U.S. Payment System Policy Issues: Faster Payments and Innovation

Summary: Technological advances in digitization and data processing and storage have greatly increased the availability and convenience of electronic payments. New products and services offer faster, more convenient payment for individuals and businesses, and the numerous options on offer foster competition and innovation among end-user service providers. Currently, many new payment services are layered on top of existing electronic payment systems, which may limit their speed.

Summary: Most payments flow through both retail and wholesale payment systems before they are completed. Consumers access retail payment systems to purchase goods and services, pay bills, obtain cash through withdrawals and advances, and make person-to-person transfers. Consumers' financial institutions access wholesale systems to complete the payment. In the United States, systems accessed by consumers are operated by the private sector, whereas systems accessed by banks to complete those transactions are operated by the Federal Reserve (Fed) or the private sector.

Summary: Regulation of retail payment systems is dispersed across multiple state and federal regulators. For example, payment systems are subject to federal consumer protection regulation under the Electronic Fund Transfer Act ( P.L. 95-630 ), anti-money laundering requirements under the Bank Secrecy Act (P.L. 91-508), and various state licensing, safety and soundness, anti-money laundering, and consumer protection requirements. Private wholesale payment systems are regulated by the Fed, and if they are systemically important, they can be designated as "financial market utilities" and subject to heightened oversight. Although faster and potentially less costly payment systems may benefit consumers and businesses, the use of new technology in existing and new payment systems raise a number of questions for policymakers. Some observers have argued that certain innovative financial technology, or fintech, payment companies would be more effectively regulated through the federal banking regulatory framework, whereas opponents of this idea assert it would result in the preemption of important state-level consumer protections and in an inappropriate combination of banking and commercial activities. The increased prevalence of data generation, collection, and analysis in payment systems has caused observers to question whether existing regulation adequately addresses issues related to data privacy and cybersecurity. Although the traditional high-levels of industry concentration and the recent entry by technology giants have raised concerns over market power and industry competition, competition to date has been robust and certain analysts argue that internet-based payments that do not require a large investment in infrastructure will prevent the market concentration that exists in older payment services. What effect technological innovation in payments will have on consumer access and whether consumers are adequately protected against potential problems, such as fraudulent or erroneous transactions, are also subjects of debate.

Summary: In August 2019, the Fed announced plans to create an interbank real-time payments (RTP) system by 2023 or 2024. The Fed stated that the new system will be available to all banks with a reserve account at the Fed, and it will require banks using this new system to make those funds available to their customers immediately after being notified of settlement. In addition, several private-sector initiatives are also underway to implement faster payments, some of which would make funds available to the recipient in real time (with deferred settlement) and some of which would provide real-time settlement. Businesses and consumers would benefit from the ability to receive funds more quickly, particularly as a greater share of payments are made online or using mobile technology. The main policy issue regarding the Federal Reserve and RTP is whether Fed entry in this market is desirable, given similar private-sector developments are already underway. There is debate about whether competition from the Fed would be beneficial in terms of cost, efficiency, safety, innovation, ubiquity, and financial stability. In the 116 th Congress, H.R. 3951 and S. 2243 , among other bills, would require the Fed to create a RTP system and would require banks to make payments to account holders in real time.

T his report examines technological innovation in payment systems generally and particular policy issues as a result of retail (i.e., point of sale) payment innovation. The report also discusses wholesale payment, clearing, and settlement systems that send payment messages between banks and transfer funds, including the "real-time payments" service being introduced by the Federal Reserve. This report includes an Appendix that describes interbank payment, clearing, and settlement systems related to U.S. payments.

The U.S. financial system processes millions of transactions each day to facilitate purchases and payments. In general terms, a payment system consists of the means for transferring money between suppliers and users of funds through the use of cash substitutes, such as checks, drafts, and electronic funds transfers. The Committee on Payment and Settlement Systems (CPSS), consisting of representatives from several international regulatory authorities, has developed generally accepted definitions of standard payment system terminology. As defined by the CPSS, a payment system is a system that consists of a set of instruments, banking procedures, and, typically, interbank funds transfer systems that ensure the circulation of money. These systems allow for the processing and completion of financial transactions.

From the typical consumer's perspective, making a payment is simple. A person swipes a card, clicks a button, or taps a mobile device and the payment is approved within seconds. However, the infrastructure and technology underlying the payment systems are substantial and complex. To simplify, a payment system has three parts (see Figure 1 ). First, the sender (i.e., the person making the payment) initiates the payment through an end-user service , such as an online payment service or mobile app, instructing the payer's bank to make a payment to the recipient. The payer and recipient interact only with end-user services, which comprise the "retail" portion of payments. Second, the payer's bank sends a payment message containing payment details to the recipient's bank through a payment system (sometimes called a clearing service ). Third, the payment is completed (or settled) when the two banks transfer funds through a settlement system. Different systems can perform each of these parts, and systems' developers and operators compete with each other to provide payment and settlement services to consumers, businesses, and banks. These final two inter-bank steps are the "wholesale" portion of payments.

End-user services, which are operated by the private sector, facilitate a consumer's ability to purchase goods and services, pay bills, obtain cash through withdrawals and advances, and make person-to-person payments. Retail payments tend to generate a large number of transactions that have relatively small value per transaction. Retail payment services can be accessed through many consumer financial products, including credit and debit cards and checking accounts. The most common methods of payment are debit cards, cash, credit cards, direct debits and credits via an automated clearing house (ACH), checks, and prepaid debit cards (see Figure 2 ).

In the United States, the Federal Reserve (Fed) operates some of the key bank-to-bank payment, clearing, and settlement (PCS) systems that process retail or wholesale transactions, and private-sector organizations operate other systems that clear and settle bank-to-bank payment, including those described in the Appendix .

Payment Systems and Financial Technology

Technological advances in digitization and data processing and storage have greatly increased the availability and convenience of electronic payments. In recent years, the use of electronic payments has risen rapidly, whereas the use of cash and checks has declined (see Figure 2 ). According the Federal Reserve's most recent triennial payment study (released in 2016), the number of transactions of three electronic payment methodsâdebit card, credit card, and ACHâgrew at annual rates of 7.1%, 8.0%, and 4.9%, respectively. Together, they totaled more than 144 billion transactions with a value of almost $178 trillion in 2015. Meanwhile, check payments declined by an annual rate of 4.4% during that period, and totaled 17.3 billion transactions worth almost $27 trillion in 2015. Less data are available on cash usage and the value of cash transaction in part because they are person-to-person and do not involve a digital record, but a Fed survey estimates that between 2012 and 2015, the share of transactions made in cash fell from 40.7% of all transactions to 32.5%.

