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Apple may have just become a Regulated Financial Institution

1AF cover - Apple Pay related report
A recent report posted by Georgetown law professor Adam Levitin after Apple announced their mobile payments service called "Apple Pay," brought up some rather interesting twists that should be noted, if only for interest sake. Levitin is one of 14 academics who write for a blog about credit, bankruptcy, consumers, and financial institutions. Levitin noted that Apple's ambition may have accidentally taken it where most companies fear to tread — into the land of financial regulation.


While Levitin acknowledges that the details about Apple Pay on a legal level have not yet been released, it's still interesting to explore some of the ramifications for Apple entering the world of finance. He also acknowledged that the CFPB already has a lot to do and limited resources so it probably won't be tackling Apple anytime soon. However, it should be noted that the CFPB will be watching Apple Pay very closely, simply for the fact that Levitin sits on the CFPB's Consumer Advisory Board.


With that duly noted, Levitin had a lot to say on the subject of Apple Pay that may interest some in the Apple community.


Levitin stated in his blog that "I think Apple may have just become a regulated financial institution, unwittingly. I think Apple is now a 'service provider' for purposes of the Consumer Financial Protection Act." To a certain degree, you should note that Apple has already legally updated their Apple logo covering new International Classes reflecting financial services extensively.


Levitin further noted that "This would make Apple subject to examination by the newly created Consumer Financial Protection Bureau, and more broadly bound to the Unfair, Deceptive or Abusive Acts or Practices (UDAAP) monitoring of the agency."


Levitin argued that because Apple is actually configuring the payments data it is transmitting in line with agreements that it has with banks and credit card companies, it is not a simple common carrier but a bona fide service provider in the sense of the law.


Apple Pay will use a unique number for each transaction — a process known as tokenization — and will transmit that instead of any credit card or bank account data.


It is this active role in determining the data transmitted, Levitin argues, that would put Apple under "service provider" definition, which explicitly includes anyone who "participates in designing, operating, or maintaining the consumer financial product or service."


The real kicker is that the CFPB's supervision would cover not only Apple Pay, but, if the company indeed does fall under this definition, every interaction between Apple and consumers.


In a speech last week, just two days after Apple announced its new mobile payments service, CFPB director Richard Cordray addressed the topic in general terms.


Cordray stated in prepared remarks at a meeting of this advisory board that "Using mobile devices for all sorts of banking services can make some transactions cheaper or faster or both. But we need to make sure that the legal and regulatory framework can keep up effectively, so that all consumers can be well served and remain protected, whether they are opening their wallet or scanning the screen on their smartphone."


He noted that the agency had recently sent out an official Request for Information on an array of issues related to mobile banking and financial management services to get a better idea of how these new technologies affect consumers.


He reportedly went on to note that if the new Apple Pay service does in fact subject Apple to UDAAP restrictions, it opens the possibility that other federal and state agencies may exert their authority in policing unfair or deceptive practices.


Several of the UDAAP cases pursued by CFPB, resulting in millions of dollars in fines and restitutions, were concluded with other regulators as well as state attorneys general.


Yves Smith, writing for the Naked Capitalism Blog noted in a recent post titled "Has Apple Pay Just Put Apple in the CFPB's Crosshairs?" that if CFPB chooses to use its powers narrowly, "that may not save Apple from the attentions of state-level enforcers."


High-profile state regulators such as Benjamin Lawsky, head of New York State's Department of Financial Services, could target Apple even if the CFPB demurs. Unwitting or not, immediately or not, it is inevitable that mobile payments technology at some point will cross the border into regulatory territory.


If Levitin is correct, it would mean that existing law is flexible enough for regulators to act on something like Apple Pay even without new legislation.


In another blog entry, Levitin noted that "Apple Pay is a closed wallet product. What's special about Apple Pay is that it links the payments data you enter with a data transmission system. The transmission system is what's important, not the digital storage of payments information."


Several of Apple's patents cover some of the deeper aspects of their wallet service in these three reports (one, two and three) while the rest of their patents on this subject could be found in our "Apple Pay, iWallet" Archive.


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