How Regulation Could Shape The Connected Economy's Future
Summary
- Analysts report that TV viewership is up year over year.
- One ecosystem operated by a provider they trust is better than multiple apps and passwords all over the web, PYMNTS consumer research finds.
- The Fed Reserve issued a proposed rulemaking in March of 2021 that would modify the Durbin Amendment that was passed in June of 2011 and became effective Oct. 1, 2011.
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In an era of explosive growth in online advertising and social media spend, media experts still say that TV advertising is the most effective way to build a brand.
Analysts report that TV viewership is up year over year - consumers average more than six hours a day consuming live programming. Ad spending on the platform is estimated to top 2019 levels thanks to the growth in connected TV (aka livestreamed) ad spend and live sports.
It's one of the reasons that I found a TV commercial airing on CNN's "State of the Union" yesterday morning (Oct. 31) so interesting.
The ad featured a guy who introduced himself as a three-year Facebook (FB) employee and a member of the company's content moderation team. He spoke of the challenges of doing his job and the responsibility Facebook feels for getting the content they publish right. It's why, he said with the utmost of sincerity, Congress needs to reform Section 230 to bring consistent publishing standards to all platforms and to provide the ability to impose liability on platforms that violate those standards.
The ad made it clear that it was paid for and sponsored by Facebook.
Section 230 is the law passed on Feb. 8, 1996, as a carve-out for internet companies to build and scale their online content platforms without the responsibility for the character or quality of the third-party content they aggregate and publish. Section 230 considers platforms like Facebook to be distributors of that content, not publishers, thereby eliminating any liability for that content - even if it is offensive, obscene, blatantly false or harmful to the reputations of people and businesses, or facilitates harmful, or possibly illegal, activity by third-party businesses or the people who post it.
It's why third-party content platforms like Yelp (YELP) can post fake, unauthenticated and negative reviews without any fear of the liability for the business damage that content causes, while still capturing all of the ad revenue that visitors coming to their site reading those fake reviews generate for them.
As distributors of that third-party content, it's a business model that's perfectly legit under Section 230 today.
Critics say Facebook's interest in reforming Section 230 is just another smokescreen intended to curry favor with lawmakers and regulators under the guise of wanting to "fix" the internet's "content problem" and avert the outright appeal of Section 230, which would leave Facebook in a world of hurt. Perhaps not so coincidentally, Zuckerberg's proposed Section 230 reform sounds a lot like the system Facebook now has in place - waiving liability for platforms that put content mediators in charge of policing third-party content, even if bad content might find its way onto the platform anyway.
Trying hard, as Zuckerberg proposes, would be good enough to uphold this new rule. Everybody gets an A for effort.
Much more interesting is that Section 230 is now a public policy debate gone mainstream.
CNN reports that its Sunday primetime programming attracts roughly 822,000 eyeballs, with 188,000 of those in the important 25-54 age slot - an important voter constituency. This is, of course, happening at the same time that Congress is actively debating the future of Section 230, Facebook's own future as a social media platform and how regulated or broken up it and many other Big Techs might end up.
Facebook's not alone. FinTech and Big Tech players are spending money on ads for a variety of topics directly related to the many largely bipartisan, regulatory and legal challenges facing them. All of this highlights the threat they likely feel from the dramatic shift in thinking among those regulators and lawmakers now.
How companies innovate, whether existing laws and regulations need to be changed for digital businesses, and the standards antitrust uses to define "consumer harm" - particularly for the digital economy - is all up for debate.
So, too, is whether any of what's being proposed considers the reality of the platform dynamics that have driven so much of the innovation that's helped consumers and businesses over the last decade - and has gotten consumers and businesses across the world on the other side of a global pandemic without a total economic catastrophe.
There is growing evidence that the connected economy will face new proposals for regulation and changes in antitrust policy targeted to the digital economy. And that every company participating in the connected economy, and their investors, could be affected by these new proposals, for better or worse. And it's clear that there is the need for a forum for a balanced, thoughtful debate on the issues that could propel its growth and derail its prospects - to inform businesses and investors about what to look out for as they refine their business models and strategies.
The Data Debate
One thing is absolutely clear: The connected economy is the future of the global economy.
We at PYMNTS write about it every day. Every company is on its own digital journey, one that has accelerated over the last 20 months, for obvious reasons. The excitement and enthusiasm for creating new business models and ecosystems are happening across every pillar of this connected economy in real time. Investors are pumping billions into ventures with their own vision for how they fit; traditional companies are, too, while also partnering with FinTechs to fast-track their progress.
More than digitizing their own activities, companies operating at the forefront of the connected economy use tech, payments and data to reimagine how people and businesses engage to streamline those activities across once separate apps and activities. The value to consumers is speed, convenience, simplicity and security - a better and more relevant experience. For companies, it's a new way to reach consumers and businesses, monetize those interactions, and scale and grow their businesses.