This trend is probably due, at least in part, to various new technological products and services that offer fast, convenient payments for individuals and businesses. Payment apps linked to bank accounts and payment cards can be downloaded onto mobile devices that allow individuals to send payments to each other or to merchants. These services include Venmo (owned by PayPal), Zelle (owned by a consortium of large U.S. banks), and Cash App (owned by Square). Other companies provide hardware and software products that allow individuals and small businesses to accept debit and credit card payments, online or in person. These companies include PayPal, Square, and Stripe. Another advance in payments is allowing consumers to make payments using a mobile device, wherein debit card, credit card, or bank account information is stored in a "digital wallet" and sensitive information is protected by transmitting surrogate data (a process called tokenization ) at the point of sale. This service includes Apple Pay, Google Pay, and Samsung Pay.

These services are generally layered on top of traditional electronic payment systems. To use these services, the consumer or business often must link them to a bank account, debit card, or credit card. The payments are still ultimately settled when the money from the payer's account is deposited in the recipient's account. An exception are payments made by cryptocurrencies, discussed in the text box.

Although faster and potentially less costly payment systems benefit consumers and businesses, the use of new technology in existing and new payment systems raise questions about whether existing regulation adequately addresses issues related to cybersecurity and data privacy, industry competition, and consumer access and protection.

How payments are federally regulated depends, in part, on whether they are being provided by banks. Banks are subject to a variety of prudential regulation, enforcement, and supervision by federal bank regulators. Nonbank payment processors are subject to similar regulation and supervision (but not enforcement) by bank regulators if they are a service provider to a bank, but otherwise are not. Nonbank companies that do not provide services to banks may be regulated as money transmitters at the state level by state agencies and as money service businesses at the federal level by the Department of the Treasury's Financial Crimes Enforcement Network and subject to applicable laws and regulations. These services are subject to federal consumer protection regulation under the Electronic Fund Transfer Act ( P.L. 95-630 ); anti-money laundering requirements under the Bank Secrecy Act (P.L. 91-508); and various state licensing, safety and soundness, anti-money laundering, and consumer protection requirements.

A broad issue that permeates many of the specific issues examined in this report is the debate over whether the various companies providing retail payment services are effectively and efficiently regulated. Nonbank money transmission is largely regulated at the state level. Some observers have argued that this state-by-state regulatory regime, designed to protect against risks presented by traditional money transmitters such as Western Union, is overly onerous and ill-suited when applied to new, technology-focused payment companies. State regulators assert they are best positioned to regulate these companies, noting their experience and recent efforts to coordinate and streamline state regulation. A greater federal role in payment regulation could impose more or less stringent standards (with federal preemption of state regulation, in the latter case) than any given state's current standards.

One potential solution for concerns that the current system is too fragmented and overly burdensome could be to allow certain nonbank payment companies to enter the bank regulatory regime. Two potential mechanisms are under consideration that could allow a technology-focused payment company to be federally regulatedâthe Office of the Comptroller of the Currency (OCC) special purpose national bank charter and a state-level industrial loan company (ILC) charter with Federal Deposit Insurance Corporation (FDIC) insurance. Both could be particularly desirable for payment firms if they provide an avenue to directly access Fed wholesale payment systems. However, both mechanisms are controversial and subject to contentious debate.

The OCC and proponents of the special purpose charter generally view the charter as a way to free companies from what they assert is the unnecessarily onerous regulatory burden of being subject to numerous state regulatory regimes while not overly relaxing regulationsâunder the special purpose charter, the companies would become subject to the OCC's national bank regulatory regime. Opponents generally assert that the OCC does not have the authority to charter these types of companies and that doing so would inappropriately allow fintech firms offering fast payment services to circumvent important state-level consumer protections. State regulators have filed lawsuits to block the granting of such charters. To date, no companies have applied for such a charter, although ongoing legal uncertainty is likely a discouraging factor.

ILC charters are controversial because they allow commercial firmsâsuch as retailers, manufacturers, or technology companiesâto own banks. The United States has historically adopted policies to separate commerce and banking, and the FDIC has not approved deposit insurance for a new ILC since 2006. Opponents of ILC charters argue that by creating an avenue for a commercial firm to own a depository institution, they blur the line between commerce and banking, exposing the U.S. economy to related risks such as creating possible incentives for imprudent underwriting, inappropriately exposing taxpayers to losses through federal deposit insurance, and leading to entities that can exercise market power. Proponents of ILC charters assert these concerns are overstated. They cite the potential benefits of mixed arrangement (e.g., economies of scale, risk diversification, information efficiencies, customer convenience and savings) and note that certain other stable developed countries allow more blending of banking and commerce than the United States with, they argue, no or little ill effect. Recently, three fintech companies submitted applications to the FDIC for ILC deposit insurance. Two companies, however, have since withdrawn their applications, and the company with a pending application, Square, is a payment system provider.

All payment methods expose users to some risks, including money theft or fraudulent payments made using their accounts or identities. In general, improving technology reduces one type of risk but may expose users to new risks. For example, if a pickpocket steals a person's cash, the victim has little recourse. If instead, the pickpocket steals a payment card, the victim can cancel the card and generally would not be held liable for fraudulent purchases. However, identity thieves can steal card information using card reader skimmers, allowing thieves to open and use lines of credit in victims' names without their knowledge.

Similarly, new payment technologies reduce certain risks but create others. For example, digital wallets on mobile devices can eliminate the need to carry physical cards that can be lost or stolen and can protect sensitive information at the point of sale through tokenization. However, the device itself can be compromised by software designed to gain unauthorized access to devices, called malware, which may lead to fraudulent charges. In addition, storing payment information on multiple websites, apps, and devices creates more opportunities for hackers to steal it than if the information existed only on the card itself.

Recent breaches at various financial and nonfinancial companies in which people's sensitive information were compromised illustrate the potential risk and have raised questions over whether policymakers should implement stricter cybersecurity requirements. Some possible policy responses include

enacting a federal breach notification law, creating federal cybersecurity standards, or increasing federal authority to penalize companies that fail to adequately protect consumer data.

Payment systems necessarily collect detailed consumer information on transactions, including the retail stores a consumer shops at, the businesses and individuals the consumer pays, and the dates, times, and amounts of each transaction. Through analysis, this data have the potential to reveal a lot of information about individual consumers, including where they live and their gender, age, race, ethnicity, and approximate income. Such data are valuable from a business perspective; for example, for targeting product marketing to consumers. In addition, scammers could use this data to facilitate fraud. Electronic payments have resulted in a proliferation in the availability and use of personal information, which has raised policy concerns about how companies use the data, whether consumers understand how their data will be used, and whether consumers should have more control over its use.

Payment data has the potential to improve consumer outcomes. For example, personal financial management apps or other digital tools could help consumers more easily track payments, automate saving and budgeting, and more efficiently shop for financial products that meet their personal needs. Consumers could also in the future share this data with financial institutions to apply for loans or other banking products. Given these benefits, as well as possible privacy concerns, the question becomes how much access should companies have to individuals' information.

Privacy policy disclosures to consumers is another important element of privacy policy that might be more difficult as payments become faster using new technology. For example, according to the Bureau of Consumer Financial Protection (CFPB), stakeholders suggest that "providing disclosures that are clear and sufficient for consumers to make informed decisions is difficult" in the mobile environment due to small screens, which may make it difficult to read long, technical disclosure documents. These stakeholders indicate that clear privacy policies and more consumer control over the use of consumer data may be important considerations in this new digital environment.

