What’s in Your Digital Wallet? A Review of Recent Trends in Mobile Banking and Payments (U.S. House Committee on Financial Services, Task Force on Financial Technology)

Hearing	What’s in Your Digital Wallet? A Review of Recent Trends in Mobile Banking and Payments
Committee	U.S. House Committee on Financial Services, Task Force on Financial Technology
Date	April 28, 2022

 

Hearing Takeaways:

• Digital Wallets and Peer-to-Peer Payment Applications: Task Force Members and the hearing’s witnesses expressed interest in the growth in the use of digital wallets and peer-to-peer payment applications. Digital wallets serve as platforms to store payment credentials (including cryptocurrencies and stablecoins) on devices that enabled contactless payments. Peer-to-peer payment applications enable people to quickly transfer funds through linking an individual’s bank account, debit card, credit card, or prepaid card with the application’s platform.
  • Lack of Consumer Protections for Digital Wallets: Full Committee Chairman Stephen Lynch (D-MA) remarked that the use of digital wallets had raised several key policy questions surrounding consumer data privacy, security, and vulnerability to fraud. He stated that protection laws remained “unsettled” regarding their application to digital wallets, particularly in cases of fraud. Ms. McAllister-Young remarked that consumers often trusted digital wallets and other financial technology (FinTech) platforms because they were under the false assumption that these wallets and platforms were subject to similar oversight as banks and credit unions. Ms. Marcellin also highlighted how many mobile payment applications often lacked customer service phone numbers and human touch points, which made it more difficult for consumers to report scams when they happened.
  • The Protecting Consumers From Payment Scams Act: Task Force Chairman Lynch and Ms. Marcellin expressed support for the Protecting Consumers From Payment Scams Act, which would amend the Electronic Fund Transfer Act (EFTA) to protect consumers when they were defrauded into sending money by a scammer, even when the consumer was induced to make that payment under false pretenses. Rep. Bryan Steil (R-WI) and Mr. Talbott expressed concerns however that the legislation could have unintended consequences through expanding the scope of Regulation E. Mr. Talbott commented that this expansion could alter the nature of the speed and cost of peer-to-peer payment platforms.
  • Absence of Insurance for Digital Wallets: Rep. Al Lawson (D-FL) and Mr. Carrillo raised concerns with how many digital wallets were holding balances that were not insured by the U.S. Federal Deposit Insurance Corporation (FDIC). They indicated that some digital wallet providers offered pass-through insurance, which did not protect the consumer against the failure of a digital wallet provider or a coin issuer and merely protected the consumer against the failure of the bank that was holding the funds. They asserted that pass-through insurance was insufficient for protecting digital wallet users.
  • Potential for Financial Inclusion: Chairman Lynch and Ms. Marcellin expressed some skepticism regarding the ability of digital wallets and peer-to-peer payment applications to bolster financial inclusion. They highlighted how these products often required customers to possess bank accounts and mobile phones, which many unbanked and underbanked individuals did not possess. Mr. Talbott stated however that there existed many solutions that enabled cash-based consumers to access modern payment systems. He mentioned how consumers could load cash and paper checks directly onto their digital wallets and peer-to-peer payment application accounts. Rep. Steil also suggested that many of the current assumptions regarding mobile phone ownership rates might be outdated and stated that policymakers ought to revisit the literature on this subject.
  • Market Concentration Concerns: Ms. Marcellin also stated that digital wallets hosted by large technology companies raised concerns with regard to economic concentration and anticompetitive practices.
• Electronic Cash: Another key area of interest during the hearing involved proposals to establish a form of electronic cash that offered all of the benefits of cash (including anonymity, privacy, and autonomy), involved no transaction fees, and addressed all of cash’s current flaws. This electronic cash would not be online and would be stored on hardware devices that could employ different types of signals, such as Bluetooth or near field communication (NFC). Task Force Chairman Stephen Lynch (D-MA) mentioned how he had recently introduced the Electronic Currency and Secure Hardware (ECASH) Act, which would direct the U.S. Department of Treasury to design and pilot an electronic version of cash. 
