Georgetown law professor says Apple may now be a regulated financial institution
The potential of Apple Pay has ignited excitement amongst iOS fans since its announcement, but is Apple opening itself up to more regulation with the business expansion? Georgetown law professor Adam Levitin, a specialist in financial regulation, suggests that the company may have just accidentally become a regulated financial institution thanks to the move. In a new post on the Credit Slips blog, Levitin lays out his legal argument that Apple Pay may be more complicated for the company than they initially anticipated.
Levitin's argument centers around the Consumer Financial Protection Act under which Apple may be considered a "service provider", and thus be subject to the regulations that go along with that title.
I think there's a reasonable case that Apple is a "service provider" by virtue of Apple Pay. A "service provider" must provide "a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service". Card issuers are covered persons, and Apple is providing a material service in connection with a consumer financial product--a credit card.
Levitin explains that since Apple is operating the payment system they will be held to the same standards as a company with a consumer financial product like a credit card.
The "service provider" definition explicitly includes those anyone who "participates in designing, operating, or maintaining the consumer financial product or service". There's an argument that Apple participates in designing, operating, and maintaining the card payments that go through Apple Pay, especially as Apple has specific agreements with card networks about what data is transmitted, what format, etc. In other words, Apple isn't just being a common carrier transmitting data for anyone. It's involved in figuring out what to transmit.
The "service provider" definition also explicitly includes anyone who "processes transactions relating to the consumer financial product or service". That sure sounds like Apple's role in the Apple Pay environment. There is a carve-out to this particular illustrative inclusion for parties that "unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes".
It's important to note that Levitin does not anticipate the CFPB actually examining Apple in the near future thanks to the amount of oversight they're responsible for and their limited budget. He also explains that possible technical details in how the Apple Pay service works will keep the company from facing this increased regulation.
There are few issues with his analysis. First of all Apple isn't storing any data on the devices. The deals they've worked out with the banks have allowed them to process payments without having the full card number stored on the device. In a sense Apple is bridge a gap between bank and consumer rather than running the card themselves, even if they're receiving a percentage of each sale.
Also, similar payment system providers like Paypal or Square aren't subject to this sort of financial regulation. Other than its size, what sets Apple apart from these competitors?
Regardless of the questions it raises, Levitin's article is an interesting look at the possible complications that could arise from Apple's latest venture. It's hard to imagine a world where Apple's lawyers wouldn't have already figured out a way around this before they announced the service, but you can never tell exactly what will happen when it comes to regulation. You can read all of Levitin's piece here.
