Open Standards Advance Fintech

Today, smartphones can scan faces, artificial intelligence can prevent human error, and a payment can be made in the blink of an eye. Demand for these types of technologies is increasing, particularly in the payments industry.

Payments technologies must adapt quickly to keep up with rapidly changing consumer demands. Over half of U.S. shoppers would stop a purchase if the checkout process is complicated. Fifty-three percent of shoppers view the security of their data and money as most important when choosing a payment method.

In July, the FDIC requested the public’s input on potential open standards-setting bodies within the financial technology, or “fintech” space. The FDIC gave all interested parties a 60-day comment period. Now that the comment period is closed, we wait in anticipation to see what decisions the FDIC will make with the comments they received.

The U.S. payments space is saddled by closed standards-setting processes and a lack of basic competition in the market. For example, EMVCo, an organization owned and controlled by the world’s six largest payment card networks, sets many key payment standards but has been used to restrict competition and  innovation. Visa and Mastercard, which jointly control EMVCo, are more interested in maintaining the status quo and preventing innovations that might threaten their dominance in the marketplace — particularly because fraud is paid by merchants and banks, not the payments networks. This structure is anti-competitive and creates negative incentives that have halted the progress of emerging payment technologies — for example, it’s complicating and preventing merchant choices in debit card routing in the United States.

Open standards are beneficial for emerging technologies across a range of industries. In payments, there is promise being shown with developments in areas including biometrics, open banking and artificial intelligence. But, if these innovations are squelched by Visa and MasterCard using EMVCo as a shield against innovation, we will all lose out in the promise these changes could provide. On the other hand, if there were an open and inclusive process for setting standards, it would protect and foster innovation, collaboration, and competition. Over the past six months, the financial and health implications from COVID-19 have accelerated the shift to fintech solutions, transforming them into an essential part of everyday business. On average, one out of three digitally-active consumers use at least two forms of these services.

The foundation on which these fintech innovations are built needs to be sound. Setting open standards could allow not only for adoption of biometric technology but also basic, less glamorous solutions that are cheap and easy to implement quickly — like more widespread use of existing technologies such as personal identification numbers.

Open standards could allow banks to transition more quickly to online platforms by streamlining innovative practices to adapt safe, fast, and easy-to-use payment methods. Seventy percent of Americans use a mobile device to manage their bank account at least once per month. And over 50 percent of consumers have used digital banking applications more since the start of the pandemic. Mobile banking reduces operational costs and location dependency of financial services.

Open standards would also help increase healthy competition that allow faster adoption of technologies like artificial intelligence to improve the payment process. The right AI can detect patterns that humans cannot, such as fraudulent transactions. In the payments world, AI creates safer and faster ways to make payments to keep up with changing customer needs.

Without open standards-setting bodies, technologies such as biometrics, mobile banking, AI and the next round of new innovations are likely to be smothered by the dominance of the legacy card networks. Standards cannot be an excuse for reinforcing market dominance. Instead, they need to be vehicles for open innovation. This is the only way the United States can secure the economic benefits of the best new technologies that improve secure and efficient payments.

Douglas Kantor is counsel to the Secure Payments Partnership and partner at Steptoe & Johnson LLP.

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