Chapter 23 Remarks on the Report of the Consumer Electronic Payments Task Force
- International Monetary Fund
- Published Date:
- August 1999
In April 1998, a Consumer Electronic Payments Task Force established a year and a half earlier by Secretary of the Treasury Robert E. Rubin to “identify consumer issues raised by emerging electronic money technologies and to determine how to address these issues without unnecessarily inhibiting the development of this market” released a report addressing four areas of consumer concern: Access, Privacy, Financial Condition of Issuers, and Consumer Protections and Disclosures.1 In each of these areas, the task force summarized, analyzed, and made recommendations based on comments that it had received “through a series of informal information exchanges with firms involved in e-money systems, financial services industry representatives, and consumer and other public interest advocates.”
The report’s approach and conclusions merit attention for several reasons. First, the membership of the task force itself—the Comptroller of the Currency, a member of the Board of Governors of the Federal Reserve System, and the leaders of the Financial Management Service, the Federal Reserve Bank of Atlanta, the Federal Deposit Insurance Corporation, the Federal Trade Commission, and the Office of Thrift Supervision—indicates the Treasury Department’s recognition that the concerns in this area span the jurisdiction of a number of governmental agencies and entities.
Second, more and more e-money products, such as stored-value cards and electronic cash, are being introduced, not only in the United States but across the globe. Indeed, the report observed that pilot e-money programs were in progress in or were about to be launched in Argentina, Australia, Austria, Brazil, Canada, China, Colombia, Costa Rica, the Czech Republic, Greece, Hong Kong SAR, Israel, Italy, Japan, Korea, Malaysia, Mexico, Moldova, the Netherlands, Norway, New Zealand, Poland, Saudi Arabia, Singapore, South Africa, Sweden, Switzerland, the United Kingdom, and the United States. In addition, nationwide e-money systems are now being implemented in Belgium, Finland, France, Germany, Portugal, Spain, and Thailand.
Third, the report follows the now-characteristic pattern of governmental reluctance to interfere with the development of e-money products. Through recognizing that existing statutes and regulations are in many ways inapplicable to these financial products, the task force repeatedly concluded that for now the e-money industry is best controlled by a combination of self-regulation and the pressures of market competition for adoption of different products by consumers. Yet self-regulation raises questions of nonenforcement, and a reliance on the market presumes that the issuers of e-money will accurately and completely inform consumers about the salient features of these financial products.
The report noted the concerns of various consumer advocates that e-money might be available (or available at reasonable fees) only to affluent consumers, and, alternatively, that low-income and moderate-income consumers might not understand the risks involved in the use of these financial products. However, representatives of the financial community had countered that such products, which do not require the consumer to have a bank account, might be very popular with “unbanked” consumers, and that if banks themselves did not make such products available to the low-income market then nonbanks might do so. Many commenters from the financial services industry observed that the issuers of e-money products could be expected to provide consumer education in this area, in order to encourage consumers to be comfortable with and to use these products. However, other commenters raised the concern that these presentations might sway unknowledgeable consumers toward such products even though those consumers might be better served by other payment systems such as checks or credit cards.
The task force ultimately “encourage[d] financial literacy efforts by industry representatives and consumer organizations, in cooperation with the government, that address the use of technology in financial services. These efforts may include electronic money products, as this emerging industry matures over time.”
Privacy concerns raised by commenters included both the desire of consumers to protect their transactional information from being gathered and disseminated and the desire of the government to prevent digital anonymity that could shield money launderers and other criminals. Once again, the task force considered questions of consumer education: would consumers understand how much information was being gathered on them as they entered into e-money transactions, and how this information would be used?
The task force observed that “unlike the nations of Western Europe, the United States does not have universal or omnibus privacy laws” but instead has a patchwork of federal and state legislation addressing financial privacy in different contexts. However, much of this law, such as the Fair Credit Reporting Act, the Right to Financial Privacy Act, and the Federal Reserve Board’s Regulation E, may not apply to e-money. Consumers might be better able to enforce their rights against issuers of e-money through contractual or tort theories, by claiming that the issuers had misrepresented their own privacy policies. This approach would augment the self-regulation practiced by groups like the Smart Card Forum, the American Bankers Association, the Bankers Roundtable, the Consumer Bankers Association, and the Independent Bankers Association of America, which have adopted recommendations for the privacy policies of their members.
