"The first thing we do, let's kill all the lawyers."
Those words were uttered by Dick The Butcher in Shakespeare’s "Henry VI" as
After reading The Clearing House’s (TCH) latest white paper on the future of payments and financial services, it seems they’d like to modernize that sentiment just a bit.
“The first thing we do, let's kill all the innovators.”
And their weapon of choice is imposing new and even more regulation on innovators under the guise of “leveling the playing field.”
Now those words – “leveling the playing field” are actually used a lot, and in payments, mostly by regulators, when justifying a set of actions or proposed actions in response to complaints by incumbents of a “lack of fairness.” We heard those words last spring to justify the need for a U.K. Payments Regulator, an action needed “to level the U.K. playing field.”
We heard them again earlier this summer when the Comptroller of The Currency advocated “using authority granted by the Dodd-Frank Act, we can ensure a more level playing field and protections for customers of nonbanks.”
Implying in both instances that established players are being unfairly disadvantaged by a band of outlaw innovators with the audacity to use technology and the proliferation of connected devices to add value to payments and open new commerce channels.
Just two weeks ago, we saw them again - as the thesis of a white paper published by TCH.
TCH is a 163-year-old organization that has the leading banks in the U.S. as its members. Their mission is to clear and settle transactions for those banks ($2 trillion each day) and “apply expert advocacy and thought leadership resources to address issues of critical importance to the industry: safety, soundness, risk mitigation and other complex policy challenges.” TCH has a reputation for being a very thoughtful and serious organization.
Unfortunately, that doesn’t extend to one of the most surprisingly one-sided depictions of payments I think I’ve ever read:
The title sort of says it all and it lives up to its billing: pitting innovators against the incumbents “seeking to introduce payment innovations and asking consumers to entrust their money to them.” TCH is taking on the cause celebre of the poor, downtrodden incumbent banks by more or less implying that we are one step away from total financial system ruin, thanks to the actions of innovators (aka “Alternative Payment Providers” or APPs). APPs are defined in the piece as everyone from Apple Pay to Square to LevelUp to PayPal and Venmo to Stripe to “buy button” players including as Google, Facebook Twitter, etc.
The assertion is that because APPs are engaging in <gasp> innovative payments-related activities, and because they are not as heavily regulated nor scrutinized as banks, they “make it easier for security flaws to go undetected” – putting our system and consumer trust at risk.
C’mon, give me a break.
When I read that passage in particular, I literally laughed out loud.
Since, of course, the facts tell a very different story.
First, the biggest hacks and breaches in payments have come courtesy of the incumbents – existing POS and mag stripe cards at Target and Home Depot and the dozens of other breaches that have happened over the last two years at physical retailers. And let’s not forget the hack of banking scion JPMorgan Chase and the 90 million accounts that “security flaw” put at risk – a risk that went undetected by them for months.
Second, the TCH paper entirely ignores the basic facts of the payments world: To enable payments of any kind, innovators have to work with and through regulated banks and play by their rules. It is not as if APPs hoverboard their way into town wearing their hoodies, create apps and start sucking money out of consumer bank accounts or hooking into consumer payments cards willy-nilly. Innovators leverage existing payments methods – and the rails they run over – to enable their innovations. They work with regulated acquirers with systems that protect the innovator, the consumer and the bank - and that decide who gets to play and how on the existing payments rails, not to mention if they get to play, at all. Innovators also have to abide by the rules that issuers have put in place to authenticate consumers and authorize transactions, including AML and KYC regulations.
Third, and perhaps more importantly, innovators don’t touch the money that their mobile payments innovations enable. So where the rubber meets the road – when the money moves between accounts - that’s all banks, all the time. Entities like Wells Fargo, for example, move the money between accounts for the innovators it sponsors – innovators such as many of those named in the TCH piece - Square and Stripe and even PayPal. Those entities play the role of the payments police, making sure that innovators are not taking undue risk with their businesses, with the system and with the safety and soundness of the consumer’s money. It’s also why innovators often pay more for the services that they obtain from the existing payments ecosystem when they first start out - banks and acquirers are pricing for the risk - as they should.
