The United States Department of the Treasury Conference--Toward Electronic Money & Banking: The Role of Government
I am delighted to have an opportunity to participate in this extremely timely conference on emerging electronic methods for making payments.* The regulatory decisions that we make or fail to make today and in the near future will have an enormous impact not just on electronic money but on the whole marketing revolution that is occurring in a new high technology - global marketplace.
In addressing these issues, I am reminded of the story (perhaps apocryphal) about Mr. Justice Holmes. Late in his career, the Justice found himself on a train but could not find his ticket. The conductor said that he recognized the Justice, was confident he was an honest man, and was certain that he would send in his ticket once he found it.
Mr. Justice Holmes is said to have replied:
"Young man, I believe I have a right to be on this train; the more important question is where am I going?"
We are at the beginning of an exciting marketing revolution. About one year ago, the Federal Trade Commission convened a series of hearings on changes in competition and consumer protection policy as a result of growing global competition and developing new technology. Among the many things we learned was that the old paradigms for how goods are marketed are being revised, as companies begin to take advantage of dramatic changes in communication technologies. In the next 5 to 25 years, consumers will be shopping in a whole new way. Instead of going to the store or mall, or purchasing by catalogue, they will be making many of their purchases on interactive television or their computer or through devices not yet even invented.
These new forms of marketing can be exceptionally beneficial to consumers and to competitive processes. Consumers are likely to have more options and greater convenience shopping on interactive television than in a shopping mall. They are virtually certain to have more relevant information -- including a wider variety of price data -- than is the case today. Assuming private arrangements do not erect barriers to entry, businesses should be able to migrate from market to market with greater ease. Tailored offerings should enable niche markets to be served more efficiently.
Changes in electronic payment systems will facilitate this marketing revolution. Great demands will be put on new payment systems to make sure they provide consumers with both convenience and security. I will try to address today consumer protection and competition issues likely to emerge in this brave new electronic world. In doing so I will try to keep in focus two overarching policy questions. What is the appropriate role of government to play in the development and deployment of new electronic payment systems? On the one hand, it can be argued that without effective government regulation, there will not be sufficient public confidence in the security, effectiveness and fairness of these new systems to allow them to develop. On the other hand, aggressive government regulation could chill voluntary private arrangements in support of these new forms of marketing and, by intervening prematurely, prevent the market from developing optimal solutions. Second, if there is to be government regulation, are current ways of thinking about consumer protection and antitrust appropriate? Particularly at the early stages of new technologies - where new issues will arise over time - there is a good case to go slow. I will suggest today, and discuss briefly in a conclusion, that we should be cautious about regulation, but that current approaches to consumer protection and antitrust are sufficiently flexible and resilient to respond to these new challenges.
II. Consumer Protection
Electronic payment systems (which I will refer to generally as "electronic money") hold tremendous potential for consumers, but they also pose risks. In order to become a part of consumers' everyday lives, electronic money must be widely accepted, convenient, and secure.
Our experience in consumer protection has taught us that payment systems will be accepted by consumers only when they are confident that those systems offer safety and security. Electronic money presents a wide array of consumer protection issues. Among the most critical will be: (1) liability for unauthorized use and dispute resolution procedures, (2) privacy, and (3) availability of these new payment systems to underserved populations. As a law enforcement agency, we must also consider the enforcement challenges posed by the growing international dimensions of some payment systems.
A. Liability Protections. There are a number of different models on which to draw in considering what liability protections should attach to payment systems. These include credit cards, debit or ATM cards, and cash. It may be most instructive to examine the evolution of the credit card market. Credit cards began as mostly local, proprietary merchant cards. While there was an effort to create widely held, general purpose credit cards, that effort did not pay off until Congress enacted federal billing dispute and unauthorized charge protections in the Truth-in-Lending Act (TILA). With these two sets of protections, credit cards instantly became more valuable than cash, especially for large transactions. Consumers who lost their credit cards or had them stolen would no longer be liable (at least beyond $50) for unauthorized charges. It is these protections that allow us all to walk around with numerous credit cards in our wallets, with substantial credit limits, without significant fear for their loss. Imagine if no liability protections existed for credit cards. How many cards would you have issued to you? How many would you carry in your wallet?
Consumers also gained from TILA the ability to dispute charges on their bills in a number of situations, including where a merchant did not deliver the goods. This gave consumers the freedom to deal with unknown merchants because they had recourse against their credit card issuer.
