Being a successful FinTech firm requires more than just great technology; it also requires an understanding of the laws and regulations applicable to your business. This course will provide you with that understanding. You will learn about the critical legal, regulatory, and policy issues associated with cryptocurrencies, initial coin offerings, online lending, new payments and wealth management technologies, and financial account aggregators. In addition, you will learn how regulatory agencies in the U.S. are continually adjusting to the emergence of new financial technologies and how one specific agency has proposed a path for FinTech firms to become regulated banks. You will also learn the basics of how banks are regulated in the U.S. If you are unfamiliar with how these new financial technologies work, fear not. We will begin each new course section with a high-level overview of the underlying technology. While the course is principally focused on the U.S. FinTech industry, we cannot possibly cover every relevant legal and regulatory issue. Therefore, this course should not be construed as legal advice. Rather, the goal of the course is to familiarize you with the key legal and regulatory challenges FinTech firms in various sectors face, as well as the critical policy debates that are occurring in Washington D.C. and state capitals across the country.
Introduction to Traditional Payment Systems
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Do curso por Duke University
FinTech Law and Policy
23 classificações
Na lição
FinTech Payments, Wealth Management, and Account Aggregation
The final module begins with an overview of the legal framework applicable to legacy payment systems in the U.S., followed by a review of how some FinTech firms are building on top of these systems to provide faster, more convenient, consumer payments while other FinTech firms are bypassing these systems all together by utilizing distributed ledger technology. From there we examine new technologies being deployed in the wealth management industry, including the use by some firms of “robo-advisors” to allocate investors’ portfolios using algorithms based on the investors’ data and risk preferences. You will see that robo-advisors are subject to the same oversight as traditional investment advisers. The module concludes by exploring the legal issues surrounding FinTech companies that allow consumers to aggregate the information from their various financial accounts.
Conheça os instrutores
Lee Reiners, CFAExecutive Director, Global Financial Markets Center
Duke University School of Law
In this module, we will be exploring
the legal and policy issues associated with FinTech developments in payments,
wealth Management and account aggregation focusing primarily on developments in the US.
We will begin by diving deep into the world of payments,
which can immediately be very esoteric and could be a whole course unto itself.
Rather than get bogged down in the technical details of how US payment systems work,
I'll provide a high-level overview of how consumers have historically paid for goods and
services and legal and regulatory frameworks applicable to each of these payment methods.
From there, we will explore the latest FinTech developments in the payments sphere,
and how they fit into the existing regulatory framework.
We will end our discussion on payments by looking at an effort spearheaded
by the Federal Reserve to bring about a faster payment system in the US.
Imagine the year is 1908 and Kate walks into our local Starbucks to buy a cup of coffee.
To pay for her coffee,
Kate has four options;
cash, credit card, debit card or personal check.
Now fast forward 20 years into 2018 and Kate still loves her Starbucks.
Now when she walks into the store,
she has a multitude of payment options available to her.
She can still pay with cash,
credit card or debit card or she can pay with the Starbucks mobile app,
Chase Pay, Apple Pay,
PayPal or Visa Checkout.
However, one option available to Kate in 1998 personal check,
is no longer accepted by Starbucks,
which is probably appreciated by the people waiting in line behind her.
All these payment options have different implications for Kate and for Starbucks.
For Kate, her choice of payment determines whether she can resend the transaction,
whether her money is at risk if her account is
compromised and whether she's exposed to overdraft or limit fees.
For Starbucks, Kate's choice of payment determines when they will
receive value for her purchase in the amount of if any,
transaction fees they must pay.
As we will see, behind each of
these payment methods is a unique system with its own procedures and
rules that transfers value from
the customer's financial intermediary to the merchants financial intermediary.
Many of the new payment technologies we will explore,
want to top the rails of older payments infrastructure and
therefore fit within established legal frameworks that govern various payment methods.
While other new technologies such as payments sent through distributed ledger technology,
utilize entirely new networks that are not subject to a well-defined legal framework.
Before we get into these details,
let's take a look at how US consumers pay for things
and how their payment preferences have changed over time.
This chart utilizes data from
the Federal Reserve's diary of consumer payments choice which
tracks consumer payment transactions over
a three-day period for a representative sample of consumers.
We can see that cash remains the most frequently used payment instrument.
Accounting for 31% of all consumer transactions.
While debit card is the second most frequently used payment method.
Accounting for 27% of payments volume.
However, cash payments account for just 8% of the value of
consumer purchases while electronic payments in the form of
electronic credit and debit transfers using the automated clearinghouse system,
account for 32% of the value of all transactions.
These rules imply that the value of the payment
appears to influence whether a consumer chooses to use cash,
debit, credit or another form of payment.
In this graph we can see that cash is used most often for payments of less than $25,
while credit and debit cards are used more frequently for
payment's value between $25 and $100.
Checks and electronic payments are used more
frequently for transactions that are at $100 and over.
FinTech payment platforms such as Venmo,
are part of the other category which you can see
accounts for a small share of payments volume and value.
As you saw with the Starbucks example,
consumer payment preferences have evolved over time.
Here we're using data from a separate federal reserve study that reports
the aggregate number of various non-cash payments
that have been made by US consumers and businesses over time.
We see that in 2003,
checks were the most common non-cash payment method
accounting for close to half of all non-cash transactions.