  • Ability to Recover Lost or Stolen Electronic Cash: Rep. Bill Foster (D-IL) raised concerns that consumers that lost their electronic cash hardware devices or were the victims of fraud or theft could not recover their electronic cash. Mr. Carrillo acknowledged this risk and asserted that electronic cash devices were not meant to serve as substitutes for bank accounts.
• Blockchain Technology and Cryptocurrencies: Task Force Members and hearing’s witnesses expressed interest in the role that crypto assets and blockchain technology would play in the mobile payments space.
  • Implications for Consumer Privacy: Task Force Ranking Member Warren Davidson (R-OH) stated that the permissionless nature of blockchain technology could alleviate privacy concerns for consumers through enabling them to self-custody their assets. Mr. Carillio raised concerns however over how blockchain ledgers were public in nature, which could undermine consumer privacy.
  • Potential Overemphasis on Cryptocurrencies for Low- and Moderate-Income People: Ms. McAllister-Young raised concerns over the current trend of FinTech platforms offering cryptocurrencies rather than encouraging users to work toward financial stability through saving for an emergency. She stated that providing consumers with education about cryptocurrencies would be key for ensuring that consumers could make informed decisions about entering the cryptocurrency market. 
  • Need for Beneficial Ownership Information: Rep. Bill Foster (D-IL) contended that the U.S. would need to be able to obtain beneficial ownership information within the cryptocurrency space in order to prevent illegal trading activities, such as wash trades. Ms. Choudhary stated however that identity regulation within the cryptocurrency space currently remained unclear with the exception of the Financial Action Task Force (FATF) Travel Rule.
• Additional Policy Issues and Concerns: The hearing further addressed additional policy issues and concerns that often span multiple digital payments technologies.
  • Impact of New Payment Technologies to Financial Inclusion: Task Force Republicans highlighted how many Americans were often unbanked or underbanked due to a lack of trust of financial institutions and the inconveniences associated with financial institutions. They stated that digital payments systems that acknowledged these concerns could help to bolster financial inclusion. Mr. Talbott further highlighted how digital payments technology could enable small businesses to better accept payments and launch online stores.
  • Data Maximization: Task Force Chairman Stephen Lynch (D-MA), Mr. Carrillo, and Ms. Marcellin, raised concerns with how FinTech companies often relied upon the practice of data maximization, which involved the constant and expansive accumulation of consumer data. They stated that that this practice left consumers vulnerable to fraud and exploitation. Mr. Carrillo noted that data maximization was integral to the business model of many FinTech companies and commented that these practices often enabled the companies to charge low or no fees.
  • Federal Privacy Legislation: Task Force Ranking Member Warren Davidson (R-OH) and Mr. Talbott called for federal privacy legislation that would be principles-driven and preempt state privacy laws. They asserted that a principles-driven approach would be key for responding to unforeseen technological developments. Mr. Talbott contended however that electronic transactions companies did need to keep transaction data and have a permissible right to use the data so that the companies could combat fraud.
  • Impact of the COVID-19 Pandemic on the Digital Payments Space: Ms. McAllister-Young and Mr. Talbott both discussed how the COVID-19 pandemic had impacted the digital payments space. Ms. McAllister-Young stated that the inflation accompanying the COVID-19 pandemic was driving many low-to-moderate income Americans to use FinTech products in order to access their funds more quickly. Mr. Talbott highlighted how mobile wallets and peer-to-peer payment applications had enabled the U.S. government to electronically distribute COVID-19 economic impact payments to consumers in need. He further mentioned how contactless payments had helped to reduce unnecessary physical contact during checkout processes.
  • Increasing the Number of Public Options for Financial Services: Mr. Carrillo and Ms. Marcellin called for the establishment of public options to expand access to banking services, such as offering banking services through the U.S. Postal Service (USPS) and expanding the number of countries that the USPS offered remittance services to.

