The Federal Reserve, Mobile Banking and Regulatory Compliance

Since 2011, the Federal Reserve has conducted annual surveys to assess how consumers use mobile phones to access accounts, transfer money, shop and check bank balances. In March 2015, the Board of Governors of the Federal Reserve System released their latest findings based on an extensive consumer study. The report, “Consumers and Mobile Financial Services 2015”, linked increasing mobile banking usage to the widespread use of smartphones among U.S. adults. Mobile banking rates have increased 33 percent since 2012 in America.

While 71 percent of adults in the United States now own an Internet-capable smartphone, only 50 percent of U.S. adults with smartphones access banking services through mobile platforms. The report also noted that the easy use of smartphones and the increasing availability of banking apps has facilitated new mobile banking services such as virtual check deposits.

All of the major banks have moved aggressively to provide easily accessible mobile app versions of their primary banking site. Consumers who stated that they intentionally avoided mobile banking services in the study, expressed concerns about the security and privacy of their financial transactions and accounts. Sixty-two percent of consumers who refused to use mobile banking lacked confidence in the technology behind mobile banking systems as well as the banks themselves.

Security and safety concerns amidst data and privacy intrusions at Target, Home Depot, Sony and others were top of mind for many consumers. Despite these security issues, the number of individuals using mobile banking apps is only expected to increase. At the same time that mobile banking is becoming widespread, a number of regulatory issues and gaps in the regulation continue to persist.

Regulatory Gaps and Mobile Banking

There are different technologies and mechanisms used in mobile banking systems, and there are varying legal apparatuses and rules that apply. Because the technologies developed separately, many of the rules that govern the rights and obligations of both consumers and banks have also been issued separately. Which is to say that there are gaps in the legal structures that govern various mobile banking and payment systems.

For example, the Uniform Electronic Transactions Act and the E-SIGN ACT regulate electronic signatures and consumer consent. Under those acts, financial institutions are required to record, retain and be capable of producing a record of any electronic signatures. Despite this affirmative obligation, neither act provides banks with any details about how to collect or keep the e-signature records. In mobile banking apps, the e-signature issue becomes even more pronounced.

In addition to the regulatory gaps, some areas of mobile banking are not governed or addressed at all. For example, a rapidly rising mobile banking technology is peer-to-peer payments (P2P). In P2P systems, consumers can send funds from bank accounts or credit cards to the accounts of another individual using a mobile device.

With such P2P mobile banking payment systems, however, it is unclear who is responsible for meeting the regulatory compliance burden. For instance, who would be responsible for due diligence efforts under OFAC in a P2P transaction. Would it be the bank, the P2P ecosystem, or some other entity? Additionally, while Regulation E and the Electronic Funds Transfer Act place the fraud remediation onus on the banks, it is unclear whether that burden remains intact in P2P transactions.

Legal practitioners in this area are currently advising clients without clear guidance on many relevant mobile banking financial issues. The regulatory compliance issues related to banking are likely to be clarified through litigation, which would ideally prompt updated compliance regulations.

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