When developing a new or faster retail payment system, consumer protection is an important consideration. Although new technology offers consumers many potential benefits, it raises issues of concern, such as consumer liability for fraudulent payment and consumer error or nonreceipt of goods resolution.

The Electronic Fund Transfer Act, currently implemented by the CFPB through Regulation E, is the most relevant consumer protection law applying to financial payments. Regulation E protects individual consumers who engage in electronic fund transfers. It mandates consumer disclosures, limits consumer liability for unauthorized transfers, and maintains procedures for resolving errors. Other regulations may also be relevant to a new faster payment system, depending on its structure. For example, the Expedited Funds Availability Act ( P.L. 100-86 ), currently implemented by the Federal Reserve as Regulation CC, prescribes how quickly banks must make funds available to customers.

When developing a new faster payment system, Congress and federal regulators may consider how a new system should comply with relevant regulations, such as Regulation E. Depending on the structure of the new system, regulators might decide to update these regulations to tailor them as appropriate. For example, current consumer protection rules might not cover all aspects of the system, leaving consumers at risk of financial loss, without clear recourse for some payment-related disputes, or other negative impacts. In this spirit, in 2015, the CFPB released nine consumer protection principles for new faster payments systems, including consumer control over payments, fraud and error resolution protections, and disclosed and clear costs. The CFPB has not acted on these principles through rulemaking or other initiatives since their release in 2015.

Financial education might be another consumer protection policy option. As new technology is introduced into financial products, consumers may need to learn new skills, sometimes referred to as digital financial literacy , which includes "knowing how to use devices to safely access financial products and services via digital channels in ways that help consumers achieve their financial goals, protect against financial harm and enhance ability to know where to get help." This type of financial education might be particularly important to ensure that lower-income and older consumers are included in a new faster payment system.

Innovations in the payment system may benefit some consumers and fail to reach others. New retail payment options that are linked to bank accounts, internet-based, or require mobile devices could disadvantage consumers who rely on cash payments, do not have easy internet or mobile access, or do not feel comfortable using this new technology. As long as payments remain based on the banking system, the unbanked and underbanked may encounter participation limits to faster payments.

In contrast, innovation in technology may help marginalized groups gain access to the financial system. The ability to access digital channels using cash may be particularly important for including underserved consumers, leading to the development of new payment productsâsuch as pre-paid cards and servicesâthat allow cash to be placed in an account that can be used to make online payments.

The cost of internet and mobile data plans might limit the ability of underserved consumers to access a faster payment system that is internet- or mobile-based. However, as internet access and mobile devices continue to proliferate and decline in cost, barriers to accessing those technologies may decline. For example, most consumers, including unbanked and underbanked consumers, have access to mobile phones and smartphones, and the use of these technologies is growing. According to a national survey, in 2017, 83% of underbanked and 50% of unbanked consumers had access to a smart phone. The survey noted that underbanked consumers were more likely to use mobile banking services than the rest of the U.S. population.

A faster payment system may provide certain other benefits besides access for low-income or liquidity-constrained consumers (colloquially, those living "paycheck to paycheck") who may more often need access to their funds quickly. In particular, many lower-income consumers say that they use alternative financial services, such as check cashing services and payday loans, because they need immediate access to funds. Faster payments may also help some consumers avoid checking account overdraft fees. Note, however, that some payments that households make would also be cleared fasterâdebiting their accounts more quicklyâ than the current system, which could be harmful to some underserved households.

Traditional payment systems generally are characterized by strong economies of scale and are subject to network effects , wherein the more widespread a payment method's use and acceptance becomes the more incentive additional consumers and businesses have to adopt it. These economic characteristics may mean payment industries naturally become highly concentrated, because a small number of widely used systems are more efficient than many narrowly used systems. For instance, established payment systems currently have high market concentrations. Debit card payment processing networks are dominated by Visa and Mastercard, and credit card processing networks are mostly operated by Visa, Mastercard, American Express, and Discover. Some observers are concerned that market concentration will also be a feature in new payment systems. Others argue that new payment systems based on the internet may avoid similar concentration observed in traditional systems, because they do not require new entrants to make large initial investments in infrastructure. To date, the entry of multiple new services and companies into the market for end-user payment systems has supported competition and consumer choice. Whether the industry will eventually consolidate remains to be seen.

Creating additional concentration concerns is the entrance of some of the largest global technology companies into the payment industry, including U.S. companies such as Google (Google Pay), Apple (Apple Pay), Amazon (Amazon Pay) and Facebook (Facebook Pay and the Libra proposal). Such companies already have large market shares in various technology-related industries and collect huge amounts of consumer data, which could increase as they now seek to expand their scope into the payment industry. Were they to dominate electronic payments, it could pose competition concerns in the payment industry, as well as increase their dominance in their core industries. In addition, these developments raise concerns discussed above (see the " Regulatory Framework " section), relating to the implications of mixing commerce with what has traditionally been a core banking activity.

Wholesale Payment Systems and Real-Time Payments

Payments between two parties who are both members of the same end-user serviceâa closed loop paymen t âcan occur in real time because the service can instantly communicate between the two parties, verifying that the payer has sufficient funds in the account to make the payment. However, a payment in which one party is outside of a single end-user service typically travels through the banking system, and thus cannot occur in real time unless real-time messaging, clearing, and settlement of the payment is available through wholesale payment systems. For example, a debit or credit card payment to a merchant needs to transfer funds from the sender's bank (in the case of a credit card, the card-issuing bank) and send them to the recipient's bank. Real-time payment can only occur in this scenario if settlement occurs in real-time or if payment occurs before settlement (putting the recipient's bank at risk that the transfer never occurs). Even within an end-user service that would provide real-time payment, if the transfer were made between two members entirely using existing balances within the service, delivery of funds could be delayed if the payer needs to add funds to their account to make payment (via direct debit or credit card transfer, for example) or if the recipient wishes to withdraw funds from the payment service to deposit in its bank account. Thus, the speed of many existing end-user services are ultimately limited by what happens with wholesale payment systems.

On August 5, 2019, the Fed announced plans to create a wholesale real-time payment (RTP) system. This section discusses the history of the Fed's role in the payment system; compares recent RTP initiatives by the Fed, the private sector, and abroad; and analyzes policy issues raised by these initiatives.

History of the Fed's Role in the Payment System

The Fed was originally created as a "banker's bank" to improve the functioning of a national banking system that was dominated at the time by small, local banks. To that end, providing bank-to-bank check-clearing services was one of the Fed's original, primary functions. Problems with private clearinghouses were one of the central issues in the financial panic that led to the Fed's creation. As other payment methods have emerged over time, the Fed has also provided other types of bank-to-bank payment and settlement systems. The Fed provides these services by linking the accounts that all banks maintain at the Fed to comply with reserve requirements.