Hearing Witnesses:

1. Mr. Raúl Carrillo, Associate Research Scholar, Yale Law School; Deputy Director, Law and Political Economy Project
2. Ms. Mishi Choudhary, Legal Director, Software Freedom Law Center
3. Ms. Renita Marcellin, Senior Policy Analyst, Americans for Financial Reform
4. Ms. Kia McAllister-Young, Director, America Saves, Consumer Federation of America
5. Mr. Scott Talbott, Senior Vice President of Government Affairs, Electronic Transactions Association

Member Opening Statements:

Task Force Chairman Stephen Lynch (D-MA):

• He explained how digital wallets were software applications used to facilitate electronic payments and transactions and stated that these wallets were “rapidly” becoming a larger part of the financial ecosystem.
  • He discussed how digital wallet providers ranged from large technology companies (including Google and Apple) to FinTech companies (including PayPal and Block) to banks (that offered Zelle through a consortium).
• He highlighted how the digital wallet space had grown “dramatically” in recent years and had reached a value of $120 billion in 2021.
• He also discussed the emergence of digital asset wallets (in addition to payment-focused digital wallets) and noted how these digital asset wallets could hold cryptocurrencies and stablecoins.
  • He attributed the growth in popularity of digital wallets to the ease and convenience that they offered to consumers.
• He remarked however that the use of digital wallets had raised several key policy questions surrounding consumer data privacy, security, and vulnerability to fraud.
  • He referenced a recent report that found that 18 million consumers were defrauded through scams involving digital wallets in 2020 and commented that this number was expected to increase given the growing rate of adoption for digital wallets.
• He then discussed how consumer protection laws remained “unsettled” regarding their application to digital wallets, particularly in cases of fraud.
  • He mentioned how the New York Times had recently found that there were “major fraud issues” with Zelle and that the major banks were reluctant to protect consumers that were unwittingly scammed using the Zelle platform.
• He stated that policymakers needed to determine who should be held responsible in the event that a consumer has been “unknowingly” tricked into transferring their money by fraudulent online activity while transacting through digital wallets on an online platform.
• He mentioned how the Protecting Consumers From Payment Scams Act would amend EFTA to protect consumers when they were defrauded into sending money by a scammer, even when the consumer was induced to make that payment under false pretenses.
• He noted that while proponents of digital wallets often highlighted the high adoption rates of these wallets as evidence that they could drive financial inclusion, he asserted that policymakers must remember that most financial products (including digital wallets) required customers to already possess bank accounts.
  • He commented that this requirement had previously been shown to exclude “significant” segments of consumers that would likely remain unbanked.
• He then raised concerns over how the transition towards digital commerce was reducing opportunities for the use of physical cash, which harmed consumers that lacked access to digital products.
• He remarked that this situation highlighted the need for a public sector digital payment offering that would allow for instant, peer-to-peer payments that protect consumer privacy.
• He asserted that consumers should not be required to surrender their personal data whenever they made financial transactions.
  • He commented that such a system would facilitate “full spectrum surveillance” of the entire population and expressed concerns that the U.S. was moving towards such a system.
• He mentioned how he had recently introduced the ECASH Act, which would direct the U.S. Department of Treasury to design and pilot a digital version of cash.
  • He stated that this legislation would support the U.S.’s digital dollar design efforts and would work in parallel with other public sector digital dollar offerings, such as a U.S. Federal Reserve-issued central bank digital currency (CBDC).
• He indicated that the ECASH Act’s proposed digital cash would be held on hardware secure devices and permit consumers to make instant peer-to-peer payments with no consumer data or transaction tracking and without the use of a bank account.

Task Force Chairman Warren Davidson (R-OH):

• He first expressed agreement with Task Force Chairman Stephen Lynch’s (D-MA) views regarding the importance of maintaining consumer access to cash and highlighted how cash was permissionless and promoted privacy.
• He then discussed how the growth in payment applications was driving the digital economy’s development and fostering further innovation.
• He stated that Congress needed to ensure that any future data privacy proposals would promote data minimization, be technology neutral, prioritize informed choice and transparency amongst consumers, and preempt state privacy laws.
  • He asserted that abiding by these principles would protect liberties that were in place long before the development of digital payment systems.
• He noted that while many of the hearing’s participants would discuss the positive impacts that digital payments would have on financial inclusion, he contended that convenience for consumers did not always equate to financial inclusion.
• He mentioned how distrust in traditional financial institutions was one of the main reasons for why many Americans remained unbanked or underbanked.
  • He commented that the third-party doctrine had rendered financial institutions as de facto arms of the government.
• He contended that new digital payment systems seeking to promote financial inclusion would therefore only be successful if they could promote trust amongst their users.
  • He stated that this promotion of trust would entail ensuring that the personal data of consumers was not being exploited.
• He then discussed how blockchain technology was permissionless in nature and noted how this permissionless nature alleviated privacy concerns for users.
• He indicated that while the current hearing would not be primary focused on cryptocurrencies, he stated that the hearing would lead to future discussion on peer-to-peer permissionless transactions carried out through hardware wallets that were self-custodied and built on a permissionless distributed ledger technology (DLT) architecture.
  • He mentioned how he had introduced the Keep Your Coins Act to support the ability of consumers to self-custody their assets.
• He lastly expressed interest in how the U.S. Consumer Financial Protection Bureau (CFPB) would pursue rulemaking under Sec. 1033 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was meant to address data sharing issues on the front and back ends of digital payment systems.
  • He expressed his interest in working on bipartisan legislation to address the issue of consumer data ownership if the CFPB’s ultimate rule proved lacking.

Witness Opening Statements:

Mr. Raúl Carrillo (Yale Law School; Law and Political Economy Project):

