Mobile Wallet Legal Issues From A to Z Wallet Lega… · Mobile Wallet™ and related Isis services. The Isis Mobile Wallet comes preloaded with an Isis Cash™ Card issued by JPMorgan

8300 Greensboro Drive Suite 1200 McLean, VA 22102 www.fcclaw.com (703) 584-8678

1 © 2013

Mobile Wallet Legal Issues From A to Z

Brooks E. Harlow

Track: Mobile sponsored by PriceWaterhouseCoopers

Las Vegas, Nevada October 23, 2013


2 © 2013

Antitrust

Banking laws—federal & state

Bank Secrecy Act/Anti-money Laundering Law (BSA/AML)

Can Spam Act

Consumer Financial Protection Board (CFPB) regs

Contracts

Dodd-Frank Wall Street Reform and Consumer Protection Act • Durbin Amendment

Electronic Funds Transfer Act (EFTA)

Reg E


3 © 2013

FCC • Customer Proprietary Network Information (CPNI) regs

• Anti-cramming regulations

Fraud/security breach liability

Gift certificate laws

Money transmitter laws

Net neutrality

Patent, trademark & copyright

Privacy laws

Truth In Lending Act (TILA)

Unclaimed money/property laws

Z = Reg Z


4 © 2013

19 Federal agencies with authority/interest, including: • OCC (Office of the Comptroller of Currency)

• FDIC (Federal Deposit Insurance Corporation)

• Federal Reserve

• Secret Service

• FTC (Federal Trade Commission)

• CFPB (Consumer Financial Protection Board)

• Treasury (e.g. FinCEN – Financial Crimes Enforcement Network)

• FCC (Federal Communications Commission)

• NIST (National Institutes of Standards and Technology)

• GAO (Government Accountability Office)


5 © 2013

Contracts • Acquiring Bank

• Application licensor/service provider

• Card brands

• Carriers

• Consumers

• EFT Networks

• Handset manufacturers

• Issuing Bank

• Processor

• Independent Sales Organization (ISO)

• Sponsoring Bank


6 © 2013

Essential to determine what the “Wallet” really is

What is the “Model” legally speaking?

And where are you or your client in the ecosystem?


7 © 2013

≠

Legally Speaking


8 © 2013

If your app, your vendor, or your customer looks like a mobile wallet…

You may have some A to Z issues Banking and telecom are two of the

most highly regulated industries


9 © 2013

Not a real currency, more like Monopoly money

So no regulations, right? WRONG! In May 2013, the U.S. Attorney (SDNY)

charged Liberty Reserve and seven of its principals with running a $6 billion money laundering scheme and operating an unlicensed money transmitting business using Bitcoins

When have you have crossed the line?


10 © 2013

State law generally determines what constitutes a “bank”

A “depository institution” may be a bank • Washington example: “‘Banking’ includes the soliciting, receiving or accepting of

money or its equivalent on deposit as a regular business.” RCW 30.04.010(2)

Only a bank may be called a “Bank”

States may require banks to have word “bank” in their name

Banks may be “members” of financial networks with other banks

Banks’ accounts may be federally insured—FDIC

Persons operating as a bank without a license—regardless of the company name—may be subject to criminal prosecution


11 © 2013

Example:

• B of A “Mobile Pay”

Traditional Swipe rates

• 2.7% card present

• 3.5% card not present


12 © 2013

Federal Definition: The term "money transmission services'' means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. 31 C.F.R. § 1010.100(ff)(5)(A)

Exempts a person that only: • (B) Acts as a payment processor to facilitate the purchase of, or payment of a

bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller;

• (C) Operates a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions. This includes but is not limited to the Fedwire system, electronic funds transfer networks, ….

• (F) Accepts and transmits funds only integral to the sale of goods or the provision of services … by the person who is accepting and transmitting the funds.


13 © 2013

State example: Washington "Money transmission" means receiving money or its

equivalent value to transmit, deliver, or instruct to be delivered the money or its equivalent value to another location, inside or outside the United States, by any means

"Money transmission" does not include the provision solely of connection services to the internet, telecommunications services, or network access. "Money transmission" includes selling, issuing, or acting as an intermediary for open loop stored value devices and payment instruments, but not closed loop stored value devices.

Banks are exempted, but not payment processors 47 States have money transmitter laws similar to this


14 © 2013

PayPal funds that have not been disbursed are kept in commercial interest-bearing checking accounts

PayPal has avoided “bank” classification in the U.S.

PayPal is licensed as a money transmitter in 47 states

PayPal also operates under the merchant/aggregator model


15 © 2013

A Mobile Wallet that stores value is at risk

• Except for single merchant devices

PayPal has blazed a trail for Mobile Wallets

• E.g., New York

Do not put subscriber funds in company’s general account

Segregate funds in a “For the Benefit Of” (FBO) regulated bank or money market account(s)

• In the names of the consumers

• Or “as agent for the benefit of _____’s customers”

Don’t hold funds—Square, Dwolla, Level Up, etc.

