VIEWS: 6 PAGES: 19 POSTED ON: 4/22/2012
Experienced A New Regulatory Era for Financial Specialized Services: Impacts to the Payments Accomplished Industry Cost-Effective NACHA Council MEGA Meeting Collaborative September 30, 2010 Dodd-Frank To Affect the Payments Industry in 4 Key Areas: Durbin Amendment 1: Likely reduction of interchange fees on debit and general-use prepaid cards Durbin Amendment 2: Restrictions on exclusive network and routing arrangements, payment forms, and transaction value minimums/maximums Bureau of Consumer Financial Protection (BCFP) Preemption 2 Durbin Amendment 1: Likely reduction of interchange fees on debit and general-use prepaid cards The Federal Reserve Board (FRB) and BCFP will have final say on whether debit card interchange fees proposed by payment networks are “reasonable and proportional” to their actual processing costs. Applies to both signature and PIN-based debit cards and to general-use gift cards, but not initially to payroll cards and other reloadable prepaid cards that are not marketed as gift cards (e.g., EBT cards). The exemption for these cards is an attempt to protect the unbanked from being driven to non-bank entities for their financial needs. Merchants permitted to offer discounts for non-card purchases (e.g., cash) as well as the power to require a $10.00 minimum purchase amount for credit card transactions. 3 Durbin Amendment 1: (cont…) These changes are codified in Section 1075 of the Dodd-Frank Act, which amends the Electronic Fund Transfer Act by adding a new Section 920, entitled Reasonable Fees and Rules for Payment Card Transactions. The new Section 920: Authorizes the FRB to prescribe regulations “regarding any interchange transaction fee” and “to prevent circumvention or evasion” of such regulation. Prescribes that interchange fees for electronic debit transactions be “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” Permits the FRB to adjust “reasonable fees” to offset issuers’ “reasonably necessary” costs incurred in preventing fraud. Authorizes the FRB to collect information from issuers and their agents or networks and requires public disclosure of information on costs incurred and interchange transaction fees charged or received by issuers “as the Board considers appropriate and in the public interest.” 4 Durbin Amendment 1: (cont…) Durbin Amendment applies to debit card issuers with over $10 billion in assets These issuers would have to charge debit card interchange fees that are "reasonable and proportional to the actual cost" of processing the transaction. There are one-year exemptions for debit or general use prepaid cards issued in connection with government benefit programs and all general purpose reloadable prepaid cards that are not linked to asset accounts and are not marketed as gift cards. Institutions with less than $10 billion are exempt but may not escape unharmed: Two-tier system will be difficult to implement at the POS; Retailers may find a way to favor cards from big issuers since they will have lower interchange costs; Market forces may require smaller financial institutions to cut their interchange fees to compete with bigger institutions for customers. 5 Durbin Amendment 1: (cont…) The Durbin Amendment requires the FRB to issue interchange fee regulations within 9 months from enactment of the Dodd-Frank Act (i.e., by March 21, 2011), and the fee regulations are to take effect by July 21, 2011. This is an accelerated rulemaking timeline for the FRB, especially when compared to the CARD Act. The regulations required by the CARD Act were more straightforward (e.g., prohibiting overdraft fees unless consumers opt-in) By contrast, DFA asks the FRB to answer a very complex and difficult question: how much does it cost to run a debit card transaction? The FRB will have only nine months to go through the following steps and arrive at an answer to that question: Collect information on the relevant costs and how they differ across the industry as well as geographically; Make a judgment based on the gathered information as to how interchange fees should be set; Draft and publish a regulation in the Federal Register for comment. Accommodate feedback and comments on the proposed regulation and write the final regulation. 6 Durbin Amendment Part 2: Routing and Network Exclusivity Restrictions Durbin Amendment also imposes several prohibitions on anti- competitive transaction practices. The new rules: Require issuers and payment card network operators to offer merchants at least two unaffiliated payment networks through which to process a debit transaction. Allow merchants to choose which of the unaffiliated payment networks will be used to route transactions without fees, restrictions or other rules that may inhibit the freedom to choose a routing network. Allow merchants to offer discounts for certain forms of payment (e.g., cash). Allow merchants to set a $10.00 minimum for credit card (but not debit card) transactions, provided they do not discriminate between issuers or payment networks. 7 Durbin Amendment 2: (cont…) Prohibitions on exclusivity: these rules prohibit an issuer or payment card network operator from restricting the number of payment networks through which an electronic payment can be processed to less than two, and make it clear that the second network cannot be owned or operated by or affiliated with the first payment network Banks which issue debit and prepaid cards with ATM access under one umbrella brand (such as Visa and Plus or MasterCard and Cirrus) would be required to enter into an agreement with at least one other non-affiliated network to meet the two-network requirement Thus, issuers of ATM-accessible debit and prepaid cards will be required to contract with at least two Electronic Funds Transfer (“EFT”) networks and will have at least a second, nonaffiliated EFT logo on their cards 8 Durbin Amendment 2: (cont…) Provisions on routing restrictions: these rules prohibit any issuer or payment network from inhibiting the ability of any merchant or retailer who accepts debit cards to direct the routing of electronic debit transactions for processing A merchant must be permitted to process transactions through any payment card network that is available—without fees, restrictions or other rules that may inhibit the freedom to choose a routing network. The drafter’s intention was to ensure, even if there is a second, non-affiliated EFT logo shown on a prepaid or debit card, that the issuer cannot add fees, restrictions, penalties or otherwise inhibit the merchant from using the other unaffiliated EFT network. The FRB will need to provide more clarity on these two related provisions but for now, it appears that issuers of debit and general- purpose prepaid cards providing access to ATMs must have a second, non-affiliated EFT logo on the card and ensure that there are no contractual or procedural restrictions that would inhibit a merchant from using the alternate network. 