• He first discussed how many digital wallets were holding balances that were not insured by the FDIC.
  • He noted that customers would be protected against the collapse of a bank but not necessarily against the collapse of a digital wallet provider or coin issuer in the instances where pass-through insurance was provided.
• He remarked that unregulated deposits often led to financial crises and partially attributed these unregulated deposits to deficiencies in U.S. banking law.
• He noted that while the Glass-Steagall Act of 1932 (Glass-Steagall) made it illegal for an entity to accept deposits without being regulated by a regulator, he stated that the law did not define the term “deposit.”
  • He commented that this lack of a definition undermined the ability of regulators to invoke Glass-Steagall or any other provision of federal law to prevent non-banks from engaging in general banking activities.
• He stated that the recent White House memorandum on stablecoins would help to address the problem of non-banks engaging in general banking activities.
  • He expressed support for the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act and asserted that the legislation would more comprehensively combat the problem of non-banks engaging in general banking activities through addressing non-stablecoin wallets.
• He then discussed how the FinTech sector increasingly relied upon data maximization, which he explained was the constant and expansive accumulation of consumer data.
• He stated that new FinTech products (such as digital wallets) might generate helpful information, which could lead them to serve as gateways to saving, credit, and investment.
• He noted how these products operated within “massive” information networks, including consumer reporting agencies (CRAs), specialty screening agencies, data brokers, and government agencies.
  • He asserted that these networks amplified systemic security and privacy risks through compounding data, which could create a data ecosystem that was “too big to fail.”
• He stated that the risks of thefts, hacks, and surveillance were especially pronounced for low-income communities of color that already suffered disproportionately from financial injustices and privacy violations.
  • He lamented how no overarching federal law structurally limited the collection, use, and sale of personal data among corporations.
• He further noted how there existed few rules governing information sharing between these institutions and the government.
  • He mentioned how the U.S. Department of Homeland Security (DHS) had collected records from Western Union for a period of over two years for any money transfer over $500 between U.S. southern border states and Mexico.
• He remarked that current notice and consent laws could not empower people to protect their privacy because people did not know how their data would be used when they provided their consent for its usage.
• He recommended that Congress pass legislation that instantiated data minimization, including through limiting the collection, processing, and usage of data to only that which was required to carry out an explicit, narrow, and permissible purpose.
  • He commented that an online credit card sign up should not lead to targeted advertising or new accounts, regardless of whether a user affirmed their agreement with the terms and conditions.
• He then expressed support for legislation that would establish a digital U.S. dollar and digital public options for various financial products, including bank accounts.
  • He asserted however that a new public financial system must prioritize data minimization.
• He specifically expressed support for the ECASH Act and highlighted how the legislation would store digital money offline using hardware (rather than storing the digital money online using software).
  • He commented that this approach had security, privacy, and financial inclusion advantages and noted how this digital money would be accessible to Americans that lacked access to high-speed internet.

Ms. Mishi Choudhary (Software Freedom Law Center):

• She discussed how free and open source software enabled many of the internet’s key benefits, including email and search engines.
• She remarked that the U.S. needed a currency or electronic token that was equivalent in functionality to cash, offered all of the benefits of cash (including anonymity, privacy, and autonomy), involved no transaction fees, and addressed all of cash’s current flaws.
• She stated that legacy transaction systems have suffered from high fees, limited access, and “modest” innovation that have undermined many financial inclusion efforts.
  • She noted that most of the currently available solutions to these problems catered to consumers that already possessed access to banks and failed to address individuals employed in the informal economy or that were paid in cash.
• She also remarked that the American public desired the conveniences associated with modern technologies without needing to sacrifice their privacy.
• She then discussed how the U.S. was already transitioning to digital payments and commented that the COVID-19 pandemic had accelerated the adoption of these payments.
• She noted however that the U.S. payments market still relied heavily upon credit cards (unlike mobile-first markets, such as China and India).
  • She highlighted how various U.S. laws, including the Fair Credit Billing Act, EFTA, and the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, encouraged the use of credit cards within the U.S.
• She stated that non-traditional market participants had sought to use mobile devices to improve access to financial products and services and indicated that digital wallets were one example of this.
  • She noted that while digital wallets were generally linked to a bank account, credit card, debit card, or a prepaid card, she indicated that these wallets did not necessarily need to be connected to accounts or prepaid cards.
• She explained how cryptocurrencies were stored in either “hot” wallets (which were connected to the internet) or “cold” wallets (which did not require online servers).
  • She commented that “cold” storage wallets provided an additional layer of security for users.
• She remarked that the U.S. must work to ensure that digital money innovations were built in the public’s interest, included privacy considerations, and facilitated financial inclusion.
• She also discussed how “super-apps” were gaining popularity around the world and asserted that this growing popularity demonstrated that the concerns about data protection and privacy had not been adequately addressed.
  • She further stated that the current market options lacked privacy-oriented messaging systems that were integrated with payments.
• She then highlighted how hard money had three main risks associated with it for working people: loss, convenience, and inflation.
• She remarked that the U.S. Treasury Department ought to certify digital wallet hardware so that working class people can use electronic cash to access the U.S.’s payments system.
  • She commented that this electronic cash should not be traceable.
• She contended that the software underlying electronic cash technologies should be free and open source in order to enable public reviews and audits.

Ms. Renita Marcellin (Americans for Financial Reform):

