CEO Perspective: Innovate, Don’t Regulate

JASON OXMAN

The Clearing House (TCH), a 162 year old trade association representing 24 banks, this week issued a white paper calling for wide-ranging new regulations on what it calls “alternative payment providers (APPs).” TCH took the unusual step of specifically naming the companies that it believes should be subject to sweeping new regulations, including Apple, Google, Facebook, Square, Stripe and PayPal, among others.

As most of these technology companies that TCH named for regulatory scrutiny are ETA member companies, I wanted to share my thoughts on the matter. TCH is a really interesting organization with a long history of service to the financial industry (you can learn about their history here). I have to respectfully disagree with this broad call to impose heavy-handed regulations and new legal requirements on providers of payment services.

I agree wholeheartedly with TCH that traditional financial services are being disrupted at a rapid pace. But where I part ways with my learned association colleagues is what the government response should be. TCH assumes that alternative payment providers are seeking to “avoid the reach of the traditional financial regulators” and that they should be “subject to regular examinations and enforcement actions by regulators.” Why? Because “[b]anks are subject to extensive regulatory, supervisory, and enforcement scrutiny by their regulators.” In other words, banks are regulated heavily, so everyone else should be too.

No question: banks are fundamentally important players in the payments industry, and they are heavily regulated. But a look at the new payments innovations happening in today’s market makes it clear that banks are playing a vital role. For example, every merchant in the U.S. that accepts electronic payments is served by an acquiring bank – a financial institution that ensures the proper movement of funds from card issuing banks to merchants. TCH acknowledges that APPs are “providing their products and services by continuing to rely on the backbone of existing bank payment systems while capitalizing on innovations in communications platforms.” This is true for brick and mortar payments and for new online and mobile payments platforms cited by TCH in its white paper – they are sponsored by banks. So if the banks are already involved, protecting consumers and merchants, why the call to heavily regulate their technology partners? It just doesn’t make sense.

Moreover, the alternative providers cited by TCH as needing heavy regulation are actually partnered with TCH member banks to deploy innovative new payments products and services to consumers and merchants. For example, 15 of the 24 banks that make up TCH are participating in Apple Pay. Many of the same banks are partnered with Samsung on Samsung Pay, with Google on Android Pay, and on other new payments technology.

Why is all this great payments/technology partnership happening? The payments industry has a unique and commendable approach to the disruptive innovation that is sweeping our sector. Many incumbent industries choose to fight innovation because of the risk of creative destruction. Think of how the record labels reacted to the advent of digital music – they went all the way to the Supreme Court to shut down nascent web-based music sites. The movie studios lost their battle at the Supreme Court to kill the VCR. John Philip Sousa took a break from composing music to lobby Congress to outlaw the player piano. (Sousa made his money selling sheet music and was worried the player piano would kill that market).

But the payments industry is different – we are embracing disruptive innovation by partnering with technology companies to deliver innovative financial products and services to consumers and merchants. Rather than emulate the buggy whip industry reacting to the invention of the car, financial institutions and technology companies are working together – and they certainly don’t call for new and onerous regulations to hobble new entrants or disadvantage whole industry segments.

It’s exciting to be at ETA at a time when our more than 500 global members – banks, technology companies, and more – are partnering together to bring payments innovations to market. Established industry giants are working with technology startups, and consumers and merchants are the beneficiaries. Most importantly, established laws provide all the protections necessary as these new innovations are deployed.

That’s why I think the TCH white paper is so out of touch with the industry I know and that ETA represents.