Throughout the Fed's history, the private sector has operated competing payment and settlement systems that the Fed has regulated (see Appendix for more details). For example, the Fed and the private-sector Electronic Payments Network (owned by The Clearing House , an association of large banks ) currently operate competing automated clearinghouse (ACH) systems, which are payment systems that allow banks (and certain other financial institutions) to send direct debit and credit messages that initiate fund transfers. The Fed also operates two wholesale settlement systems for payments, Fedwire Funds Service and the National Settlement Service. The Clearing House Interbank Payment System (CHIPS) is a competing private-sector gross settlement system. (The Fed does not operate any end-user service directly accessed by individuals or nonfinancial businesses.)

A typical bank-to-bank electronic payment is currently settled on the same or next business day. The Fed plans to introduce an RTP system called FedNow in 2023 or 2024. FedNow would be "a new interbank 24x7x365 real-time gross settlement service with integrated clearing functionality to support faster payments in the United States," that "would process individual payments within seconds ... (and) would incorporate clearing functionality with messages containing information required to complete end-to-end payments, such as account information for the sender and receiver, in addition to interbank settlement information." According to the Fed, FedNow will be available to all banks with a reserve account at the Fed. It will require banks using FedNow to make funds transferred over it available to their customers immediately after being notified of settlement.

In a November 2018 proposal, the Fed also sought comment on the possibility of the Fed creating "a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, whether those services are provided by the private sector or Federal Reserve Banks." The purpose of this tool would be to accommodate the need for banks to move funds between their accounts at the Fed continuously, including outside of business hours in real-time settlement. In the August notice, the Fed stated it was exploring whether this goal could be accomplished by expanding Fedwire Funds Service and the National Settlement Service to permit 24x7x365 real-time gross settlement. Previously, the Fed proposed expanding same-day payment settlements on Fedwire and the National Settlement Service.

Several private-sector initiatives are also underway to implement faster payments, some of which would make funds available to the recipient in real time (with deferred settlement) and some of which would provide real-time settlement. Notably, the Clearing House introduced its RTP network (with real-time settlement) in November 2017; according to the Clearing House, it currently "reaches 50% of U.S. transaction accounts, and is on track to reach nearly all U.S. accounts in the next several years."

In addition, both the Fed and private-sector companies can set joint standards, rules, and a governance framework to facilitate the adoption of faster payments, whether those systems are operated by the Fed or the private sector, and promote interoperability between systems. The Fed convened the Faster Payments Task Force, composed of more than 300 stakeholders, which has issued a number of recommendations to facilitate the adoption of faster payments.

Other countries have already introduced or are in the process of introducing RTP. According to Fed Chair Jerome Powell, "the United States is far behind other countries in terms of having real-time payments available to the general public." Businesses and consumers would benefit from the ability to receive funds more quickly, particularly as a greater share of payments are made online or using mobile technology. Some have argued that RTP would be especially beneficial to low-income, liquidity-constrained individuals as described in the " Financial Access " section above. The main policy issue regarding the Federal Reserve and RTP is whether Fed entry in this market is desirable.

The Fed bases decisions on whether to introduce new payment systems or system features on three principles:

"The Federal Reserve must expect to achieve full recovery of costs over the long run. The Federal Reserve must expect that its providing the service will yield a clear public benefit, including, for example, promoting the integrity of the payments system, improving the effectiveness of financial markets, reducing the risk associated with payments and securities-transfer services, or improving the efficiency of the payments system. The service should be one that other providers alone cannot be expected to provide with reasonable effectiveness, scope, and equity."

Stakeholders are divided over the introduction of FedNow. Some question whether, in light of these principles, the Fed can justify creating a RTP system in the presence of competing private systems. Some fear that FedNow will hold back or crowd out private-sector initiatives already underway and could be a duplicative use of resources. The Treasury Department supports Fed involvement on the grounds that it will help private-sector initiatives at the retail level. Others, including many small banks , fear that aspects of payment and settlement systems exhibit some features of a natural monopoly (because of network effects), and, in the absence of FedNow, private-sector solutions could result in monopoly profits or anticompetitive behavior, to the detriment of financial institutions accessing RTPs and their customers (merchants and consumers). In 2017, the Justice Department sent the Clearing House a letter stating that it did not plan to challenge the Clearing House's RTP system on antitrust grounds, based on the Clearing House's plans at that time. From a societal perspective, it is unclear whether it is optimal to have a single provider or multiple providers in the case of a natural monopoly, particularly when one of those competitors is governmental. Multiple providers could spur competition that might drive down user costs, but more resources are likely to be spent on duplicative infrastructure.

RTP competition between the Fed and the private sector also has mixed implications for other policy goals:

Innovation. Competition typically fosters innovation, but the Fed's unique cost structure could potentially undermine the private sector's success, limiting the latter's willingness to invest in innovations. Ubiquity. The Fed argues that RTP ubiquity is more likely with its involvement because it has existing relationships with all banks and because no single payment system has ever achieved ubiquity historically. However, the Fed's entry into RTP could delay the achievement of universal RTP in the next few years if banks decide to wait until FedNow is available instead of joining the Clearing House's network. Interoperability. Interoperability (the ability to make payments across different systems) is more difficult to achieve with competing firms, but the Fed argues that if no single RTP system is ubiquitous, the ability of any two given institutions to exchange funds is improved if competing systems increase ubiquity. The ability to make payments across ACH networks is an example of how interoperability has currently been achieved between competing Fed and Clearing House systems. However, the technology involved in RTP may make interoperability more difficult. In its proposal, the Fed did not commit to ensure interoperability, but stated that it was a desirable goal. Equity. The Clearing House has attempted to assuage equity concerns by pledging access to its system on equal terms to all banks, regardless of size, but these terms could change, and small banks have raised concerns that they may since the system is owned by large banks. The Clearing House has pointed to the Fed's volume discounts for existing payment systems as evidence that FedNow may not be equitable, however. Security. Security across competing systems could be difficult to coordinate, but systems might also attempt to compete by providing better security features. The Fed argues that competing RTP systems reduces operational and systemic risks because a system with only one provider has a "single point of failure." Repeated data breaches at large financial institutions also point to the difficulty of monitoring cybersecurity in private systems, although government has also proven to be vulnerable to data breaches as well. The Fed states that "participating banks would continue to serve as a primary line of defense against fraudulent transactions, as they do today ... " under FedNow.

The Fed, and by extension the taxpayer, is exposed to default risk because of its provision of intraday and overnight credit (some of which is uncollateralized) when banks use its payment and settlement systems. Currently, when banks use Fed payment and settlement systems, the time lag between payment and settlement can cause mismatches in the amounts due and the amounts available in their accounts. As a result, the Fed extends intraday credit for a fee (if uncollateralized) to avoid settlement failures. Daily overdrafts have been relatively low in recent years, but peaked at $186 billion during the 2007-2009 financial crisis. Introducing real-time payments with deferred settlement could increase the use of intraday credit. The Fed does not state in its final rule whether it expects the level of intraday credit to be affected under FedNow, although it notes that it might need to extend the availability of intraday credit to off-hours. Note that the Fed provides this credit to reduce systemic risk to the banking system, so eliminating intraday credit has the potential to reduce financial stability.