• She remarked that it remained uncertain as to whether many novel payment technologies actually expanded access to financial services.
• She stated that the potential failure of novel payment technologies would disproportionately harm underserved communities and called it imperative for the U.S. to properly regulate these products.
  • She also asserted that policymakers should ensure that there existed sufficient safeguards to protect consumers from fraud, erroneous transactions, abusive data collection, and the corporate flexing of market power.
• She raised doubts regarding the ability of digital wallets to promote financial inclusion given how they tended to be account-based and mobile application-based.
  • She elaborated that digital wallets usually required consumers to link the digital wallet to a bank account or credit card through a smartphone.
• She noted how unbanked consumers tended to have lower household incomes (as compared to consumers with bank accounts), often paid via paper checks, and spent about 10 percent of their income on services to just access their own money.
  • She further highlighted how unbanked households were more likely to cancel or suspend their cellular phone service plans, which reduced their ability to make use of mobile payments technologies.
• She mentioned how the U.S. Federal Reserve Bank of Atlanta had proposed giving people that depended on cash access to digital payment methods that did not require traditional bank accounts in order to promote financial inclusion.
  • She noted that the ECASH Act would pilot this proposal.
• She stated that policymakers should continue to pursue policies that would expand access to banking, such as offering banking services through the USPS while also ensuring that people that relied upon cash and remittances would be able to transact in the modern economy.
  • She highlighted how many of these people were low-income and came from communities of color.
• She remarked that digital wallets did not adequately protect consumers and noted how many banks failed to provide their customers with any recourse when they were victims of fraud schemes involving peer-to-peer applications, including Zelle.
• She mentioned how the CFPB had received over 9,000 complaints about digital wallets between 2017 and 2021.
  • She indicated that PayPal (which owns Venmo), Block (which owns Cash App), and Coinbase accounted for more than two-thirds of all digital wallet complaints.
• She also highlighted how many mobile payment applications lacked customer service phone numbers and human touch points, which often caused customers to delay their reporting of scams.
• She remarked that the “myriad” of existing consumer protection laws failed to adequately protect consumers from fraud and erroneous transactions.
  • She noted how the definition of an unauthorized transaction did not cover scams that induced the customer to send money or cases in which a consumer’s device was stolen.
  • She further noted how firms claimed that they were not required to reimburse consumers for fraudulent transactions linked to debit cards.
• She then stated that the main law governing privacy for financial institutions contained gaps regarding its application to digital wallets.
  • She elaborated that the law was not currently interpreted to cover technology companies and only covered nonpublic personal information (NPI).
• She noted how technology companies were able to combine transactional data from consumers with their internet browsing histories.
• She further remarked that digital wallets hosted by large technology companies raised questions about economic concentration and anticompetitive practices.
• She urged Congress to pass the Protecting Consumers From Payment Scams Act, which would provide the CFPB with additional authority to pursue financial scams.

Ms. Kia McAllister-Young (America Saves, Consumer Federation of America):

• She mentioned how America Saves was a national campaign that focused on building financial stability, resilience, and confidence with an emphasis on low-to-moderate-income earners.
  • She noted that the campaign sought to support these people in saving money, reducing their debts, and building wealth.
• She discussed how mobile banking and payments had several concerns associated with them, including the high prevalence of fraud and scams, a lack of accountability, “very few” consumer protections beyond disclosures and warnings, ineffective consumer privacy, and a lack of federal and state oversight.
• She stated that many consumers were oblivious with respect to the risks that they were taking when using digital payment options, including PayPal, Cash App, and Zelle, as opposed to cash, credit cards, and debit cards.
• She attributed the fact that many consumers chose to use digital payment options to the convenience of the platforms, as well as strategic marketing and placement.
  • She noted that while consumers were often presented with several payment options in a store’s checkout process, she indicated that consumers were rarely presented with the risks associated with these options.
• She stated that consumers tended to trust FinTech platforms because there did not exist a clear delineation between financial institutions and mobile payment applications.
  • She commented that this “intentional opaqueness” created a false perception among consumers that mobile payment options were regulated with the same scrutiny as banks and credit unions.
• She asserted that the misguided trust of consumers to FinTech platforms left them vulnerable to fraud, scams, and payments being held with very limited or no recourse.
  • She testified that PayPal had held her own personal funds for over 30 days in 2018 and stated that her experience was not unique.
• She remarked that the use of FinTech products had “dramatically” increased due to public health concerns and inflation.
  • She noted how digital payment options had been embraced as quick, available, and safe for making transactions during the COVID-19 pandemic.
  • She also stated that inflation was driving low-to-moderate income earners toward FinTech credit products in order to access their pay earlier.
• She also highlighted how immigrants often sent money back to their families living in their native countries and commented that these populations were being disproportionately subjected to “alarmingly high” remittance fees.
• She further raised concerns over the current trend of FinTech platforms offering cryptocurrencies rather than encouraging users to work toward financial stability through saving for an emergency.
• She remarked that FinTech products could play a beneficial role in helping consumers to better manage their finances.
  • She asserted however that federal and state oversight were still needed to ensure that consumers were being protected from harmful practices and violations of their data privacy.