Of course, these protections come at a cost to issuers and merchants, and ultimately consumers. The question is whether the cost is worth it. In the credit card industry, the answer appears to be "yes."
There is another model for regulation of electronic money -- the Electronic Fund Transfer Act. As the name suggests, the EFTA focuses its protections on the transfer process rather than on the underlying transaction, and applies to non-credit card transactions. Two key protections relate to errors on the consumer's statement, such as the proper amount of the transfer, and limited consumer liability for unauthorized use. One question is whether consumers will demand the transaction-related protections similar to those afforded credit cards before they are willing to venture into the electronic marketplace. Consumers now feel comfortable making remote credit card purchases over the telephone. Will they demand credit-card type protections when shopping with electronic money in on the Internet?
Some concerns have been expressed that enhanced protections may inhibit the development of new technologies. The reverse may be true as well. Insufficient consumer protections may inhibit consumer confidence in any new systems, meaning they will never reach a critical mass of acceptance. One has only to look at the history of 900 numbers to see what happens when consumers lose confidence in a payment system. It may be sensible in some situations to exempt from EFTA coverage the stored value portion of smart cards--cards with embedded computer chips on which, among other things, value can be stored -- as recently proposed by the Federal Reserve Board. For that purpose, they are functionally similar to, but far more sophisticated and potentially more widely usable than, the subway fare cards used in Washington. But that exception may work only so long as those cards are used for relatively small transactions, as has been initially proposed. If their use includes larger dollar transactions, consumers may want greater protections. Yet, some protections afforded under EFTA, such as the requirement that written receipts be provided, may not make sense in a small payment context, as recognized by the recent Federal Reserve Board proposal.
Initially, industry and government will be faced with the major challenge of educating consumers about all of their various payment system options and the pros and cons of each. There will be a challenge in educating consumers about the features of multifunction chip cards and the different features of cards that may have a similar appearance and perhaps the same corporate logos but very different functions. Consumers will need to be informed of their potential liability for the use of new types of electronic money, so they can understand how it differs from cash, credit cards and possibly ATM and debit cards. Consumers will also want to know about fees, charges, float, frequent flyer points, and the many additional competing features of payment systems, so they can better decide which payment method to use in which circumstance.
Before leaping to the conclusion that a new regulatory structure is required, some alternatives should be considered and given a chance. The technology that is opening new markets and methods of marketing also has the potential of addressing some of these concerns.
Encryption has the potential of solving some consumer protection problems. Under certain encryption schemes, theft of electronic money could be a waste of time because the encoded digital information needed to use that money would be unavailable to the thief. A merchant's failure to give a customer a receipt may not matter if the payment system provides proof that the electronic money was deposited. The ongoing problem of forged and bounced checks could disappear with the use of digital signatures, online verification, and other authentication devices. Thus, even without added legal protections, systems could be designed to make electronic money better protected than cash.
Another major issue we may face, depending on how electronic money evolves, is international jurisdiction. We have grown accustomed to controlling payment systems domestically. In the future, we may have to confront electronic money that is issued abroad, not easily traced, lacks consumer protections, and may be beyond the ability of United States law enforcement agencies to challenge. In the conventional consumer protection and antitrust fields, it is becoming increasingly clear that international coordination and cooperation - bilateral and multilateral - is essential if consumers and markets are to be protected. There is every reason to expect that regulation of electronic money will require the same attention to the international dimension.
B. Privacy. Even if electronic payment systems provide consumers satisfactory liability protections, there is still the issue of the privacy of consumers' online transactions. In the course of holding several public workshops on this issue, the FTC has learned that privacy is a critical issue for consumers in online transactions. It will also be relevant to consumers' perception of electronic money and their desire to use it. Our staff is preparing a report to be released this fall summarizing what we have learned in this area, but let me touch on a few key points now:
Consumer education: We will all face the challenge of better educating consumers about what types of information can be captured about their transactions in the online environment. Only when consumers have been armed with this basic information can they intelligently decide what degree of privacy they will seek for their transactions.
But consumers may not know that the potential will soon exist, if it doesn't already, to monitor not just their ultimate purchases, but the whole shopping process that led to their purchases. By analogy to a supermarket's ability now to track your purchases if you use a check cashing card and the store uses an electronic scanner, all the store currently knows is that you made a particular purchase. In the online environment, it will be possible for merchants not only to know the equivalent of that information, but also to know what other items you examined, for how long, and at what point this took place during your visit to the store. Some consumers might not care whether that information is captured, especially if it results in their getting better service or individually tailored offers in the future; others might be highly offended. Shopping for some products -- books, magazines, videos -- may raise more sensitive privacy concerns.