Banks also have the option to shut down bad actors when they violate the rules, which they do routinely, or smack their hands and tell them to stop doing A and start doing B instead – also a routine occurrence.
But of course, the folks who wrote the TCH paper should know all this, too – the banks are TCH’s members. That why “we only want to level the playing field,” isn’t really intended to do what it says.
[bctt tweet="“Leveling the playing field,” sounds more like killing innovation outright."]
“Leveling the playing field,” sounds more like killing innovation outright. And the tool that the TCH proposes to deliver the finishing blow is more regulation.
TCH takes to task the fact that the FTC has relaxed regulation on innovators, a decision that the agency has made, wisely, so that innovators have enough slack to get out of the starting blocks and to see if their business can scale or even has a shot. They recognize, rightly, that innovators have to work through the highly regulated payments ecosystem to even get to the starting line.
Rather than applauding that, as everyone who’s a champion of innovation should, the TCH, in its paper, sees that as a threat, suggesting that a lighter regulatory hand puts the banks in the position of having to pay for the sins of the innovators if something goes wrong. And that APPs play fast and loose with security standards because they are new.
Ignoring two big points: how innovation actually ignites and gets to scale and how innovators are using the latest technologies to both create and inspire new ways to secure payments transacting.
TCH cites the flaws in Apple Pay security, overlooking the facts associated with Apple Pay’s account takeover problems earlier in the year. Apple Pay relaxed account provisioning in order to minimize the friction associated with onboarding new customers. There was fraud, fraud perpetuated by the hackers who had account numbers from the Target and Home Depot hacks. The media sensationalized the “6 basis points of fraud” but failed to point out that the 6 basis points of fraud was on a very tiny number of transactions and transaction volume. You don’t have to be a math whiz to know that even a large percentage of a small number is still a small number. Since then, Apple Pay has tightened its provisioning systems.
TCH also cites Venmo and its one instance of a customer having a mix-up with a P2P transfer. TCH implies that the customer service breakdown, which Venmo admitted to, “might even be an intentional one” so as not to have to deal with the issue – pushing it off on the bank to make good for the customer. Intentional, seriously? The example ignores the fact that since the bank, not Venmo, moves the money, the bank had to be the one to put the money back into the customer’s account.
Payments tokens, an innovation that came out of the networks’ and issuers’ bid to secure mobile payments innovations for schemes like Apple Pay, Android Pay and Samsung Pay, is intended to make transacting via the mobile device more secure for everyone. Security tokens, an innovation that we’ve had in payments since the mid-2000s came courtesy of an innovator, Shift4, and is how online transaction data is kept secure.
There are also a slew of innovators working tirelessly to leverage the power of mobile and biometrics to authenticate the digital identities of consumers transacting in an increasingly digital world using connected devices. And, it’s the innovators who’ve devised new ways of encrypting cardholder data as it travels from the merchant point of sale through the acquirer to the issuer for authorization and back to the merchant for approval, working in collaboration with the payments ecosystem.
That’s why I found TCH’s position in its white paper so disturbing.
[bctt tweet="It’s sickening to read how many billions of dollars are going into the compliance operations of banks today, instead of innovation initiatives."]
Sure, I get that their job is to protect the banks that are its members. And that the banking industry has taken it on the chin since the financial crisis. It’s sickening to read how many billions of dollars are going into the compliance operations of banks today, instead of innovation initiatives. Banks are under siege from new regulations, some, unfortunately in response to bad behavior by banks on things like overdraft fees.
Banks are also under the thumb of a new regulator. The CFPB has an unfettered ability to march into a bank, decide that a product is bad, fine them regardless of whether it is or isn’t really harmful to consumers and without regard for the unintended consequences of their actions, and then require banks to staff up to monitor those activities on a going forward basis. Understandably, the fear of reprisal from the CFPB has curtailed a lot of the innovative ideas that might otherwise come out of the banking sector.