Mr. Scott Talbott (Electronic Transactions Association):

• He remarked that the electronic transactions industry was heavily regulated at both the federal and state levels and was highly competitive.
  • He stated that the industry was constantly making investments in new technologies and services to address constantly changing consumer needs.
• He discussed how mobile wallets were a platform to store payment credentials on a phone that enabled contactless payments and commented that these mobile wallets were very convenient for consumers.
  • He also stated that mobile wallets benefited merchants through enhancing loyalty programs and reducing transaction times.
• He then discussed peer-to-peer payment applications and explained that these applications enabled people to quickly transfer funds to their families and friends.
  • He mentioned that these applications were often used for splitting restaurant checks and sending gifts.
• He noted that peer-to-peer payment applications worked through linking an individual’s bank account, debit card, credit card, or prepaid card with the application’s platform.
  • He also mentioned how there existed many solutions that enabled cash-based consumers to load cash or paper checks onto their peer-to-peer payment applications.
• He stated that peer-to-peer payment applications were very popular and indicated that the total transaction volume on these applications was forecasted to reach close to $350 billion by the end of the year.
• He remarked that both mobile wallets and peer-to-peer payment applications were very secure and stated that the electronic transactions industry employed a robust, holistic, and multi-level approach to security.
  • He discussed how phones required unique authentications to unlock and had their transactions encrypted.
• He also stated that both mobile wallets and peer-to-peer payment applications advanced financial inclusion given how they can be used by cash-based consumers and accessed at any time.
• He remarked that both mobile wallets and peer-to-peer payment applications had played key roles during the COVID-19 pandemic in terms of enabling the U.S. government to electronically distribute economic impact payments to consumers in need.
  • He further highlighted how contactless payments had helped to reduce unnecessary physical contact during checkout processes.
• He lastly discussed how electronic transactions companies were “closely examining” crypto asset solutions for use in the payments space.
  • He mentioned how his trade association, the Electronic Transactions Association, had published guiding principles on this topic and expressed the trade association’s interest in working with Congress to advance policies within this space.

Congressional Question Period:

Task Force Chairman Stephen Lynch (D-MA):

• Chairman Lynch noted how FinTech company business models often relied upon data maximization, which referred to the constant and expansive accumulation of consumer data. He commented that this practice of data maximization left consumers vulnerable to fraud and exploitation. He asked Mr. Carrillo to discuss the issues for consumers associated with such data collection. He also asked Mr. Carrillo to address how public sector options (such as the ECASH Act) would provide consumers with the same convenience and ease of digital wallets without subjecting consumers to data vulnerability.
  • Mr. Carrillo remarked that data maximization was integral to the business model of many FinTech companies and commented that data maximization practices often underwrote low or no fees for these companies. He asserted that data collection should not be necessary for simple payments. He then stated that the ECASH Act would support the U.S.’s transition to digital payments in a manner that was accessible to consumers without internet connections and that enabled consumers to transact with a degree of privacy. He discussed how most consumers tended to use a variety of payment instruments that had varying privacy and security features and functions. He noted that while blockchain applications might grow in popularity in the future, he raised concerns over how blockchain ledgers were public in nature, which could undermine consumer privacy. He further stated that blockchains raised their own data maximization concerns.
• Chairman Lynch then asked Ms. Marcellin to identify current barriers that prevented digital wallets from helping the U.S. to achieve its financial inclusion goals. He also asked Ms. Marcellin to provide recommendations for enabling digital wallets to support the goal of financial inclusion.
  • Ms. Marcellin noted how the 2019 FDIC National Survey of Unbanked and Underbanked Households had estimated that about 5.4 percent of U.S. households were unbanked. She also noted how around 80 percent of Americans used digital wallets or mobile payments. She commented that most of the people that were using digital wallets or mobile payments “very likely” had access to banking services. She contended that public banking options, including the provision of USPS banking service options and the ECASH Act, would help to address these banking access issues. She further suggested that the USPS expand the number of countries that they offered remittance services to. She highlighted how digital wallets currently had lower adoption rates among people that made less than $60,000 annually, people that did not have college degrees, and unbanked individuals.

Task Force Ranking Member Warren Davidson (R-OH):

• Ranking Member Davidson discussed how the digital payments space was moving forward in the absence of U.S. government action and commented that this industry action was a good thing. He criticized policy proposals that would restrict innovation within the digital payments space and highlighted how there were proposals to require parties seeking to self-custody their crypto assets to first obtain permission from the U.S. government. He further expressed concerns over the proposed U.S. Internal Revenue Service (IRS) reporting requirements for crypto assets. He reiterated that people were already transacting digitally and called for more legal clarity for the digital payments space. He also commented that the U.S. lacked sufficient consumer protections surrounding privacy and data security within the digital payments space. He further highlighted how there were risks associated with lost passwords within the crypto assets space given how these assets could not be accessed without passwords. He then asked Mr. Talbott to address how the U.S. could ensure that its consumer data privacy laws could adapt to future technologies given the current pace of technological innovation.
  • Mr. Talbott first remarked that the U.S. needed a uniform national standard for governing the issue of consumer data privacy. He commented that the current “patchwork” of state privacy laws created compliance challenges for companies that operate nationally. He then stated that such a standard for consumer data privacy ought to be principles-driven so that it could adapt to future products and services. He further recommended that policymakers consider ways to provide consumers with control and transparency regarding their data. He lastly discussed how electronic transaction companies did not know the items that a consumer purchased. He contended that electronic transaction companies did need to keep transaction data and have a permissible right to use the data so that the companies could combat fraud. He commented that privacy laws ought to acknowledge the importance of this data for combating fraud, as well as for law enforcement purposes.
• Ranking Member Davidson contended that the U.S. ought to recognize a property right for consumer data. He then highlighted how 69 percent of retailers now accepted some form of contactless payment. He asked Mr. Talbott to discuss how these types of innovations helped small businesses and entrepreneurs.
  • Mr. Talbott remarked that the ability for small businesses to accept payments was crucial and noted that the ability for money to be loaded to a mobile wallet made it easier for businesses to accept payments. He further highlighted how payment innovations enabled small businesses to collect more data and increase the speeds of transactions. He lastly mentioned how payments innovations made it easier for small businesses to establish online presences. He commented that this ability to establish online presences was especially important during the COVID-19 pandemic.
• Ranking Member Davidson highlighted how many innovative payment technologies were not subject to Dodd-Frank’s Durbin Amendment, which he commented could be beneficial for small businesses.