One response may be that certain forms of electronic money will offer to insure that transactions are anonymous. As part of the consumer education process, consumers will want to know that there are tradeoffs that accompany anonymity. For instance, without an audit trail, it may be impossible to replace lost or stolen cards or other payment devices. Armed with this information, consumers can then decide whether a card value replacement feature outweighs the loss of anonymity.
Technology: At the FTC's workshop on online privacy, we had many demonstrations of innovative software that has the potential of empowering consumers to protect their own privacy online (as well as their family members' exposure to undesirable materials). For example, consumers will soon be able to load software onto their computers that has the capability of filtering out Web sites that are not rated privacy protective, either by the site itself, or more likely, by third party rating services. The next step will be software that allows consumers to engage in an electronic dialogue with Web sites over how their personal information should be handled. Time will tell whether this technology is adequate to protect consumers' privacy both now and as new technological developments take place.
Government: The role of government in protecting consumers' privacy is less clear. At the close of our most recent workshop on privacy, I stated that self-regulation, while it has been far from perfect in many consumer protection areas, should be given a chance to operate, especially in this high technology arena where we see changes in the world order every few months. The government regulatory process has generally not been able to keep up with fast changing technological developments. The question may ultimately be whether there is any alternative if self-regulation does not fill the void.
Children: Gathering information from and about children raises a sensitive set of issues. Many of these issues are unique in the electronic environment, where marketers now or will soon have the ability, which they have rarely had before, not just to send messages directed at children, but to interact with children individually and glean information directly from them. The Commission has received a petition on this subject from the Center for Media Education and devoted a portion of its workshop to this issue. The petition has spurred consideration of the following questions: Can children under a certain age consent to revealing information about themselves and their family? Should such information be usable in a personally identifiable form? Can it be used if aggregated, or should it never be used? When it comes to electronic money, will parents be able to hold tightly to the purse strings and control their children's ability to engage in commercial transactions online? As we know, that has not always been the case in other contexts in the past, as when children have used a credit card without authorization.
C. Availability to Under-Served Populations. A broader question to be addressed is one of access to new payment systems. New payment systems for a time may not reach under-served populations, like low income or ethnic communities, because they cannot afford several thousand dollar computers to link with new systems. By the same token, new payment systems hold the potential of reaching out to communities not served by financial institutions and providing them with safe, efficient payment mechanisms.
We have seen that many communities not served by banks or other efficient financial institutions often turn to higher cost approaches, such as the use of money orders or check cashing firms. Generally, one advantage of a stored value card is that it does not require its holder to have a banking relationship or a credit card. Another is that the cost of processing electronic transactions is far smaller than in-branch banking transactions -- making them easier to provide to a larger group of consumers. With a smart card and a neighborhood ATM, people in those communities may be able to download government benefit payments (through Electronic Benefit Transfer programs) and then make all or many of their regular expenditures through such cards. This will save some of the costs now incurred by public benefits recipients who must cash their benefits checks and then make payments through costly money orders, all due to their lack of a banking relationship.
The future holds the possibility that ATMs can be used for bill payment, even for those without a banking relationship. Of course, we may have to address the question of whether these neighborhoods are adequately served by ATM machines and what incentives would be required to insure that under-served neighborhoods have ATM machines. It may be that the expanded ability of ATM machines to handle deposits of checks from non-bank customers and to arrange for payment of bills will be enough to encourage their deployment.
Another possibility is that smart cards themselves may obviate the need for many ATMs. It is even possible that equipment used by merchants to accept smart cards could perform some of the functions now performed by ATMs, such as money transfer and bill payment. There may also be a greater shift to using the telephone to both download and transfer funds, thus avoiding some of the need for ATMs.
III. Competition Issues
The antitrust laws have long been understood to express this nation's commitment to an economic policy that favors competition as the best means to allocate goods and services and to promote innovation and efficiency. Antitrust is a distinctly non-regulatory approach. It is based on a belief that the free market, unimpeded by anticompetitive obstacles, will lead to the optimal allocation of goods and services.
Because the markets for electronic commerce are just emerging, the role of antitrust enforcement is still evolving. Generally, where markets are emerging, the antitrust laws counsel that caution should be exercised before the Government intervenes. Premature intervention may be unnecessary or may actually prevent the market from evolving along the most efficient lines.