Will disclaimers work?


16 © 2013

Commercial Mobile Radio Service (CMRS) provider Or a Mobile Virtual Network Operator (MVNO)

• A non-facilities based reseller of wireless service

Purchases are made using a mobile phone Key element is that the charges for the purchases

appear on the carrier’s bill Post-paid—Credit is extended Pre-paid—Funds are deposited


17 © 2013

Example, Boku:

Carriers supporting: AT&T, Cricket, Sprint, T-Mobile, US Cellular, Verizon

Consumer enters phone number and confirms purchase by SMS


18 © 2013

MP provider is an intermediary between the actual merchant and a payment network

Purchases are authorized using a mobile phone Key element is there is a traditional non-cash payment

network behind the transaction • E.g., American Express, Discover, MasterCard, Visa

• Credit and debit networks/transactions

Traditional network fees—interchange, switch fees, etc.—will apply

• Some aggregators will bill lump sums and store a small value to spread network fees over multiple transactions, especially for small transactions

• Some aggregators bill a credit or debit card for each transaction


19 © 2013

Examples: Level Up, Isis, Square


20 © 2013

New venture: MCX • Merchant Customer Exchange • Trying to cut Association/Network fees

Lots of participation; a partial list: • 7-Eleven • Bed Bath & Beyond • Best Buy • CVS/pharmacy • DICK's Sporting Goods • Dunkin' Donuts • Gap • Host • Lowe‘s • Michael’s • Sears Holdings • Shell Oil • Target • Wal-Mart

What’s the value to the consumer?


21 © 2013

Operates like a gift card or certificate—pre-stored value

Example, Starbucks:

But Starbucks moved beyond this model and now partners with Square


22 © 2013

The Isis™ Terms of Service is an agreement governing your use of the Isis Mobile Wallet™ and related Isis services. The Isis Mobile Wallet comes preloaded with an Isis Cash™ Card issued by JPMorgan Chase Bank USA, N.A. Fees and terms for this card are in the Isis Cash Card Terms and Conditions, some of which are described in Section 4 below.


23 © 2013

Cardholder

Merchant

ISO/MSP

Processor/Gateway

Front-End Network

Back-End Network

Acquiring Bank

Association (Visa, MasterCard, American Express

Issuing Bank

SOURCE: http://www.ippay.com/index.php?q=merchant_processing_overview


24 © 2013

Source: A Guide to the ATM and Debit Card Industry, Federal Reserve Bank of Kansas City, 2003


25 © 2013

In pure form, is the simplest model

After payment, may be only two parties to the transaction

• Consumer and merchant

Akin to a gift card or “closed loop stored value device”

Standard merchant legal issues—UCC, Fair Trade laws, etc.

State gift certificate laws

• Similar to a gift card—same issues

State unclaimed property laws

• Many based Uniform Unclaimed Property Act)


26 © 2013

Still may be regulated; e.g., Washington’s Gift Certificate Act • "Gift card" means a record as described in subsection (5) of this section in the form

of a card, or a stored value card or other physical medium, containing stored value primarily intended to be exchanged for consumer goods and services.

Expiration dates are unlawful in most instances in Washington

Inactivity charge allowed, but only if: • Charge is disclosed on the card • The value is less then $5 each time the charge is assessed • Charge is $1 or less per month • Charge only after 24 months of inactivity (RCW 19.240.040)

If the Gift Certificate Act does not apply, then a state Unclaimed Property Act may apply


27 © 2013

EFTA and Federal Reserve Reg E also govern gift cards

The EFTA and Regulation E preempt inconsistent state laws, but only to the extent of the inconsistency. The Board is given the authority to determine whether or not a state law is inconsistent.

A state law will not be deemed inconsistent if it is more protective of the consumer than the EFTA or Regulation E.

Reg E § 205.20(a)(2) defines “store gift card” as “a card, code, or other device that is: (i) Issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and (ii) Redeemable upon presentation at a single merchant or an affiliated group of merchants for goods or services.”


28 © 2013

Uniform Unclaimed Property Act (Washington version) • (1) A gift certificate or a credit memo issued in the ordinary course of an

issuer's business which remains unclaimed by the owner for more than three years after becoming payable or distributable is presumed abandoned.

• (2) In the case of a gift certificate, the amount presumed abandoned is the price paid by the purchaser for the gift certificate. In the case of a credit memo, the amount presumed abandoned is the amount credited to the recipient of the memo.

