Academic journal article Texas Law Review

Regulating Internet Payment Intermediaries

Academic journal article Texas Law Review

Regulating Internet Payment Intermediaries

Article excerpt

I. Introduction

The Internet has produced significant changes in many aspects of commercial interaction. The rise of Internet retailers is one of the most obvious changes, but oddly enough the overwhelming majority of commercial transactions facilitated by the Internet use a conventional payment system. Thus, even in 2002, shoppers made at least eighty percent of Internet purchases with credit cards.1 To many observers, this figure has come as a surprise. The early days of the Internet heralded a variety of proposals for entirely new payment systems-generically described as electronic money-that would use wholly electronic tokens that consumers could issue, transfer, and redeem. But years later, no electronic-money system has gained a significant role in commerce.2

The continuing maturation of the Internet, however, has brought significant changes to the methods by which individuals make payments. Person-to-person (P2P) systems like PayPal now make hundreds of millions of payments a year between individuals.3 The most common purpose is to facilitate the purchase of items at Internet auctions, but increasingly P2P transfers are used to transfer funds overseas. Less far along, but gaining transactions rapidly, are a variety of systems for electronic bill presentment and payment (EBPP).4 Interestingly, both of these developments follow a less ambitious path than the still-hypothetical electronic-money systems: they involve the use of intermediaries to "piggyback" on existing systems to provide payment. Thus, in essence, they use the technology of the Web site to facilitate the use of conventional payment networks.5

However disparate these developments might seem at first glance, they present a common challenge to the regulatory system.6 Unlike banks, which control the execution of payment transactions in conventional payment systems, the intermediaries that populate these new sectors generally are not inevitably subject to regulatory supervision. At most, they are subject to regulation as money transmitters (akin to the regulation of Western Union).7

That circumstance presents a serious gap in the regulatory scheme. The pervasive regulatory supervision of banks helps to ensure that they honor their obligations under a variety of consumer-protection and data-privacy regulations that govern their activities.8 A shift of a significant share of volume to the new and unregulated entities raises a corresponding risk of loss from the irresponsibility of those entities.9 Thus, although the risk of fraud and privacy violations is doubtless higher in these new forms of transactions than it is in conventional transactions, the regulatory framework governing them is much weaker.10

Although the advent of the new transactions has been widely noted,11 the literature contains no sustained legal or policy analysis of the problems that they pose. This Article responds to that challenge. The analysis proceeds in three steps. Part II provides a summary description of the mechanics of the systems, focusing on how they interact with existing payment systems and conventional actors in those systems. Part III explains the problems with the existing laws (principally the Electronic Funds Transfer Act12 (the EFTA) and regulations that the Federal Reserve has promulgated to implement that statute). Generally, the problem is that the outdated provisions of the EFTA and the applicable regulations leave consumers exposed to losses from fraud and error in the new transactions, even though federal law would protect them from this loss if the transactions had been completed directly with conventional payment systems. Finally, Part IV examines broader questions of how to ensure that the new Internet intermediaries are adequately motivated to comply with the obligations the EFTA and privacy laws impose. Any regulatory intervention must accommodate both the benefits of increased competition from those new entities and the risks that their lack of responsibility will harm the consumers whose accounts are involved in the transactions. …

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