The digital revolution quickly made checks obsolete and today,
checks account for just under 13% of all non-cash transactions.
As sharply as checks have fallen,
debit cards have risen.
Today, debit cards account for 59% of
all non-cash transactions while credit cards are the next most popular payment method,
accounting for 24% of all non-cash payment transactions by businesses and consumers.
Different laws, rules and regulations govern all of these payment methods.
The laws governing payment systems are passed by the US Congress and
state legislatures and regulations are then
established by federal and state agencies to implement these laws.
In addition, payment system operators and providers have established their own rules and
agreements that provide more details on
the rights and obligations of the users of the payment system.
These frameworks are designed with one purpose in mind, to facilitate settlement.
Settlement simply means that whatever is purchased is delivered
to the buyer and the payment per said purchase is major the seller.
Well this may sound straightforward,
achieving settlement is a complicated process.
So let's take a look at the steps that typically
take place before any kind of payment is complete.
The initiation of a payment begins when
either the payer or payee in a payment transaction or
a third party sends an instruction to
another entity that triggers a process ultimately leading to a payment.
This initiates a process that authenticates the identity or veracity of a participant,
device, payment or message connected to a payment system.
Authentication may happen at multiple points in the payment process,
for example end-user identity maybe verified when the end-user enrolls with
a provider or additional checks maybe built in to verify the identity of the payer,
account or account provider for
instance by entering a password during the payment process.
During the authentication process,
the payer's account provider verifies that the payer's account has
good funds or credit necessary to complete the transaction.
From there, the payment is authorized which involves
explicit instructions including timing, amount, payee,
source of funds and other conditions given by the payer to
their account provider or to the payee to transfer funds on a onetime, a recurring basis.
The next step is to clear the payment,
which involves the payer and payee's account providers
exchanging payment information to confirm a transaction prior to settlement.
Then comes receipt, which is the point when funds are received by
the payee such that funds can be withdrawn or transferred.
Next comes settlement, which in some payment systems come before receipt,
where obligations and respective funds between two or more entities are
discharged and finally the payment is reconciled.
Meaning a procedure is followed to verify that the records are
issued by entities involved in a transaction match.
Note that each payment method uses a slightly different processing approach,
it may not follow all the steps I just mentioned or in the order I mentioned them.
Nonetheless, these steps reflect
the general process a payment go through to achieve settlement.
With that in mind, let's turn our attention to two of
the oldest payment methods in the US, cash and check.
While the government is required to accept cash as valid payment,
there's no law that requires private individuals
or businesses to accept cash or coins as payment.
Therefore cash is a trust-based system
that works along as the public has confidence in it.
Cash is a preferred form of payment for many people because
it does not require or record the identity of end-users.
Until the launch of Bitcoin,
cash was the only payment instrument with such features.
The main risk associated with using cash is theft or loss,
and this rest is borne entirely by the holder of cash.
However, this loss is limited to the amount of cash the owner actually carries.
When you use cash to pay for goods,
say a carton of milk at the store,
settlement is achieved the moment you hand
your cash to the cashier and he hands you the milk.
Checks on the other hand,
achieves settlement by moving funds from the payer's bank to
the payee's bank by decreasing
the payer's account balance and increasing that of the payee's.
So imagine again the year is 1998 and Kate pays for a Starbucks with personal check.
Settlement is achieved for the following steps.
First, Starbucks deposits Kate's check and Starbucks' bank credits Starbucks account.
Starbucks' bank in turn presents a check to its regional federal reserve bank,
which credits Starbucks' banks account at the Federal Reserve,
and passes the obligation on to Kate's bank.
The Federal Reserve Bank then debits the account that
Kate's bank maintains as a Federal Reserve Bank.
Finally, Kate's bank satisfies the claim by debiting the amount from Kate's account.
Well we know that checks are becoming less frequent form of payment,
the process by which checks are settled is similar for all non-cash payment systems.
In essence, settlement is achieved by updating
ledgers at different financial intermediaries to adjust
deposit balances in accordance with the transfer of
claims as they move along the chain from payer to payee accounts.
Checking is governed by both state and federal law,
at the state level checks are negotiable instruments,
such as provisions of the Uniform Commercial Code which was
established to make it easier for
businesses in different states do business with each other.
At the federal level,
checking is governed by provisions of
the the expedited funds availability act and the Check clearing for the 21st Century Act,
also known as check 21.
The expedited funds availability Act,
requires banks to make funds available to account holders within
specified time frames and to disclose their policies on funds availability.
Federal Reserve regulation CC,
is a regulation that implements the Act.
Check 21 allows the recipient of
the original paper check to create a digital version of the original check,
thereby eliminating the need for further handling of the physical document.
In essence, the recipient bank no longer returns a paper check
but effectively emails an image of both sides of the check to the bank it is drawn upon.
Another effect of the law is that is now legal for anyone to use
a computer scanner or mobile phone to capture
images of checks and deposit them electronically.
A process known as remote deposit.
Unlike cash, checks do not settle instantaneously which
therefore exposes depository institutions to the risk of non-payment and fraud.
Generally speaking, the laws and regulations governing checking require
banks to bear the responsibility for
losses that would be typical for another party to avoid,
such as a loss arising from an unauthorized check.
As you will see in the next lecture,
debit cards are subject to many of the same laws and regulations that apply to checking.
We will also discuss the legal framework associated with credit card transactions.
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