RTPs offered by the private sector could fit into the existing regulatory framework. The Fed already regulates and supervises private payment systems for risk management and transparency, but not pricing. RTP could potentially alleviate some existing risks (e.g., if settlement is in real time, credit risk is reduced for the recipient institution) while posing new risks (e.g., RTP requires more active liquidity management). Any RTP system and regulation would need to account for these changing risks.

To address systemic risk concerns, a private RTP system could be designated as a systemically important Financial Market Utility (FMU) under Title VIII of the Dodd-Frank Act ( P.L. 111-203 ). The Dodd-Frank Act allows the Financial Stability Oversight Council , a council of financial regulators led by the Treasury Secretary, to designate a payment, clearing, or settlement system as systemically important on the grounds that "the failure of or a disruption to the functioning of the FMU could create or increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system." FMUs, currently including the Clearing House Interbank Payments System, are subject to heightened regulation, and the Fed has supervisory and enforcement powers to ensure those standards are met. Policymakers could consider whether systemic risk concerns are better addressed through Fed operation of payment and settlement systems or Fed regulation of private systems.

Appendix. Selected Interbank Payment, Clearing, and Settlement Systems Involved in U.S. Payments


Competition on the Edge of the Internet

Summary: Edge providers are individuals and entities that provide content, applications, services, and devices accessed over the internet. An edge provider can be a personal blog created by an individual or a website created by a billion-dollar company. Some edge providers sell products or subscriptions, while others sell consumer data or use it for digital advertising. Edge provider activities, conducted on the "edge" of the internetâhence the nameâare not regulated by the Federal Communications Commission (FCC).

Summary: Edge providers rely on internet service providers (ISPs) and mobile carriers to deliver content to users. Some companies that operate as ISPs have become edge providers, and a few edge providers with substantial financial resources have become or intend to become ISPs. This has the potential to affect competition among edge providers, as an ISP may have incentives to prioritize content from affiliated edge providers. To deliver content at speeds similar to edge providers associated with ISPs, unaffiliated edge providers may choose to incur the costs of direct connections to users' ISPs. Other unaffiliated edge providers may build or pay to use another company's content delivery networks, which use geographically dispersed servers to deliver online content and services more quickly. Mobile carriers that also serve as edge providers can also have a competitive advantage. For example, they can include their own apps on mobile devices for free, while charging other edge providers a fee. Mobile carriers can also allow users to access content from affiliated edge providers without incurring charges on the users' data plans. These actions could affect net neutrality, a term associated with the concept that all data traveling through the internet should be treated in a nondiscriminatory manner.

Summary: Some edge providers are acquiring other edge providers for a variety of reasons, including to increase their customer base, to improve the content or services offered, or to eliminate potential competitors. By increasing its customer base, an edge provider could enhance its market position, increasing its leverage in bargaining with ISPs over the speed and quality with which its content is delivered. An edge provider that relies on digital advertising could also benefit from enlarging its customer base, as this would allow it to send advertisements to more individuals and sell more advertisement spaces to advertisers. It may be difficult to distinguish between acquisitions intended to improve the content or services offered and those seeking to eliminate potential competitors. While consumers generally benefit in the former case, the latter case could have negative effects, such as hindering innovation.

Summary: While the FCC does not regulate edge provider activities, the Federal Trade Commission (FTC) and Department of Justice (DOJ) may examine edge providers on a case-by-case basis for potential consumer privacy or antitrust violations. The FTC, DOJ, and at least 47 attorneys general have reportedly opened antitrust investigations of possible anticompetitive behavior, reportedly including Google, Apple, Facebook, and Amazon. The House Judiciary Committee also opened an investigation into competition in digital markets.

Summary: A key question in these investigations is how to define the markets within which edge providers compete. Oftentimes, edge providers offer products and services that can be classified under multiple industries. For example, do video streaming services compete only with each other, with cable networks and movie theaters, or with the entertainment industry as a whole? Should a diversified company be examined as a unified entity, or should its edge provider component be evaluated separately? Estimating the market shares of edge providers that rely on revenue from digital advertising is further complicated by the difficulty of determining "sales" for these companies, as they may not obtain revenue from offering their content to users.

Summary: Some edge providers now operate in multiple industries. Some companies have integrated vertically, both generating content as edge providers and delivering it to consumers as internet service providers (ISPs). Other companies have integrated horizontally by acquiring other edge providers, which could increase their customer base and expand the content or services offered, but also eliminate potential competitors. This report focuses on how horizontal and vertical integration may affect edge providers' relationships with ISPs and competition among edge providers.

Around the world, people use websites on their computers and apps on their mobile devices to access information and services. Creators of these websites and apps are known as "edge providers." The Federal Communications Commission (FCC) first used the term in 2010 to refer to individuals and entities "providing content, applications, services, and devices accessed over or connected to broadband Internet access service." Such activities, conducted on the "edge" of the internetâhence the nameâcan range from an individual creating a personal blog to a billion-dollar company creating a website. At that time, the FCC determined that it would not regulate edge provider activities. Instead, similar to other businesses, edge providers may be examined by the Department of Justice (DOJ) and Federal Trade Commission (FTC) on a case-by-case basis for potential violations of consumer protection or antitrust statutes.

Federal agencies and Congress are investigating competition among edge providers, particularly companies with large amounts of revenue. The FTC, DOJ, and at least 47 attorneys general are reportedly looking into whether select edge providersâreportedly including Google, Apple, Facebook, and Amazonâhave violated antitrust laws. A House Judiciary Committee investigation into competition in digital markets has raised the question of whether existing antitrust laws, competition policies, and current enforcement levels are adequate to address competition issues among edge providers. Competition is generally viewed as a means to ensure low prices for consumers and to spur innovation. Some have raised concern that competition is being harmed by a few dominant edge providers and that regulations may be needed.

This report examines the potential effects of edge providers' expansion on competition. Due to acquisitions or growth, some edge providers now operate in multiple industries. Some companies have integrated vertically, both generating content as edge providers and delivering it to consumers as internet service providers (ISPs). Other companies have integrated horizontally by acquiring other edge providers, which could increase their customer base and expand the content or services offered, but also eliminate potential competitors. This report focuses on how horizontal and vertical integration may affect edge providers' relationships with ISPs and competition among edge providers.

In its 2010 Open Internet Order, the FCC first referred to individuals and entities "providing content, applications, services, and devices" over the internet as "edge providers." These can be search engine providers, streaming video or music services, social media platforms, retailers, or other types of businesses. An edge provider can be a blog or personal website maintained by an individual, making it difficult to distinguish between edge providers and end users. It can also be a website maintained by a company that generates billions of dollars in revenue. An edge provider can serve as a conduit for content created by others instead of or in addition to content created by the company itself. Some of the content may be subject to licenses granted by copyright holders, while other content might not face any copyright restrictions. This report focuses on companies that operate at least one edge provider.