Rep. Bryan Steil (R-WI):

• Rep. Steil expressed concerns that the Protecting Consumers From Payment Scams Act could have unintended consequences. He asked Mr. Talbott to discuss how this legislative proposal would impact the electronic transactions ecosystem and the consumers that relied upon electronic transaction services.
  • Mr. Talbott discussed how there existed numerous types of payment systems and associated use cases. He noted how peer-to-peer payment applications largely supported money transfers between families and friends. He compared payments made using peer-to-peer payment applications to cash given how the payments were free, immediate, and generally irreversible. He asserted that there would always exist risks surrounding peer-to-peer payment applications and suggested that these risks could be best mitigated through consumer education and building prompts into the applications. He mentioned how PayPal published several disclosures on its webpage and how Venmo required verification of a payment recipient’s phone number for a first-time sale. He stated that the Protecting Consumers From Payment Scams Act would expand the scope of Regulation E, which could alter the nature of the speed and cost of peer-to-peer payment platforms. He suggested that policymakers consider this unintended consequence.
• Rep. Steil then discussed how many Americans lacked accounts with either banks or credit unions. He noted that the two main reasons people often were unbanked were due to a lack of trust in financial institutions and the inconveniences associated with financial institutions. He asked the witnesses to discuss how digital wallets and mobile payments foster greater participation within the formal financial system.
  • Mr. Talbott first highlighted how digital wallets and peer-to-peer payment applications provided convenient payment options for customers given their 24/7 nature. He then discussed how there existed many solutions that enabled cash-based consumers to access modern payment systems. He noted how consumers could reserve items online from retail stores and then pay for said items in cash at stores. He also mentioned how consumers could load cash and paper checks directly onto their digital wallets and peer-to-peer payment application accounts. He further noted how many employers offered payroll services to digital wallets and highlighted how some digital wallets did not require bank accounts. He then discussed how many consumers often did not trust banks or the U.S. government and commented that these consumers might actively choose to not engage with the traditional financial system.
• Rep. Steil interjected to express agreement with Mr. Talbott’s comments. He raised concerns with proposals to permit the IRS to track inflows and outflows of bank accounts over a certain dollar threshold. He contended that these proposals would exacerbate the aforementioned trust issues that led many consumers to not participate in the traditional financial system. He stated that mobile payments could improve financial inclusion. He suggested that the Committee should look into available research in order to determine how many Americans could access smartphones. He indicated that smartphone ownership rates tended to correlate more with age than with race.

Rep. Al Lawson (D-FL):

• Rep. Lawson noted how funds stored on a digital wallet were not deposited, which meant that these funds were generally not eligible for deposit insurance. He indicated that some digital wallet providers offered pass-through insurance, which covers consumer transfers of funds from a direct deposit account to a digital wallet. He explained that digital wallet providers that offered pass-through insurance acted as a protected agent and deposited the funds into an FDIC-insured bank account. He asked Mr. Carrillo to address whether additional protections should be created to ensure that digital wallet users were not operating under the false impression that the balances of their digital wallets were insured. He also asked Mr. Carrillo to indicate whether digital wallet providers should be required to provide users with disclosures regarding the different types of insurance that cover transactions and how this insurance might differ from FDIC insurance. He further asked Mr. Carrillo to recommend other measures that policymakers ought to consider for protecting consumers against fraud and loss of funds within the digital assets space.
  • Mr. Carrillo remarked that the very existence and necessity of pass-through insurance demonstrated that digital wallets were not equivalent to bank accounts. He mentioned how many digital payment companies (such as PayPal) were establishing partnerships with banks in order to provide banking services. He asserted that pass-through insurance was insufficient for protecting consumers. He noted how digital wallet providers and coin issuers often commingled funds within an FDIC-insured account and indicated that such commingling did not constitute a direct relationship between a consumer and a bank. He explained that pass-through insurance did not protect the consumer against the failure of a digital wallet provider or a coin issuer and merely protected the consumer against the failure of the bank that was holding the funds. He commented that increased disclosures might be helpful for ensuring that consumers were aware of these risks. He contended however that policymakers would ultimately need to address the fact that some digital wallets were holding funds in long-term custody in an uninsured manner.
• Rep. Lawson then asked Ms. McAllister-Young to provide recommendations for supporting consumers in areas with limited broadband access in their efforts to connect with the payment system.
  • Ms. McAllister-Young remarked that broadband access was a key element of ensuring that all Americans had access to payment services. She highlighted how America Saves worked to educate rural Americans and provide them with resources so that they could better access payment services. She stated that while she was unsure as to how the U.S. could best expand broadband access, she testified that the current lack of broadband access was a “huge issue” for the consumers that she worked with in terms of their ability to make use of mobile wallets.

