This article originally appeared in Electronic Retailing Magazine, January/February 1997 issue.
Electronic payment methods such as "electronic cash" and electronic fund transfers may hold great promise for electronic retailers and their customers. These payment systems may be not only the most efficient means yet devised for completing retail sales transactions, but also may even prove to be the most secure payment methods for both buyers and sellers. The use of so-called "e-cash" and other electronic payment systems for retail and business-to-business transactions, and much of the technology that facilitates these methods, is certainly growing. But these technologies are still new enough that one can not be certain about the full range of benefits that they can offer or problems that they may create. And, the industry is evolving at a breathtaking pace, so it can be hard to keep up. Although some are calling for the establishment of some rules for "fair play," without a better sense of the full potential of electronic payment systems, it is unclear whether or not any of the existing regulatory frameworks should apply (or if they even could), or whether new ones need to be created. With all of this uncertainty, how can electronic retailers navigate this new territory What are some of the key issues? How are the government regulators responding? And is there a place for self-regulation before these new opportunities become saddled with burdensome legal requirements?
Although electronic fund transfers have been in around for some time, the use of electronic payment for retail transactions is gaining wider acceptance. The familiar forms of payment for retail purchases have changed gradually, from coins or paper currency, to checks, and on to debit and credit cards. And electronic fund transfers are increasingly common among employers and others as a way to make payments. Electronic cash looks like the next wave in this continuing process of change. The two uses of e-cash that seem to be generating the most interest right now are stored value cards ("SVCs"), and purchases made through direct computer payment, which is different than simply electronically transmitting payment instructions. Electronic cash essentially enables consumers to buy what amounts to a "claim," usually against the card issuer, worth a specified amount of money. The value of the claim is stored on a computer chip on a wallet-sized card, or directly on a computer. The consumer can then exchange the claim the value stored on the computer chip for goods or services; as payment, the seller of the goods or services acquires the claim against the e-cash issuer.
Last fall, the U.S. Department of the Treasury sponsored a conference entitled, Toward Electronic Money and Banking: The Role of Government, to explore emerging issues in the rapidly evolving new electronic payment industry. During the conference, Treasury Secretary Robert E. Rubin announced the formation of a Consumer Electronic Payments Task Force, which will examine questions that arise in the development and use of new electronic payment methods. The Task Force will include representatives of Treasury, the Federal Trade Commission, the Federal Reserve Board, and the FDIC, which are among the principle federal agencies involved in the regulation of payment systems. The task force will have plenty of work ahead in more closely analyzing the concerns voiced at the conference last fall, ranging from the need for international cooperation to individual consumers' privacy.
For instance, participants emphasized the need for international cooperation in tackling potential
problems connected with the use of electronic payment systems, since new technologies such as the Internet are beginning to break down traditional border check-points and limitations on the flow of funds. Representatives of both private industry and U.S. government agencies noted that they have been working in cooperation with the European Commission, lawmakers in various countries, and several international banking and financial groups to address issues that are ripe for international coordination, standardization, regulation, as well as the security of electronic cash and other electronic payments flowing across national borders. As it now stands, different countries may impose different standards on the use of various types of electronic payments. Obviously, this patchwork can take the unwary by surprise, creating real problems for electronic retailers that want to market their products or services abroad.
At home or abroad, the use of SVCs at times seem to pose as many issues as it solves. For example, debate continues over what can or should be done to ensure the reliability and solvency of SVC issuers; what types of entities should be permitted to offer SVCs (e.g., whether only "banks" should issue SVCs to banks, or whether others may do so); and what, if any, regulations issuers must follow. It is also unclear whether, and in what form, a dispute resolution mechanism should be established to address issues concerning lost, stolen, or destroyed cards, system failures, or other payment disputes.
In addition, the same kinds of consumer protection issues that crop up in connection with advertising and marketing have been gaining the attention of consumer groups, regulators, and industry members involved in electronic payment system issues. For example, regulators are thinking about what disclosures consumers should receive about the terms of their use of SVCs, the potential for deceptive advertising claims (especially concerning the extent to which SVCs are the "same" as cash), and how to balance the need for payment security against the desire for anonymity. What information should be collected about consumers, how it should be used, and what degree of notice and control should consumer should about these matters?
Participants at the Treasury Department conference last fall wisely expressed general consensus that that the primary role of government at this early stage should be to gather more information, and foster industry's own efforts to address emerging issues. Many cautioned against premature or heavy regulation of an industry that is still in its infancy. And for the most part, representatives of various government agencies seemed to agree, which is good news for electronic retailers.
FTC Chairman Robert Pitofsky, for instance, indicated that the FTC will continue to collect information about e-money systems, as well as about the Internet and other new technologies. He specifically identified liability for unauthorized use of electronic payment techniques and protections for consumer privacy as among the most important issues that need to be addressed. And he suggested that the existing laws and regulations governing the use of credit cards may serve as a good model for e-money systems, citing recent cases the FTC has initiated against Internet marketers of financial services. The FTC will also be looking to ensure that e-money systems are accessible to all from an antitrust perspective, and Pitofsky explained his special concerns about the potential for antitrust violations in connection with joint ventures.
The FTC Chairman seems willing to let the industry develop, stating that he believes that the market should have an opportunity to address problems that arise. So, we are not likely to see any new rules on this subject from the FTC for some time. However, Pitofsky does believe that government needs
to be ready to step in when private solutions are ineffective, and said that the agency will address unfair or deceptive practices on a case-by-case basis.
Other lawmakers, however, are considering regulatory measures. For instance, the Federal Reserve Board has proposed regulatory amendments to "Regulation E," which governs disclosures about reporting procedures and liability for unauthorized use, transactional costs, and error resolution procedures in connection with electronic fund transfers, to provide limited coverage of SVCs.
Also, like most on-line transactions, electronic payments could provide retailers with a great deal of information about their customers that would be highly valuable for marketing purposes. Yet, a bill was introduced in the House of Representatives last year, entitled the "Consumer Internet Privacy Protection Act," to regulate the use of personal identifying information in connection with interactive computer service. Similarly, the European Commission is considering a proposed Directive that would limit use of consumers' personal or transactional data, transmitted via telecommunications services, to that necessary for billing, payment, and interconnection. Such data could be used for marketing purposes only if the consumer gave his or her "unambiguous consent," and then only by the telecommunications provider. Although this proposal closely resembles a provision of the 1996 Telecommunications Act here in the U.S., which restricts common carriers' use of "customer proprietary network information" in connection with their provision of telecommunications service, there is continuing disagreement about whether the proposed EC Directive does or should apply to new media such as the Internet, electronic payment systems, or interactive television.
One of the best ways for our industry to avoid unnecessary government intervention in the electronic payment field is to respond to what concerns lawmakers before they do. Retailers and others who use electronic payment systems must play an active role in shaping the industry, or face the prospect of excessive regulation. Responsible self-regulation is good for business, too: consumer trust and confidence in e-cash and other electronic payment systems will be vital to their acceptance and growth.