Payment Systems: Regulatory Interest in Payment Processors, Faster Payments, and Related Consumer Protections
The expansion of the Internet and the growth in electronic payments has significantly increased consumer demand for a variety of payment options and faster payments. The increased number of available electronic payment options and the volume of activity have heightened financial services regulators’ interest in payment processors and the potential risks they may pose to financial institutions (as both account customers and service providers) and to consumers (because of their role in the infrastructure through which consumer make payments to merchants). Most recently, the regulators have placed additional scrutiny on the processes and activities performed by payment processors and have focused regulatory guidance on the need for related parties to engage in risk assessments, due diligence, and ongoing relationship monitoring. In particular, the guidance indicates that financial institutions that directly or indirectly provide payment processing for merchant customers are expected to assure themselves the merchant customers are operating in accordance with applicable laws and that they (financial institutions) are not facilitating fraudulent or other illegal activity. Similarly, the Consumer Financial Protection Bureau ("CFPB" or "Bureau") expects the bank and nonbank providers of consumer financial products and services under its authority and their service providers, including payment processors, to comply with the federal consumer financial laws as well as to assure themselves that their merchant customers are also operating in accordance with those laws.
The demand for faster payments, and push toward real-time payments, is being fueled by rapid technological innovations that impact elements supporting the payment process. In the U.S., both the Federal Reserve Board ("Federal Reserve") and the National Automated Clearing House Association ("NACHA") have announced "faster payments" initiatives and payment stakeholders, such as payment processors, have begun work to develop faster payment systems. This month, the CFPB published an outline of nine Consumer Protection Principles ("Principles") that the Bureau would like to be considered and incorporated into the architecture of the new payment systems under development in the United States. The CFPB notes that there is "substantial opportunity to improve efficiency, reduce transaction costs for participants, and reduce credit and fraud risks" throughout U.S. payment systems and it supports industry efforts to develop faster and safer consumer payment capabilities.