But that isn’t a reason to throw sand in the wheels of progress. Misery may like company, as the saying goes, but it sure won’t get us anywhere close to achieving the full potential of innovation in payments.
Sadly, the TCH is not alone in taking the position that the only way to protect regulated incumbents who can’t or won’t change is to throttle the innovators who are using new tools to imagine a better and more valuable future. Innovators are being attacked all over the world — and especially in Europe.
Uber is being demonized for reducing the friction associated with reliably getting and paying for a clean taxi with a courteous driver. Regulators are trying to shut it down left and right. In France, Uber has been called “economic terrorism.” Just this past weekend, The New York Times reported that the EU will launch a study to determine if Uber needs to be regulated. Ignoring, of course, the fact that consumers love using it and that there’s nothing now nor in the past that has prevented the taxi industry from innovating to provide the same service except inertia and lack of imagination
In Europe this summer, the heads of the large print publishers have held closed door meetings with European officials to cook up ways to regulate the digital economy in Europe. At the root of this issue is the impact of digital content on print media – and the print media business model. This is print media we’re talking about here – as in the stuff that few people still read. One of the proposals would require Google to pay print publishers whenever links are shown on its European sites, in addition to other regulations stipulating use of content. Germany tried something similar not long ago. In response, Google simply removed the links to many local news organizations from its site. The losers, of course were the local news sites that simply lost the traffic, and they ultimately caved. But that hasn’t stopped the established print media players to think about penalizing innovators instead of putting the energy into reinventing themselves.
Back in the 19th century, a group of English textile workers started smashing the spinning wheels and power looms and stocking frames that were revolutionizing the garment industry. Ned Ludd, and his band of disenfranchised workers, gave birth to a new vocabulary word – Luddites – a term used to define those who stand in the way of any attempt to use technology to innovate.
It seems to me that banks have a decision to make.
They can, as the TCH suggests, lobby for more regulation in the hopes of marginalizing innovators or slowing them down.
Or they can tell the innovators who knock on their doors to get lost.
But to what end?
[bctt tweet="In reality, it’s the innovators who are making the incumbents relevant in a digital world."]
It’s not as if banks are blazing the trail to mobile payments innovation in an increasingly mobile payments and commerce world. In reality, it’s the innovators who are making the incumbents relevant in a digital world.
And working in partnership with them to make innovation happen.
Apple Pay embraced the existing payments ecosystem, so too have Android Pay, Samsung Pay, PayPal, Stripe, Square and every single other example that TCH calls out in its paper. The ability to leverage the existing payments ecosystem with all its built in safeguards - and combine it with the cloud, data and the raft of connected devices that are emerging - is why there’s been so much innovation in payments and commerce. Innovators with their agile organizations, creative ideas, and knowledge of technology, are able to see and solve a problem and payments-enable it, without fear that attaching payment to an app will create a risk for them or the consumer or business they seek to serve.
And, they are actually making payments more – not less – secure.
[bctt tweet="As history has shown, throttling innovators and innovation has never had a happy ending for incumbents who stand in the way. "]
As history has shown, throttling innovators and innovation has never had a happy ending for incumbents who stand in the way. It only makes innovators work harder to find ways around the obstacles.
Jason Oxman, the CEO of the ETA, calls out The TCH for being "out of touch.” I couldn’t agree more. The payments industry needs more innovation and fewer regulations, and leadership that looks forward, not back. The Luddites in the 1800s and their movement tried really hard to stop the Industrial Revolution. They obviously failed. History will surely repeat itself with this new, modern day version directed to the mobile payments and commerce revolution.
[bctt tweet="Long live innovation – and the innovators who make it happen."]
Long live innovation – and the innovators who make it happen.
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