Some edge providers generate revenue by selling products or subscriptions to their content. Others offer their content for free and generate their revenue by using information provided by their users to sell advertising spaces or by selling the information itself. In the third quarter of 2019, Facebook, one of the largest edge providers as measured by market capitalization, reported $17.4 billion in revenue from advertising, which made up 98% of its total quarterly revenue. Google, another large edge provider, reported $33.9 billion in advertising revenue for the same quarter, which made up 84% of its total quarterly revenue.

ISPs and mobile carriers connect edge providers with those who use their content. On mobile devices, edge providers generally provide their content over apps. Consumers typically obtain apps from online app stores such as Google Play and the Apple App Store. Browser appsâsuch as Chrome, Safari, and Firefoxâallow users to access other edge providers' websites, similar to a browser on a computer. To access the content on apps, users need a data plan from their mobile carrier or a wireless connection to an ISP.

Figure 1 presents a simplified example of how edge providers interact with ISPs and users. In this example, Content Provider (CP) A relies on digital advertising for its revenue: advertisers pay CP A to place an ad, and in turn receive revenue from users who pay for the advertised product. CP B receives a direct payment for its content from users. Both edge providers pay the ISP a termination fee to bring the content to the terminal point, the user. Users pay the ISP a subscription fee to access the data provided by CP A and CP B.

In reality, the process can be more complicated. An edge provider may rely on a different ISP than its users' ISPs, in which case the content would travel through the internet backbone. The internet backbone consists of various networks linking servers and multiple ISPs together. An edge provider may also have direct connections to multiple ISPs or upload its content directly onto the internet backbone. While details on how the internet operates are beyond the scope of this report, a key factor in competition among edge providers is the role ISPs have in the relationship between edge providers and their users.

Edge providers depend entirely on ISPs and mobile carriers to deliver their content to users. A growing number of companies operate both as edge providers and as ISPs, becoming vertically integrated (i.e., operating at multiple stages along a supply chain). Thus, companies that both generate content and deliver it to users are competing with others that either solely generate content or solely deliver it to users.

Companies that started in the telecommunications and media industries are now among the most popular edge providers. Of the 16 edge providers that attracted the largest number of users in the United States in July 2019 ( Figure 2 ), six â Google, Facebook, Amazon, PayPal, Twitter, and the Weather Companyâstarted as edge providers.

Examples of ISPs Becoming Edge Providers

AT&T. AT&T owns part of the internet backbone and is considered a Tier 1 ISP, meaning it has free access to the entire U.S. internet region. It is also a mobile carrier and provides voice services and video programming. In 2018, AT&T acquired Time Warner, a content creator that owns HBO and its affiliated edge provider HBO NOW, as well as other cable channels. The DOJ unsuccessfully attempted to block the merger. AT&T has announced plans to introduce a new edge providerâHBO Maxâto stream video programming for no extra charge to AT&T customers who are also HBO subscribers; other customers will reportedly be charged a subscription fee.

Comcast. Comcast is an ISP, a cable television service, and a voice service provider. In 2011, Comcast became the majority owner of NBCUniversal, which owns television networks and broadcast stations, and thus obtained minority ownership of Hulu, an edge provider that streams video programming to subscribers. In 2019, Walt Disney Company obtained "full operational control" of Hulu, but Comcast retained its 33% financial stake. Comcast also announced plans to launch its own video streaming service, Peacock. Comcast reportedly plans to offer three subscription options for Peacock: a free option supported by ads, a premium version with more programming for a fee, and the premium version with no ads for a higher fee. The premium version is to be offered for free to subscribers of Comcast and Cox Communications.

Verizon. Verizon owns part of the internet backbone and is considered a Tier 1 ISP. It is also a mobile carrier, and offers video, voice, and ISP services. In 2015, Verizon acquired AOL, an ISP and edge provider, and in 2016, it acquired the core business of Yahoo, an edge provider. It combined the edge provider products from these acquisitionsâsuch as Yahoo Finance, Huffington Post, TechCrunch, and Engadgetâin 2017 to create Oath.

Examples of Edge Providers Becoming ISPs

Google. Google is the largest subsidiary of the company Alphabet. It offers multiple products, including a search engine, email server, word processing, video streaming, and mapping/navigation system. Google generally relies on other ISPs to deliver its content, but entered the ISP market in 2010 when it announced Google Fiber. Google Fiber provides broadband internet service and video programming. Beginning in 2016, it suspended or ended some of its projects; as of October 2019, it had installed fiber optic cables in 18 cities.

Facebook. As it attracted more users, Facebook expanded from providing an online platform that connects users to an online platform suitable for various activities, including fundraising, messaging, and commerce. In 2018, a spokesman confirmed that Facebook was pursuing another project, dubbed Athena. Athena is an experimental satellite that would beam internet access through radio signals. If successful, Athena would enable Facebook to become an ISP.

Amazon. In addition to being a major online retailer, Amazon offers information technology infrastructure services through Amazon Web Services. In 2019, Amazon confirmed plansâdubbed Project Kuiperâto launch 3,236 satellites into low-Earth orbit to provide broadband internet across the world. If successful, Project Kuiper would enable Amazon to become an ISP.

Edge providers can compete in various ways. A few examples include offering new content or services, advertising their content, or acquiring potential competitors. Subscription-based edge providers can lower their fees, offer discounts for referrals, or use price promotions to attract new users. This report focuses on the potential effects of vertical integration (e.g., where a company operates as both an edge provider and an ISP) as well as horizontal integration (e.g., where an edge provider acquires another edge provider).

Common indicators used to determine the level of competition in a market include measuring its concentration and changes in the number of establishments. Market concentration is determined by examining whether most sales are concentrated among a few firms or dispersed among a large number of firms. Changes in the number of establishments can be used as an indicator as well, particularly when firm-level sales are unavailable. For example, if the total number of stores in a market is decreasing, it can suggest, but does not demonstrate, that competition is decreasing.

To use these indicators to measure competition in a market, one must first define its scope. A common method of defining a market's scope is to use the North American Industry Classification System (NAICS). Two industries that consist of only edge providers are "Data Processing, Hosting, and Related Services" (NAICS 519130) and "Internet Publishing and Broadcasting and Web Search Portals" (NAICS 518210). Figure 3 shows that the number of establishments in both industries has increased over the past decade. However, most users seeking specific types of content obtain it from only a few edge providers. For example, data from August 2019 show that among social network websites, 95% of the visits from the users in the United States went to three websites: Facebook, Pinterest, and Twitter ( Figure 4 ). Similarly, data from June 2019 show that among mobile social networking apps, the three most popular among users in the United States were Facebook, Instagram (owned by Facebook), and Facebook Messenger ( Figure 5 ).

