Skip to content

ACI Blog

Effective Regulation Equals Innovative and Safe Payments

From cutting-edge payment platforms to easily accessible mobile banking apps, key financial players are reaping the benefits of innovation such as improved customer satisfaction and subsequently closer customer relations.

Innovation is and always has been the underlying reason behind success. As a consumer, I have seen this work for businesses time and time again. When businesses are able to innovate, adapt, progress and provide better solutions to a given customer’s problems, they are creating a secure future as well as a present-day success. 

However, in our globally interconnected financial system, innovation often needs to be tempered with clear and concise regulation in order to avoid situations where an unhealthy disregard for risk can cause serious and lasting economic repercussions.

It wasn’t very long ago when the financial industry suffered from the damaging potential of innovation that was insufficiently channeled by effective regulation. Myself, and many consumers like myself, were greatly affected. Although several factors combined to create the global financial crisis of 2008-09, it can be argued that a lack of intelligently applied financial regulation allowed for the adoption of risky practices- mostly within the mortgage sector- that were unsafe and proved a major contributor to the crash. 

Since the end of 2010, the six major Wall Street banks- JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley- have agreed to pay $67 billion in settlements and penalties related to the financial crisis according to research firm SNL Financial.

In 2010, The Durbin Amendment, a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act, was introduced. The amendment “has two major goals: to introduce competition into the debit processing network, and to cap swipe fees just in case competition didn’t lower prices,” (NerdWallet, 2012).

It does exempt financial institutions with less than $10 billion in assets, which will eliminate most local and state banks, as well as all but three credit unions. On June 29th, 2011, The Federal Reserve announced its final terms of The Durbin Amendment.

  • Debit card interchange rates are capped at 21 cents plus 0.05% of the transaction, with the possibility of an additional cent if certain security criteria are met
  • Each network must be able to be process on two independent networks, one for signature debit and one for PIN

Regulation is a complex issue in any industry, and none more so than in the globally interconnected financial services industry where untold billions are moved around the world in a series of innumerable international online payments every day. 

Adding to that complexity, is the ever-present threat of criminals who commit money laundering and fraudulent activities. Anti-money laundering, Know Your Customer (AML/KYC), regulatory requirements had a huge impact on the financial services industry back in 2013, and their ramifications are still being felt in 2015.

In March 2015, Commerzbank admitted and accepted responsibility for its criminal conduct in violation IEEPA, and Commerz New York admitted its criminal activity in violation of the BSA. 

A four-count felony criminal information was filed in the District of Columbia charging Commerzbank with knowingly and willfully conspiring to commit violation of IEEPA and Commerz New York with three violations of the BSA for willfully failing to have an effective anti-money laundering program, willfully failing to conduct due diligence on its foreign correspondent accounts, and willfully failing to file suspicious activity reports. In total, Commerzbank will pay $1.45 billion in penalties.

As regulatory bodies attempt to subdue online fraudsters and other parties, financial institutions often struggle to keep up with rapidly-changing sanctions and compliance requirements.

Regulators have also been experiencing difficulty in determining the best course of action when considering diverse, new financial trends such as the rise of digital currencies.

According to a press release sent out on May 5, 2015, The Financial Crimes Enforcement Network (FinCEN) has fined Ripple Labs and its subsidiary XRP II a total of $700,000 for violating the Bank Secrecy Act (BSA). “Ripple Labs failed to register as a money services business with FinCEN prior to selling XRP, a digital token used to settle payments on the Ripple network. 

Plus, the company is said to have failed to implement appropriate anti-money laundering procedures with its responsibilities as an MSB,” (CoinDesk, 2015). Ripple Labs claims it did not “willfully engage” in criminal activity, stating that the company has not been prosecuted for any of its actions. Even so, Ripple and XRP II agreed to pay $450,000 and settle “possible criminal charges” in connection with the investigation.

Even so, Ripple refuses to allow these accusations to stop them from expanding their reach. Just recently, Ripple closed a $28 million Series A funding round that includes IDG Capital Partners and the venture arms of CME Group and global data storage company Seagate Technology. According to Ripple Labs CEO and co-founder Chris Larsen, “[Their] mission is to modernize decades-old payments infrastructure with IP-based technology so value moves around the world as freely, easily, securely and transparently as information on the web today.”

Around the world, the digital currency, Bitcoin, has created quite a stir. Bitcoin is an electronic peer-to-peer payment network. Its main feature is decentralization—not being backed by or tied to any government or central bank. 

In some countries such as Bolivia, Ecuador and Indonesia, Bitcoin is banned. These countries have banned the digital currency because they feel it could potentially be used in scams and money laundering. Other countries like China and India, allow Bitcoin to be used with restrictions. In China, private parties can hold and trade bitcoins, but regulation prohibits financial institutions from doing the same.

Ideal regulatory policy allows for the acceptance and controlled growth of innovation without stifling it. It needs to be flexible enough to accommodate new ideas and technologies and harness their potential for positive change while reining in their capacity for unacceptable risk if improperly implemented. While this balancing act is extremely complex, it has potential to give the world smarter and fairer financial services without sacrificing customer confidence and trust. 

Market Intelligence Intern

Kristine is a digital native lending her millennial perspective when it comes to the payments world. Based in the silicon prairie, her responsibilities include supporting the global marketing team and keeping the office up to date with the latest technology. Kristine is in her final year at the University of Nebraska at Omaha.