According to PYMNTS' ConnectedEconomy research published earlier this year, based on a national sample of more than 15,000 U.S. consumers, people want to be part of a single ecosystem that aggregates at least five discrete activities today - shopping, eating (grocery shopping + restaurant ordering and takeout), payments and communicating with family and friends. The ability to easily see and manage their funds on hand as part of that experience is also regarded by the consumers we studied as important.
Two-thirds of consumers who wish to experience such a digital ecosystem also believe they'll have more control over their data and privacy, along with more personalized and relevant experiences. One ecosystem operated by a provider they trust is better than multiple apps and passwords all over the web, PYMNTS consumer research finds.
Yet the new CFPB Director Rohit Chopra has put BigTech, FinTech and payments processors on notice that the data practices that enable this ease, convenience, security and simplicity are now under his review. The U.S. is operating in a "bit of a surveillance state," he reported in testimony given to Congress on Oct. 22. He expressed concerns that the data collected by Big Tech and FinTechs - and how that data is used to serve personalized recommendations - gives them too much influence over how people spend their money. He also said that embedding payments into Big Tech apps could be too limiting and anti-competitive, and that "speedy" growth of P2P platforms like Venmo and Square Cash could cause risks to people.
Amazon (AMZN), Apple (AAPL), Google (GOOG) (GOOGL), PayPal (PYPL), Square (SQ) and Facebook were among the CFPB's first targets for detailed responses to a lengthy data request. But they're certainly not the last. FinTechs and payments processors, here's looking at you next: Chopra told the Senate Banking Committee that both are also of concern.
What that means, here in the U.S., is that the CFPB is a regulator that innovators need to consider. Similar regulators in other countries will surely be looking at these same issues. How regulators decide what businesses can and can't do will influence how the connected economy evolves, what kind of innovation will take place and what types of business models can succeed.
Banking and Credit in the Crosshairs
Lending, forever a CFPB hot button, has buy now, pay later (BNPL) players in its sights, too. CFPB has raised concerns that consumers don't know enough about these new credit schemes to use them prudently, and that BNPL providers don't provide enough disclosure for how they do business.
Banks, which are largely now leveraging existing credit lines to enable BNPL installment plans, might get to exhale on this issue - but not on others, including open banking, which is now part of the CFPB's consumer remit.
One of President Biden's initial executive orders back in January was aimed at making consumer banking information portable and available to third parties with the permission of the consumer. Although the banking industry is actively working with third-party FinTech data networks to enable that to happen safely and securely, existing regulation still holds banks responsible if something goes haywire.
We got a look at haywire about a month ago in the birthplace of open banking, the U.K. Then Barclays found itself the victim of a phishing attack initiated through a neobank account, Monzo. Millions of pounds of consumer funds were swiped from those bank accounts.
Also under the CFPB spotlight is small business access to credit, something the CFPB is addressing in light of the working capital constraints and overall lack of access to credit for this cohort of businesses. Across the pond, U.K. regulators passed a late payments law that requires payment to be made to SMBs within a specific window, and gives suppliers the ability to charge interest on past-due bills. Legislation passed recently in France will require that all businesses use electronic invoicing from providers they certify in an effort to improve tax payments and compliance.
How 'Bout Those NeoBanks?
Speaking of neobanks, the Fed Reserve issued a proposed rulemaking in March of 2021 that would modify the Durbin Amendment that was passed in June of 2011 and became effective Oct. 1, 2011. Durbin was the controversial piece of legislation that capped debit interchange at 21 cents plus .05% and .01 for fraud costs per transaction for all banks with over $10 billion in assets.
The proposed ruling would extend Durbin fee caps to all card-not-present transactions, and would also require debit card issuers to offer two unaffiliated debit networks for processing to avoid network exclusivity.
Opening the Durbin Amendment to change could also open the door to lobby Congress for a change to the law itself.
Large banks have long pushed back on the $10 billion threshold, arguing that the two sets of debit fee rules have unfairly disadvantaged their own bank offerings, including their ability to use debit interchange to offset the costs of servicing DDA accounts.
Neobanks, many of them prepaid cards with a mobile UX issued by Durbin-exempt banks in the background, use debit interchange as the business model to support their offer. A change to Durbin that would eliminate the exemption would hit these neobanks hard.
Then there's the question of what is a bank and how it should be regulated, including the future of the FinTech bank charter. Saule Omarova, who is President Biden's reported nominee as head of the OCC, has some very specific views on the topic, including one that would make the Fed the exclusive bank for consumer depository accounts in the U.S.