Edge providers compete for users based on content and quality of services offered. To increase the number of users, edge providers attempt to provide content that is in high demand and to ensure that the content is delivered as seamlessly as possible. In response to network congestion, most content used to be delivered on a "best effort" basis because most of the content was not time-sensitive (e.g., email). The "best effort" basis does not guarantee that content will be delivered by a certain time or at a certain speed. This meant that some content was held at a congestion point until a future time, while other content was dispatched in real time. While this practice was suitable for some content, it became problematic for edge providers sending time-sensitive content. Interruptions, latency, or delays in transferring data lower the value of time-sensitive content (e.g., video programming). As a result, some edge providers have been given the option to pay network managers, including ISPs, to ensure their content would be given priority, an industry practice known as paid prioritization.

Another practice to ensure a more consistent quality of service is to avoid potential congestion points by bypassing parts of the network. For example, edge providers can pay ISPs for a direct connection to their networks, or edge providers can build their own content delivery network (CDN) or pay to use another company's CDN. Examples of CDNs include Microsoft's Azure or Amazon's CloudFront, which is available through Amazon Web Services. A CDN distributes online content and network services from servers located as close as possible to users' ISPs to avoid potential congestion points and reduce the bandwidth needed to send the content; a CDN may also have a direct connection to users' ISPs. As a result, CDNs can serve as a digital intermediary between users' ISPs and other edge providers.

Congress and the FCC have considered edge providers' access to end users over the internet under the rubric of "net neutrality," a term associated with the concept that ISPs should treat data in a nondiscriminatory manner, regardless of the size or type of content. Policy discussions on net neutrality have focused on the role of the ISP in delivering content to end users. Concerns over practices ISPs might use to manage the flow of content, such as blocking, throttling, and paid prioritization, have become major discussion points. Although the FCC placed a ban on such practices when it issued the 2015 Open Internet Order, the restrictions were subsequently removed by the FCC with the issuance of the 2017 Restoring Internet Freedom Order. Congress has considered bills both banning or removing bans on such practices.

The ability to pay ISPs for direction connections or prioritization of content could affect competition among edge providers. Although some see paid prioritization as a management tool that ensures time-sensitive content receives priority, others view it as a means to discriminate among content. A nascent edge provider may not have the financial resources to pay for prioritization or for a direct connection, meaning its content could be delivered more slowly than content from competing edge providers that can afford these payments. The potential competitive imbalance between nascent edge providers and more established ones may be further exacerbated by the growing number of vertical mergers.

Effect of Vertical Integration on Competition

Some of the companies edge providers rely on for distribution are also their competitors because of vertical integration among edge providers and ISPs. For example, while Netflix works with Comcast to deliver its content, Comcast is also its competitor as the operator of cable systems, a partial owner of Hulu, and the owner of the planned video streaming service Peacock.

Vertical integration could affect competition among edge providers. Companies that operate as both an ISP and edge provider may have a competitive advantage with the quality of content delivery over edge providers that have not paid for a direct connection to the ISP's network. Companies that pay for a direct connection to the network may also be at a competitive disadvantage because they incur an additional cost to obtain a connection that vertically integrated edge providers do not. Edge providers that also operate as CDNs may similarly benefit from better connections to ISPs without incurring a cost borne by edge providers that are not integrated with CDNs or ISPs. For example, Netflix pays Amazon to house its content on Amazon Web Services, although it competes with Amazon Prime Video, which also offers video streaming services. Vertically integrated companies associated with an ISP or CDN could also potentially prioritize their own edge providers' content over rivals' content.

Similar concerns affect companies that operate as both edge providers and mobile carriers. Edge providers that are also mobile carriers can include their own apps on their customers' mobile devices for free and retain all of the profits from those apps. In contrast, competing edge providers may be charged a feeâsuch as an initial payment or a percentage of salesâfor including their apps in the app store. In this case, nonaffiliated edge providers would face a cost that edge providers affiliated with mobile carriers do not.

Edge providers associated with mobile devices in general may also have similar advantages. For example, in 2005, Google acquired Androidâan operating system for mobile devicesâand further developed the software thereafter. Google was fined â¬4.34 billion ($5.05 billion) by the European Union (EU) for anticompetitive practices related to Android. Specifically, the European Commission determined that Google violated EU antitrust law by "bundling" its Play app store with its Search and Chrome apps (i.e., by requiring smartphone manufacturers that preinstalled the Google Play store to preinstall Google Search and Google Chrome). The ruling stated that by doing so, Google reduced the ability of rival search engines and web browsers to compete effectively, as consumers with Google Search and Google Chrome preinstalled on their devices were less likely to download competing search engines and web browsers.

Some ISPs, particularly mobile carriers, have introduced "zero rating" or sponsored data plans. These plans allow subscribers to consume specific content or services without incurring charges against the subscriber's usage limits. For example, Facebook's Free Basics is a mobile phone app available through various mobile carriers in 65 countries. It provides free access to a limited selection of services and websites, including Facebook. It was banned by the Telecom Regulatory Authority of India for being anticompetitive by offering free access only to online services owned or controlled by Facebook. Similarly, critics claim that these plans favor edge providers affiliated with ISPs and those that are entrenched and well financed. However, supporters claim that these plans encourage consumers to try new services, particularly those that require large amounts of data.

By combining consumer data collected by its ISP and edge provider components, a vertically integrated company may also have a competitive advantage through its ability to send targeted advertisements. In proposing to acquire Time Warner in 2018, AT&T chief executive Randall Stephenson stated that the merger would expand AT&T's access to customer and viewer data, allowing it to run targeted advertisements, which tend to be more profitable. Some state legislatures have passed or introduced legislation restricting how ISPs may collect or share consumer data; Congress has not passed similar legislation at the federal level. California has enacted data protection legislation, the California Consumer Privacy Act, which went into effect on January 1, 2020. It provides California residents the right to access, delete, and share personal information collected by businesses, including edge providers and ISPs.

Consumers could benefit from the economic efficiencies obtained from edge providers' vertical integration with ISPs or mobile carriers by receiving content at faster speeds and lower prices. Vertically integrated edge providers could pass on to consumers the cost savings of not paying for a direct connection to the ISP network. For example, subscribers to a streaming service owned by an ISP may be able to receive its content more smoothly and at lower cost than subscribers to a streaming service not affiliated with an ISP. Free apps could benefit consumers as well.

Vertical integration may also benefit consumers by increasing competition among ISPs. Currently, individual users in many areas have access to a limited number of internet providers because of the high costs associated with broadband deployment. If edge providers enter the ISP market, consumers may benefit from an increase in provider options, potentially resulting in lower prices and/or faster speeds. For example, one study credits Google Fiber for encouraging faster speeds, lower prices, and/or network upgrades among competing ISPs. However, the competitive benefit of edge providers entering the ISP market may be undermined by reduced competition among edge providers.