The task force observed that “[a]t the present time, whether consumers will demand e-money products that protect their privacy is uncertain.” As the market for such products develops, consumer demand might lead to several different types of products, some of which might be distinguishable by their privacy features (and possibly by a higher price).
The report stated that the task force encourages issuers to adopt self-regulatory initiatives that are meaningful and effective in that they both respond to consumers’ privacy concerns and involve some means to ensure adherence by individual participants. These means can involve a variety of flexible approaches. Until e-money has had more time to develop, it is premature to assess whether and the degree to which it will present threats to privacy that would warrant government action.
As the e-money industry changes and matures, the extent to which industry participants have effectively addressed privacy interests through self-regulatory initiatives should be carefully monitored. The need for government action regarding privacy standards for e-money then can be reassessed based on the growth of e-money as payment media and the success of e-money providers in implementing effective privacy principles and policies.
Financial Condition of the Issuer
Similarly, when examining questions of the regulation, examination, and supervision of issuers of e-money, the task force observed that banks, thrifts, and other federally supervised depository institutions would be under the jurisdiction of federal authorities but that the e-money issued by these institutions might not be backed by a deposit guarantee by the Federal Deposit Insurance Corporation. That is, a consumer who had paid $100 for a stored-value card or e-cash supply to a bank that later became insolvent might find her electronic money effectively worthless and not covered by federal deposit insurance. Nor do the states currently have uniform regulations of money transmitters.
The task force suggested that the industry seeking the adoption of e-money would have a great incentive to reassure potential customers and merchants of its safety. Issuers could not only take out their own insurance but could self-regulate in this area.
As in the privacy area, the task force decided that the time was not yet right to change existing regulation:
It is too early to tell whether market developments will adequately address these concerns in light of existing regulatory schemes. E-money is not currently, nor expected to become in the near future, a significant part of the payment system. Accordingly, regulatory action to set standards for e-money issuer financial integrity is premature at this time.
The task force urges issuers of electronic money to establish policies and procedures to safeguard consumer funds and ensure that transactions can be honored as promised ….
Moreover, for all e-money issuers, the task force urges that issuers disclose to consumers information concerning whether they can recover funds held in stored value in the event of issuer insolvency and the insured or uninsured nature of e-money products. Effective disclosure of this information would be a useful self-regulatory step that could be undertaken at this early stage of e-money industry development.
Consumer Disclosures and Protections
Even on this most basic element of consumer protection (and one that would be central to the consumer’s ability to bring common law contract, tort, breach of warranty, and negligent misrepresentation claims against issuers of e-money) the task force stopped short of requiring industry action.
Though it urged that the issuers of electronic money make certain disclosures to consumers, the task force recognized that “the application of existing statutory regimes to e-money is uncertain and may not by themselves [sic] specifically address consumers’ concerns about receiving adequate information about their rights and liabilities in e-money systems, liability for unauthorized use or card malfunction, and the ability to correct e-money transaction errors.” However, once again it decided that market forces precluded effective regulation: “Government action, such as supervisory guidelines that encourage issuers to provide disclosures, may help to ensure consumers receive certain disclosures, but such guidelines may not be responsive to the needs of a changing market.”
Thus, the report recommended “that industry groups and participants take steps to ensure that the features, costs, and risks are sufficiently transparent such that consumers can best make informed decisions about the relative merits of e-money products.”
Because the task force declined to impose any new requirements on the issuers of e-money, the report seems a clear victory for financial institutions over consumer advocates. The issuers of e-money are indeed on notice that the government will be monitoring the development of their industry and market; yet the report does not indicate when at long last the industry will be “mature” enough to regulate.