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Will Unintended Consequences Kill Payments Innovation?

Thoughts from the ACI Prepaid Compliance Conference

By Marilyn Bochicchio, CEO

It’s ironic that as the Federal Reserve and others explore modernizing the U.S. payments system, bank regulators continue to bear down on prepaid, arguably the most significant innovation in payments in the past 15 years. The most direct manifestation, of course, is the CFPB’s NPRM on prepaid that, at least in its proposed form, is the most proscriptive consumer protection regulation ever written. But the CFPB isn’t alone in wanting to rein in the innovation and fresh way of viewing financial relationships that prepaid uniquely provides. The FDIC and other regulators and agencies are using their considerable and varied resources to put prepaid into a box—preferably, it seems, the box of a traditional checking account, which is within their comfort zone.

Adding to the irony is that network branded prepaid cards are bank-issued products that always have operated in a regulated environment with protections (combining federal, state and payments networks protections) on par with debit cards. Yes, general use prepaid products differ from checkless checking accounts in some ways—permitting greater distribution and loading flexibility, for example—but, when it comes down to it, they’re responsibly issued bank products that are a variation on the debit card. Those who put forth crazy outlier prepaid products as examples of the mainstream do nothing more than discredit their research.

Prepaid Will Adapt and Change

OK, I’ll stop. It’s all been said before and it’s largely fallen on deaf ears for reasons too complex to explore here. So, the environment in which prepaid operates is what it is and will be what it will be.

unintended_cons_sidebar2_mbWhile Paybefore encourages all industry members to take advantage of the comment period to weigh in on the prepaid NPRM in a thoughtful and constructive way, we also must accept that the provisions of the NPRM that make their way into the final regulation will have a significant impact on prepaid providers, the partners with which they do business and the products they offer. It’s not crying wolf to predict that as a result, some prepaid products popular with consumers will be withdrawn from the market or will cost consumers more. And, some participants in the prepaid delivery value chain will go out of business (or find it necessary to merge) due to market forces ignited by regulation. That’s just how it is.

Still, regulation isn’t new to banks, and prepaid card issuers will find constructive ways to work within the new regulatory structure and enhanced regulatory scrutiny. There will be a price to pay, but they’ll make it work and prepaid in its many forms will continue to grow.

Who Will Drive Payments Innovation?

But, this gets me back to the topic of innovation. Prior to attending the annual ACI Prepaid Compliance conference, Jan. 29-30, in Washington, D.C., I (now I realize ridiculously) thought I was the only one concerned about how the industry’s experience with prepaid might chill future innovation in payments. But, speaker after speaker—mostly payments attorneys and compliance officers with deep in-the-weeds knowledge—shared this concern as they dissected regulation and the application of regulation to prepaid.

So, the question becomes: If innovation in payments is sorely needed, who will be there to provide it? Will traditional financial institutions rush in to innovate at the consumer product level? Based on the experiences of the past few years, it seems likely that many bank boards and executive management will question putting resources in that direction.

But, that’s not to say there won’t be payments innovators. There will be, because if there’s a dollar to be made, someone will fill the void. Econ 101, right? There are a whole host of entrepreneurs who see payments as a business opportunity. Unfortunately, at least in my experience, some of these entrepreneurs don’t fully appreciate what it means to operate in the regulated environment of banking, which is why third-party oversight is such a hot topic. As much as payments innovation needs to incorporate the fresh thinking of these entrepreneurs and as much as the industry needs to be inspired by their refusal to accept limitations, at some point—when there are funds to be moved—regulated financial institutions, which know and understand the rules of the financial system, must be part of the process. Effectively disintermediating financial institutions from the process of innovation through one means or another, or a combination of means, unleashes unintended consequences whose negative effects will be felt for decades.

If, in 2015, regulators still hold the traditional checking account as the gold standard for a consumer transactional banking relationship, what does the future look like? If regulators don’t recognize the benefits of a prepaid card issued by a regulated entity, providing significant consumer protections, how will they view innovations that are likely to take them much farther from their comfort zone? What, then, is the future of the mobile channel, P2P payments, virtual currencies and so much more?

To be clear, it’s not regulation per se that chills payments innovation. In fact, I’m pretty sure everyone involved in the evolution of prepaid agrees that regulation makes sense for many reasons—one of which is to remove the taint, however inaccurate, of not being federally regulated. At issue is clamping down so hard to protect consumers against hypothetical or manageable concerns that the ability to be innovative in a way that helps consumers is quashed, along with the economic incentive to do so. The reality is that millions of consumers have chosen to purchase GPR cards—although free checking options have been available. And, according to research conducted by the Philadelphia Fed’s Payment Cards Center, “Millennials with Money,” 52 percent of GPR card owners are considered “banked,” while 90 percent of GPR card owners actually have a bank account.

unintended_cons_sidebar3_mbSure, it’s complicated—really complicated. And, maybe the horse is out of the barn. But, also, just maybe, there’s still time for a constructive meeting of the minds between regulators and industry—for both groups to put aside the desire to win the point and to think about whom they’re both serving. This isn’t a political issue. We’re not on opposite sides here. We both want consumers to end up as the winners. But, the conversations at the ACI conference made me recognize there’s still a long way to go and not much time to cover that ground.

Unintended consequences are a horrible part of any legislation, regulation or regulatory interpretation—and best to be avoided upfront. So, let’s think now about the unintended consequence of stifling payments innovation before we find ourselves with paper-based checking accounts that are still the gold standard in 2020 and beyond.

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