Effect of Horizontal Integration on Competition

Through mergers and acquisitions among themselves, edge providers have integrated horizontally. Facebook has made at least 79 acquisitions, including Instagram, WhatsApp, Oculus VR, and Chai labs. Google has made over 200 acquisitions, including DoubleClick, Waze, Nest, and YouTube. In some cases, edge providers have acquired companies with unique technologies in the early stages of development, foreclosing potential competition. Whether such acquisitions should be reviewed in the context of antitrust enforcement is controversial. Some commentators advocate limiting mergers among edge providers or breaking up large edge providers to increase competition, while others view mergers as a natural result of a competitive market in which more successful firms acquire smaller ones.

Edge providers can benefit from acquiring other edge providers that offer different content or services. They can participate in a diverse set of online markets, expand or improve their content, or eliminate potential competitors. Google's acquisition of YouTube enabled it to gain a stronger footing in the online video market. Facebook acquired Divvyshot to improve its photo-sharing platform, particularly for mobile devices. These acquisitions can be viewed as integrating media platforms to improve end users' experience, a positive byproduct of competition, or as reducing competition by preventing the growth of other edge providers. Some have criticized Facebook's acquisition of Instagramâa photo and video-sharing social media appâand advocate for breaking up Facebook and Instagram; critics include some Members of Congress.

Horizontal integration may increase an edge provider's customer base, which may give it greater bargaining power with ISPs. Because edge providers rely on ISPs to deliver their content, ISPs generally have leverage over edge providers that seek access to their networks. However, edge providers with large numbers of end users may have much greater bargaining power than smaller local or regional ISPs, as they may in some cases account for a large share of an ISP's internet traffic.

By increasing their customer base through horizontal integration, edge providers can improve their market position. Edge providers that rely on digital advertising can target more individuals with digital advertisements and potentially increase the number of spaces to sell to advertisers. Edge providers can create more detailed profiles of individual users and improve their methods of targeting advertisements by combining consumer data from multiple sources. Some edge providers have acquired firms that control tools used to buy and sell digital advertising, such as advertisement servers that place spaces in auctions to determine which advertisement should be selected. By controlling such tools, an edge provider could have a competitive advantage against other edge providers that need to pay to use these tools.

Concern about control of digital advertising tools has focused on Alphabet, which has acquired and incorporated into Google several digital advertising tools, including DoubleClick, AdMob, and Admeld. These acquisitions helped Google become the largest seller of digital advertising. Google has reportedly waived fees for using multiple components of its advertising services, bundling them together. This could make it difficult for rivals to offer competing services. Google reportedly required advertisers to use its advertising services to purchase advertisement spaces on YouTube, and used data collected from its edge provider services (e.g., Gmail and Google maps) in its advertising server. The DOJ and state attorneys general are reportedly investigating Google's use of its advertising products.

The vertical integration of edge providers and ISPs creates a situation in which certain activities of a company may be regulated by the FCC while closely connected activities are not. On June 15, 2015, Consumer Watchdog, a nonprofit organization that advocates for taxpayer and consumer interests, filed a petition requesting the FCC to regulate edge providers and prevent them from "tracking personal information and web activity without consumers' knowledge and permission." The FCC dismissed the petition on November 6, 2015, citing its 2015 Open Internet Order, which stated that the FCC would not regulate any internet content. The 2017 Restore Internet Freedom Order reversed the 2015 Open Internet Order by reclassifying ISPs under Title I, but it also did not address the regulation of edge providers. Thus, pursuant to the 2015 Open Internet Order, the FCC has left oversight of edge providers to other agencies, principally the FTC and DOJ. The FTC deals with consumer privacy issues under its broad authority to prohibit unfair and deceptive trade practices, and the FTC and DOJ deal with unfair methods of competition that may violate antitrust laws.

The FTC has expanded its examination of consumer data privacy concerns from its initial edge provider focus to include vertical integration by ISPs. On March 26, 2019, the FTC issued orders to seven ISPs to obtain information on how they collect, retain, use, and disclose information about consumers and their devices. The order specifically addressed the need to better understand ISPs' privacy practices because their vertical integration allows them to provide advertising-supported content produced by related entities within the companies.

The FTC and DOJ opened antitrust investigations of possible anticompetitive behavior by "Big Tech" firms, reportedly including Google, Apple, Facebook, and Amazon. On September 6, 2019, the attorneys general of eight states and the District of Columbia announced an investigation of Facebook and Google for possible antitrust violations. By October 22, 2019, the number of participating attorneys general had reportedly grown to 47.

A key question in these antitrust investigations could be determining the market for edge providers. Generally, a market is established based on specific goods or services, and their substitutability with other goods and services. However, because some edge providers offer multiple goods and services that could be classified in multiple industries, it has become difficult to determine which market(s) these edge providers belong in. For example, should each product sold on Amazon (e.g., clothes, children's toys, books) be placed in a separate market? If so, should products that are sold by another company on Amazon's website be considered Amazon's products or the selling company's products? Are physical books sold on Amazon in the same market as its Kindle e-books or its Audible audiobooks? Competition analysis generally involves defining the market of a product, which can be particularly complex in the analysis of edge providers.

Determining the market share for edge providers that rely on digital advertising rather than selling tangible products may be even more complicated. In addition to the complexity of defining which market some of these edge providers fall in, it can be difficult to determine their "sales," as they generally do not obtain revenue from offering their content to users. These edge providers obtain revenue from selling advertisement spaces using users' data or from selling users' data directly. Should the market share for these edge providers be determined by the total advertising revenue obtained from each website or by the amount of user data collected? In the latter case, how should user data be "priced"? Should all edge providers that rely on digital advertising be compared to each other in one market, or should these edge providers be separated based on content?

On June 3, 2019, the House Judiciary Committee announced that it would begin an investigation into competition in digital markets. It has held five hearings, which have raised questions and discussions including or related to the topics covered in this report. Among the major questions related to edge providers that Congress may wish to consider are the following:

How does vertical integration among ISPs and edge providers affect competition? One of the difficulties in answering this question is the inability to evaluate how the market would have developed absent vertical integration. For example, vertical integration may lead to greater innovation in some cases, but to less innovation in others. It is also unclear how the effect of vertical integration on competition should be measured. As many users of edge providers' services do not pay for those services in a monetary sense, price effects, which are traditionally used to evaluate the extent of competition, may not be a sufficient measure. How could inequities in the amount of consumer data obtained by edge providers affect competition in the future? Consumer data may become increasingly important as machine learning and artificial intelligence technologies are further refined. It could be used to predict behavior among consumers or provide other competitive advantages for edge providers with large amounts of consumer data. Should competition among edge providers be regulated, and if so, to what extent? While the DOJ and FTC examine specific companies on a case-by-case basis for consumer protection or antitrust violations, the establishment of a regulatory framework could help prohibit anticompetitive practices. However, regulations may also disadvantage potential entrants while strengthening incumbents, and may impede innovation. Edge providers offer a wide variety of products and services, which could complicate the establishment of a single regulatory framework. However, other aspects of competition among edge providers, such as their relations with ISPs, are a matter relevant to all edge providers.