Then There's Crypto
PYMNTS devoted an entire week to the discussion of crypto and its use in payments - and what a lively week that was. At the heart of the debate is the definition of crypto and whether its uses and use cases subject it to existing regulation.
It's a debate that's also taking place among members of Congress, the Fed and regulators, including who gets to decide one way or the other. The only point of agreement so far is that there is no agreement for how crypto should be regulated or who should do it.
The SEC says cryptos are securities, and that it should be able to regulate and enforce. The CFTC says crypto is a commodity, so it gets to have the say. The Fed says it won't ban crypto - since it, too, wants to issue a CBDC, but wants it to be regulated by someone. Some large crypto players want Congress to appoint a special crypto regulator to make and enforce (presumably new) rules. States want to make the payment of ransomware illegal, even though the FBI doesn't think that's the way to go, and Treasury Secretary Yellen now has the authority to sanction digital payment systems that enable ransomware payments in some way.
In the meantime, FinTechs make it easy for consumers to buy and spend crypto at the point of sale. Card networks do, too. New digital asset networks are aggregating all forms of digital assets, like airline miles and rewards points, and turning them into spendable currency at the point of sale. At the same time, innovators and traditional point-of-sale players make it possible for merchants to accept crypto-native wallets for payment.
Too Big to Be Left Alone
The current pox on all of the houses of Big Tech came several years ago on the heels of what I call the "Facebook contagion" - the Cambridge Analytica debacle in 2015 that put a fine point and a big flashlight on the data practices of the world's largest social network. From there, it became a bit of a free-for-all on any big platform that aggregated consumers and their data.
Today, there is no shortage of antitrust measures making their way through the House and Senate to rein in Big Tech. Just last week, the DOJ reported that it was investigating Visa (V) and the financial incentives it gave to FinTechs, naming PayPal, Square and Stripe (STRIP) as recipients of those payments.
Senator Amy Klobuchar is leading perhaps the broadest sweeping effort, one with bipartisan support that would make it illegal for platforms to promote their own products. An important question is whether it makes sense to do that without imposing the same limitations on Walmart (WMT), Costco (COST) and Target (TGT) for their digital platforms and private-label brands.
Following the release of a report in late September detailing Big Tech acquisitions, FTC Chair Lina Khan also said that her team would aggressively examine Hart-Scott-Rodino provisions that allow mergers under $92 million to "fly under the radar" without reporting them to the FTC for review. Her views, expressed in an open meeting that month, reflect her concern that in a digital, highly competitive environment, "even smaller transactions invite diligence."
These sorts of changes in how laws and regulations are imposed potentially affect many in the digital economy - not just Big Tech, but also startups, their investors and competitors of Big Tech who might not face as stringent rules.
Then There's Healthcare - and Gig Workers
Then there's what's happening in other sectors of the connected economy, such as healthcare and sharing economy platforms.
There are 57.3 million gig or freelance workers in the U.S. today who work for themselves and rely on digital platforms to find work suitable to their schedules. The most common type of gig workers is ridesharing and delivery drivers, although they are not the only classification. Globally, there is an active debate over whether gig workers should be classified as employees and offered extended benefits.
Recently, the U.K. Supreme Court ruled that all Uber workers should be classified as employees and be given minimum wages, paid holidays and pension benefits. U.S. Labor Secretary and former Boston Mayor Marty Walsh believes the U.S. should do the same. Gig platforms fear that the president has the ability to declare gig workers as employees under federal workplace laws. Many states, including Massachusetts, have gig worker status on the ballot in 2022, even though a similar effort in California (Proposition 22) failed to pass in 2020.
HealthTech is an area of great potential, as technology and connected devices are truly democratizing access to healthcare providers with little more than a mobile phone. During the pandemic, analysts reported that telemedicine visits increased 38-fold, as consumers took to cyberspace to see their doctors. Experts say that the consumer's comfort with everything digital could shift $250 billion in spend to a connected healthcare model.
One of the many things that boosted the consumer's use of telehealth was a decision to waive state licensing rules for doctors to provide care and an agreement for how telemedicine visits would be billed - waivers that have now been rescinded.
Today, only 18 of the 50 U.S. states allow telemedicine visits to happen between certified doctors in one state and patients living in another, potentially cutting off access to medical care for those most in need.
What's Next
As the connected economy grows and sweeps across the economy, it isn't really surprising that there is intensive debate about new laws and regulations, or about how to apply existing ones to these digital businesses.
This isn't going to be all settled soon. Governments don't act quickly, and the issues are complex. But more than that, new issues will arise as new business models and technologies are introduced. Everyone who plays in this space needs to be clued into what's going on.
And many need to participate in the debate to help make sure that we strike the right balance between regulation and innovation - so that the latter doesn't suffer in the hands of the former.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by
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