• (3) A gift certificate that is presumed abandoned under this section may, but need not be, included in the report as provided under RCW 63.29.170(4). If a gift certificate that is presumed abandoned under this section is not timely reported as provided under RCW 63.29.170(4), RCW 19.240.005 through 19.240.110 apply to the gift certificate.

Generally unclaimed property is “subject to the custody of the state”


29 © 2013

FCC and states regulate mobile carrier billing • Unauthorized charges are known as “cramming”

• Consumers are permitted to block third-party charges from being placed on their mobile phone bills

FCC regulations specify how third-party charges must be billed

• Charges contained on telephone bills must be accompanied by a brief, clear, non-misleading, plain language description of the service or services rendered. (47 CFR 64.2401(b))

• Telephone bills must contain clear and conspicuous disclosure of any information that the subscriber may need to make inquiries about, or contest, charges on the bill. (47 CFR 64.2401(d))

TCPA and “do not call”—covered later


30 © 2013

Telecom Carriers are subject to special privacy rules imposed by the FCC and many states

• “CPNI”—Customer Proprietary Network Information

• Information “(1) relating to the quantity, technical configuration, type, destination, location, or amount of use of a telecommunications service; (2) relating to service subscribed to by a specific customer; and (3) made available to the carrier by the customer solely by virtue of the carrier-customer relationship.”

The FCC is investigating updating CPNI rules • “In light of these developments, we now seek to refresh the record in this docket concerning

the practices of mobile wireless service providers with respect to information stored on their customers’ mobile communications devices.”

• “Further, the definition of CPNI in section 222(h)(1) … on its face could apply to information collected at a carrier’s direction even before it has been transmitted to the carrier.” (Public Notice, May 25,2012, DA 12-818, CC Dkt. No. 96-115)

Customers may elect not to receive carrier marketing based on CPNI


31 © 2013

FCC clarified that “when mobile carriers use their control of customers’ devices to collect information about customers’ use of the network, including using preinstalled apps, and the carrier or its designee has access to or control over the information,” carriers are required to give that information full CPNI protection

A carrier’s “designee” is “an entity to which the carrier has transmitted, or directed the transmission of, CPNI or is the carrier’s agent”

FCC Order 13-89, Wireless CPNI Declaratory Order, June 27, 2013


32 © 2013

Massive state and federal regulation Not a good model, unless you are actually

chartered as a “Bank”


33 © 2013

Telephone Consumer Protection Act (TCPA)

Bans telemarketing calls—including text messaging—without prior express consent

As of October 16, 2013, consent must be in writing “Written” consent can be electronic

• E.g., email, website form, text message, or telephone key press

Consumer must receive “clear and conspicuous disclosure of the consequences of providing the requested consent, i.e., that the consumer will receive future calls that deliver prerecorded messages by or on behalf of a specific seller”

Agreement must be obtained “without requiring, directly or indirectly, that the agreement be executed as a condition of purchasing any good or service"


34 © 2013

“Over the Top” (OTT) access to handset functionalities

Secure element may be reserved to carrier’s own MP application

NFC may also be reserved for the carrier

Antitrust remedies?

47 U.S.C. § 202(a): It shall be unlawful for any common carrier to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service

No help in FCC’s “Open Internet” Order

- Gives CMRS some latitude to discriminate


35 © 2013

Durbin Amendment

• Reduces incentives to build around debit—credit unaffected

• Judge Leon’s decision could force Fed to lower debit swipe fees even more

Proposed settlement in In Re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case. No. 05-MD-1720 (JG) (USDC, EDNY)

DOJ settlement with MasterCard and Visa in United States v. American Express, et al. (USDC EDNY, 2011)

Exclusivity issues

• Access to “secure element” and NFC chips

Market power issues

• E.g., MasterCard’s “staged wallet fee”


36 © 2013

Privacy—mostly it’s about disclosure and compliance

Children’s Online Privacy Act (COPA)

Example: Starbucks/Google “permissions”: This application has access to the following:

• Services that cost you money - directly call phone numbers

• Your location

• Network communication - full network access

• Storage - modify or delete the contents of your USB storage modify the USB storage. Allows the app to write to the SD card.


37 © 2013

Only by understanding the model can you begin to ensure that the appropriate regulations are met

And that the appropriate issues are addressed in contracts

Key warning flags:

• Storing money/value

• Sending money/value to a third party

• Pushing unsolicited content/offers to mobile users

• Extending credit


38 © 2013

Brooks E. Harlow

[email protected]

DID: 703-584-8680

Cell: 206-650-8206

www.fcclaw.com

http://www.fcclaw.com/

Documents

Mobile Wallet Legal Issues From A to Z Wallet Lega… · Mobile Wallet™ and related Isis services. The Isis Mobile Wallet comes preloaded with an Isis Cash™ Card issued by JPMorgan