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Law professor thinks Apple turned self into a regulated financial institution
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Law professor thinks Apple turned self into a regulated financial institution

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Law professor thinks Apple turned self into a regulated financial institution

Did Apple Inc. AAPL -0.12% just inadvertently take on a new financial regulatory burden with the rollout of Apple Pay? That’s the question pondered by Georgetown law professor Adam Levitin in a Credit Slips blog post that’s well worth a read.

Levitin, whose specialties include financial regulation, suspects the answer is yes:

I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a “service provider” for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP.

The CFPB is the Consumer Financial Protection Bureau. UDAAP stands for “unfair, deceptive or abusive acts and practices,” regulatory provisions described as the “most dangerous weapon in the CFPB’s arsenal.”

Apple didn’t respond to requests for comment. In an emailed response, a CFPB spokesperson said the agency will continue to closely monitor developments in mobile-payments technology in order to identify any consumer-protection issues.

“The bureau’s role is not to choose market winners and losers, but to protect consumers and to make sure that companies offering consumer financial products or services play by the same rules. By and large, those rules are technologically neutral. Rules that apply to plastic card payments generally also apply to payments with a phone. For example, disclosures must be clear, consumers must be protected from unauthorized transactions, and conduct towards consumers must not be unfair, deceptive, or abusive,” the agency said.

In his post, Levitin breaks down how the CFPB has authority over two classes: “covered persons” and “service providers.” He explains that Apple isn’t a covered person since it doesn’t offer a financial product or service — Apple Pay doesn’t actually transmit funds. The rub, however, is that Apple could be considered a “service provider” to a covered person.

“Card issuers are covered persons, and Apple is providing a material service in connection with a consumer financial product — a credit card,” Levitin writes. (Levitin goes into a lot more detail on carveouts and clawbacks within the act, further explaining why he thinks this ultimately may leave Apple on the hook as a “service provider.”)

Moreover, he argues that given the way the Consumer Financial Protection Act is drafted, UDAAP isn’t limited to practices tied to the offering of a consumer financial product or service. Levitin explains:

It is a simple prohibition on covered persons and service providers engaging in unfair, deceptive, and abusive acts and practices, period. There is no language saying that the unfair, deceptive, or abusive acts and practices has to have any relationship with the consumer finance business. Read literally, anything Apple does is therefore fair game for state AGs, and for private attorneys who use private rights of action under state UDAP statutes based on a predicate violation of the federal UDAAP statute (that does not contain a private right of action).

So that’s a big potential worry. Levitin acknowledges he doesn’t know whether the CFPB would agree with his reading of the statute, emphasizing that even if it did, it’s unlikely the agency would start examining Apple any time in the near future given more pressing maters and limited resources.

Apple may also disagree with the interpretation, Levitin said, but noted that if his reading of the law and Apple’s relationship to it is correct, “Apple just walked into the very different world of being a regulated entity.”

Law professor thinks Apple turned self into a regulated financial institution - The Tell - MarketWatch

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Apple Pay trumps traditional credit & debit cards: MasterCard SVP

Starting next month consumers who buy Apple's (AAPL) latest iPhone--the iPhone 6 or 6 plus--will be able to use their phones instead of physical credit or debit cards for purchases. All they'll have to do is install Apple Pay on their phone, which stores their credit card and debit card information.

American Express (AXP), Visa (V), MasterCard (MA) and six of the biggest U.S. banks have signed up to support the new payment system along with 220,000 retail outlets, including McDonald's (MCD), Bloomingdales and Macy's (M).

The app uses chip and pin technology, instead of the magnets that credit cards currently use, to keep information secure. The chip generates a one-time authorization code for each purchase and the pin is the unique number a consumer will have to tap into a retailer's credit card reader for each purchase. This technology is considered more secure than the magnetic stripe technology used on most credit cards.

Sherri Haymond who heads the digital channel management group at MasterCard, tells Yahoo Finance that the technology is "really, really safe" because it uses "EMV security which gives each transaction a code number that only MasterCard or the issuer can unlock."

In addition, she says, MasterCard, Visa and American Express will have the ability to shut off the application immediately, if, say, a consumer loses their phone. "When we send over the data to Apple to put onto your phone, we send over a fake 16-digit number, called a token, and then we're able to eliminate that token and shut it off," Haymond explains in the video above.

Whether Apple Pay eventually replaces the physical credit or debit card for iPhone users will depend on not only consumers installing it on their phones but also retailers buying the readers, which cost $300 to $500 each.

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