Rep. Pete Sessions (R-TX):

• Rep. Sessions asked Ms. McAllister-Young and Mr. Talbott to discuss the general demographics of cryptocurrency users and to address whether these users were knowledgeable regarding cryptocurrencies.
  • Ms. McAllister-Young mentioned how America Saves worked primarily with low-to-moderate income earners and stated that there existed broad interest in cryptocurrencies across income levels. She indicated that America Saves worked to ensure that the consumers that they worked with were financially stable before these consumers entered into the cryptocurrency markets given its risks. She also stated that providing consumers with education about cryptocurrencies would be key for ensuring that consumers could make informed decisions about entering the cryptocurrency market. She commented that this education could be difficult given how the cryptocurrency space was constantly changing.
  • Mr. Talbott remarked that cryptocurrencies were still primarily investments and were not yet a mainstream means of payment. He commented that stablecoins could help cryptocurrencies to eventually become a mainstream means of payments. He stated that the investors involved within the cryptocurrency space tended to be fairly knowledgeable about cryptocurrencies. He also remarked that the payments industry was considering ways to incorporate cryptocurrencies into the broader payment space so that cryptocurrencies could be more widely available.
• Rep. Sessions expressed agreement with Ms. McAllister-Young’s comments about the importance of educating consumers about prospective investments. He then highlighted the important role that blockchain technology could play in terms of enabling consumers to own their assets in a private manner.

Rep. Bill Foster (D-IL):

• Rep. Foster asked the witnesses to address whether electronic cash would be similar to physical cash in that consumers that lost their electronic cash devices or were the victims of fraud or theft could not recover their electronic cash.
  • Mr. Carrillo remarked that electronic cash was attempting to replicate the functions of physical cash, which included both the advantages and disadvantages of physical cash. He noted how the ECASH Act included error resolution rights and rules surrounding the disclosure of error resolution rights. He indicated that these rights would apply to electronic cash devices rather than the electronic cash itself. He acknowledged that consumers that lost their electronic cash devices would not be able to recover their electronic cash. He stated however that this structure would guard against the risks that consumers would withdraw all of their bank deposits and place them into electronic cash devices. He asserted that electronic cash devices were not meant to serve as substitutes for bank accounts.
• Rep. Foster asked Mr. Carrillo to address whether there existed a means of preventing electronic cash from being used for ransomware.
  • Mr. Carrillo highlighted how electronic cash would not use the internet and noted how most ransomware involved the internet. He noted however that electronic cash could employ different types of signals, such as Bluetooth or NFC. He commented that these different types of signals had their own attenuation and distance issues that would need to be addressed.
• Rep. Foster then stated that there were two classes of cryptocurrency transactions. He indicated that the first class of cryptocurrency transactions involved payments and the second class of cryptocurrency transactions involved changes in the value of the cryptocurrencies. He commented that market regulation would be needed to address the latter class of cryptocurrency transactions in order to prevent wash trades. He asked Mr. Talbott to address whether there existed a way to prevent cryptocurrency wash trades without providing market regulators with beneficial ownership information.
  • Mr. Talbott commented that he would need to further consider Rep. Foster’s question as it related to the investment aspects of cryptocurrencies (rather than the payment aspects of cryptocurrencies). He stated that the fluctuations in the values of cryptocurrencies hindered the mainstream adoption of cryptocurrencies and suggested that stablecoins could help to address these value fluctuations.
• Rep. Foster commented that the U.S. would need to have a separate regulation for the identity of users within the cryptocurrency space in order to prevent wash trades.
  • Ms. Choudhary remarked that different jurisdictions had handled identity issues for users within the cryptocurrency space “very differently.” She mentioned how the European Union (EU) required information from the parties involved in cryptocurrency transactions and outlawed anonymous cryptocurrency transactions. She commented however that the EU’s approach might adversely impact cryptocurrency innovation. She noted how large cryptocurrency companies had unveiled initiatives to improve their know-your-customer (KYC) and anti-money laundering (AML) practices.
• Rep. Foster interjected to ask Ms. Choudhary to indicate whether these innovations allowed for any single regulator to see the beneficial owners involved in cryptocurrency transactions.
  • Ms. Choudhary mentioned how Coinbase and Circle had introduced a digital protocol that enabled the companies to verify the identities of their customers while permitting their customers to maintain control over their own personal information. She stated however that identity regulation within the cryptocurrency space remained unclear with the exception of the FATF Travel Rule.