Antitrust does not favor one type or group of competitors over another. Rather, the concern of the antitrust laws is that markets remain open, so that firms can compete on a level playing field.
It does not follow, however, that antitrust has no role in assuring a competitive marketplace for electronic commerce. Even in emerging markets, certain firms may possess control of critical "gateways" to the market. Other firms may control the standards that govern how competition in the market takes place. Control of both gateways and standards can be used, in certain circumstances, to distort the competitive dynamics of the market. The emerging world of electronic commerce poses many novel and cutting edge issues for antitrust enforcers, many of which were addressed in the FTC's recent hearings on competition and competition policy in the 21st Century. The Commission held these hearings to assess whether the century-old antitrust laws needed to be adjusted in response to the competitive challenges of the next century. The general conclusion of the staff report was that the antitrust laws are sufficiently durable and flexible to meet those challenges, although some adjustments -- for example, a more open attitude toward efficiency claims -- are in order.
Let me pose one issue addressed by the report that is germane to the new world of electronic commerce: access. There are two types of access at issue: access to the electronic marketplace and access to private joint ventures that participate in that marketplace.
Although some may seek to restrict access to the new world of electronic commerce, those restrictions should be imposed only where necessary to protect a well defined interest. For example, regulators or private networks can impose restrictions to assure that participants are financially sound or capable of providing the necessary services. Those restrictions should not be overbroad. In some cases, groups of competitors have imposed restrictions on rivals to deter or delay competition. The antitrust laws disfavor the creation of artificial barriers to entry. Thus, the presumption should be that access is available to all who seek to compete for consumers business, and therefore that a general prohibition based on the class of competitor should be carefully scrutinized.
Another set of issues involve access to private joint ventures. Joint venture networks play a prominent role in current payment systems: ATM, credit card, and debit card networks touch the lives of most U.S. consumers. Often, they reflect substantial market power. One issue that antitrust enforcers have grappled with, which we can expect in the new world of electronic commerce, involves the availability of access by non-participants to the benefits of membership in the joint venture.
Here there are no simple answers, especially where markets are in their infancy. On the one hand, if a private joint venture, even one with substantial market power, is compelled to admit everyone too readily, the incentives of firms to create joint ventures in the first place may be dampened. Rather, firms may simply sit on the sidelines and demand access only after the venture has succeeded. Thus, a rule that mandates access can become an "insurance policy for laggards" and will ultimately diminish the incentives for risk taking and innovation.
On the other hand, access to a venture may be necessary for a firm to compete effectively. In some cases, new networks may eventually become something like a natural monopoly. Network joint ventures frequently exhibit substantial customer-side scale economies (i.e., the more customers who use one, the lower its costs). To the extent that substantial customer side scale economies render competition outside the network less viable, heightened scrutiny of membership denials may be appropriate.
As you can tell there is no single or simple answer to the problem of access. Rather, the question must be resolved based on the facts presented in any individual situation. One critical issue is whether membership in the joint venture is truly essential. That may not be so if the "outsider" can either independently, or in cooperation with others, effectively compete with the incumbent. In this environment, antitrust enforcers should be particularly sensitive to the dynamic and ever changing pace of the competitive marketplace.
It is not only healthy, but somewhat unique, to be having a policy debate, at conferences such as this, about the proper role of government in providing consumer and market protections before major problems start to develop. This is certainly the time to identify issues and pose questions as the new payment technologies are developing.
While consumer protection and antitrust issues with respect to electronic money arise in a novel factual context, the issues themselves are not entirely unprecedented. Regulation of dispute resolution and privacy with respect to credit cards has generated a relevant body of scholarship and precedent that can apply to electronic money; regulation of access to powerful joint ventures similarly has been a theme of prior antitrust enforcement. We will not be returning to square one in developing solutions to new problems. Beyond that, I suspect it makes sense to err on the side of under rather than overregulation with respect to these new payment systems. Market created solutions, voluntary self-regulation, and technological fixes may do the trick. If and when private solutions prove inadequate, government must be ready to step in. The broad values of efficient, decentralized marketing on interactive television, the Internet and who knows what future technology are too valuable to allow them to evaporate because an effective payment and credit system does not develop.
On many of the questions I have raised today, the Commission is at the information gathering stage. We look forward to working with the Administration and, in particular, the banking agencies, industry, consumer groups and privacy advocates, to try to develop coordinated solutions.
* The views expressed are those of the Chairman and do not necessarily reflect the views of the Federal Trade Commission or any other Commissioner or staff.