms. Martin. The remittance rule?
    Mr. Luetkemeyer. Yes.
    Ms. Martin. I am somewhat familiar with it.
    Mr. Luetkemeyer. Okay. Are you for it, against it, think it 
is going to work? How is it going to affect mobile payments, I 
guess is the question?
    Ms. Martin. That is a good question. I am not sure there 
are any mobile payment arrangements at this time--and maybe, 
Jim, you can jump in here--that are being used for 
international remittances.
    Mr. Freis. Actually, there are some services for which 
mobile payments are a part of that international remittance 
network, as I have mentioned in my written testimony, but that 
are covered from our regulatory framework. And, Congressman, 
responding to your question, I just wanted to reiterate that we 
at FinCEN recognize the risks of cross-border payments, and it 
is for that purpose that although some of our regulations are 
subject to thresholds or some activity test, any ability to 
transfer money in or out of the country from a zero dollar 
threshold automatically brings that payment mechanism, 
including that mobile phone network, into our regulatory 
framework and subject to all of those controls.
    And furthermore, one of the risks that we had concern with 
is that if we impose an important regulatory framework on the 
United States but do not do something with the ability of 
entities from outside the country to access, that would pose a 
vulnerability. So we specifically have also amended our 
regulatory framework last year taking advantage of the full 
authority that Congress gave to us to assert jurisdiction over 
foreign-based money transmitter providers to the extent that 
they are serving U.S. persons. So that also should avoid that 
type of regulatory arbitrage, people from outside the United 
States.
    Mr. Luetkemeyer. There were a couple of studies that had 
been done. The Atlanta Fed, Swift, and the World Bank have 
acknowledged that these new services had a potential to 
facilitate money laundering. And, the Swift study recommends 
that regulators take a proportionate approach, limited amounts 
that can be transferred, advanced financial inclusion and 
ensure the soundness of financial services.
    What are your thoughts on those recommendations or are you 
aware of those?
    Mr. Freis. Yes, I am, and it is exactly those type of 
considerations that we took into account in the development and 
promulgation of this final rule last year, and we will continue 
to monitor. One thing I can say is that something I instituted 
after joining the agency more than 5 years ago is a year after 
we promulgate a new rule, we take a look at whether it is 
achieving its intended effect and then reconsider whether 
changes are made. That is something we will constantly look at 
and will certainly be doing in this area in a very rapidly 
evolving marketplace.
    Mr. Luetkemeyer. Thank you. I yield back the balance of my 
time. Thank you, Madam Chairwoman.
    Chairwoman Capito. Our final questioner will be Mr. Scott, 
and I think then we will dismiss the panel. We have about 10 
minutes left until votes.
    Mr. Scott. Thank you, Madam Chairwoman. Let me just ask you 
this: What advice would you give the American people if one of 
them were to lose their cell phone, their mobile phone? What 
should they do, especially regarding how they protect their 
vital information? What should they do if they lose their cell 
phone?
    Ms. Martin. I would say two things, and one is, before you 
lose your cell phone, make sure you have a password on it.
    Mr. Scott. I am sorry, you said, ``password?''
    Ms. Martin. Password-protect your cell phone. Also, I think 
it is very important for consumers to understand what is on 
their phone and who to call if they lose their phone. So to 
have that information somewhere other than on your phone would 
be a very good step in helping you mitigate the problems that 
could occur if you lose your cell phone.
    Mr. Scott. Okay. But on your side of things, what steps 
would you as regulators take to make sure consumers know how 
and when and where to complain, to call, what do they do? It is 
good that they put their cell phone, their ID and password and 
all of that, but is there anything specifically they should do? 
Should they just forget it? If for example, I lose my credit 
card, I am going to call somebody and I am going to say, stop 
payment on that. So there ought to be something or some 
procedure we can communicate to the consumer as to what you do, 
particularly if that consumer may not have the password on it 
or they may have--some scam artists out there now are capable 
of doing a lot of things with this advance in technology. So if 
we don't have a procedure for what consumers should do, we 
ought to get something out so consumers will know how, when, 
where, and who to contact once they lose this precious 
instrument.
    Ms. Martin. I think who you call might depend on what kinds 
of mobile payment applications you have on your phone. If I had 
a mobile wallet with a credit card attached to it, I would do 
exactly the same thing as if I lost my plastic; I would call 
that credit card company. I think many of those procedures that 
you would follow if you lost your real wallet would be the same 
things you would do if you lost your phone.
    Mr. Scott. Okay. Mr. Freis, do you have any comment on 
that? What advice would you give consumers?
    Mr. Freis. I think being aware of the risk is clear. One 
thing that must be said is that part of the reason why these 
payment products, these prepaid whether it is through a mobile 
phone or a card have taken off because do you have recourse to 
your funds. So unlike if you lost your wallet with cash in it, 
if you have lost a card, you do have the ability to contact the 
provider to shut down that old card and get your money back. It 
is not lost for good. So it is exactly that, which has been of 
benefit to consumers, and I agree with you that it is important 
that they understand these steps to take to follow to get the 
funds back such as Ms. Martin described.
    Mr. Scott. Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you. With us being on a vote, and 
no further questions, the Chair notes that some Members may 
have additional questions for this panel, which they may wish 
to submit in writing. Without objection, the hearing record 
will remain open for 30 days for Members to submit written 
questions to these witnesses and to place their responses in 
the record.
    I appreciate the witnesses coming today, and I know we will 
have many more discussions on this as the evolving technology 
brings different challenges, but also different opportunities, 
and I appreciate that. This hearing is adjourned.
    [Whereupon, at 10:28 a.m., the hearing was adjourned.]



                            A P P E N D I X



                             June 29, 2012

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