9 Durbin Amendment 2: (cont…) Restrictions on offering discounts for use of non-card payment forms: These provisions will prevent payment card networks from inhibiting the ability of any merchant or retailer to provide a discount or incentive for payment by the use of cash, checks, debit cards or credit cards, provided that the discount or incentive “does not differentiate on the basis of the issuer or the payment card network.” The purpose of the provision is to allow discounting between payment methods generally (for example, giving more favorable pricing for those who use debit cards rather than credit cards) but without favoring particular issuers. This ensures merchants don’t discriminate against smaller banks, whose cards may have higher interchange, in favor of larger banks, whose cards are subject to the Durbin Amendment interchange restrictions. The effect of this provision may be to encourage more favorable prices for cash over credit, debit or prepaid. 10 Durbin Amendment 2: (cont…) Credit card transaction minimums and maximums: Merchants are permitted to set transaction minimums of no more than $10 for credit card purchases. The Act permits federal agencies and institutions of higher learning to impose maximum caps on credit card transactions, provided that the maximums do not differentiate between issuers or payment networks. Minimum and maximum transaction amounts apply only to credit cards, and do not apply to debit card transactions. 11 Durbin Amendment: Impact on Payment Industry Players How will the Durbin Amendment affect each of the players in the payment value chain? Merchants will set minimum purchase amounts for consumers to use cards; may offer cash discounts or charge a surcharge to use a credit card; and will see lower processing costs for debit cards if the FRB says current rates are too high. Banks have billions in revenue at stake if the forecasted interchange revenue declines on debit transactions are realized. Discounts for non-card payment options and minimum purchase amounts will steer some transactions to cash in lieu of credit and debit. To offset these revenue losses, issuers are likely to increase fees in other areas where rate hikes are not prohibited by the recent legal changes, such as monthly fees for checking accounts, annual credit and debit card fees, upfront processing fees, balance transfer fees, cash advance fees, etc. Buyers/Consumers may have fewer payment options as they lose the ability to make low-end purchases with a credit card due to potential minimum transaction restrictions. They will also likely see an increase in overall banking fees. Community Banks and Credit Unions while outside the reach of the Durbin regulations if their revenues are under $10 billion, nevertheless worry that merchants will favor cards issued by larger institutions at the point-of-sale due to lower interchange costs. 12 Consumer Financial Protection Bureau: BCFP: Independent entity housed in the FRB with the authority to prohibit “unfair,” “deceptive,” or “abusive” practices in addition to requiring certain disclosures. The words “unfair” and “deceptive” come from the enabling legislation of the FTC. Use of the term “abusive” in this grant of regulatory scope is new and defining its meaning will produce additional regulation and litigation. An act or practice may not be deemed unfair unless it is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers, and the substantial injury is not outweighed by benefits to consumers or competition. An act or practice cannot be deemed “abusive” unless it materially interferes with the ability of a consumer to understand a term or condition of a credit, debit or stored value product or service or takes unreasonable advantage of the consumer’s: lack of understanding; inability to protect his/her interests; reasonable reliance on a person covered by the Act. A “covered person” is any person who engages in offering or providing a consumer financial product or service. 13 Consumer Financial Protection Bureau: (cont…) Who is covered by the BCFP? A “covered person” is any person who engages in offering or providing a consumer financial product or service. Selling, providing or issuing credit, debit and “stored value” cards to consumers falls within this scope. Retailers that simply sell other entities’ prepaid cards are most likely not covered, unless they are selling their own network branded reloadable products and have substantial control over the terms. Entities (such as vendors and processors) that provide a material service to a covered person in connection with the offering or provision of credit or debit product or service also are subject to BCFP regulation. 14 Consumer Financial Protection Bureau: (cont…) The President has appointed Elizabeth Warren an interim head of the Consumer Financial Protection Bureau. In the absence of a permanent director, the interim head’s authority will last until July 21, 2011 when the bureau officially absorbs and consolidates various federal agencies’ consumer-protection functions. It will likely be many months before proposed new regulations are issued, commented on and finalized, but the agency is already at work trying to merge and simplify mortgage disclosure forms. 15 Impact of Dodd-Frank on Preemption Issues Preemption before Dodd-Frank: The last fifteen years have seen a significant expansion in the extent to which state law is preempted for national banks and federal thrifts and their subsidiaries. The authority for the OTS came from the Home Owner’s Loan Act (HOLA) and for the OCC by opinions and regulations it promulgated known as the Preemption Rules. Preemption after Dodd-Frank: Dodd-Frank claws back a significant part of the above preemption authority, particularly with respect to consumer financial laws. The standard for the preemption of state law returns to the one enunciated in Barnett Bank v. Nelson: state laws can regulate national banks only where doing so does not “prevent or significantly interfere with” a national bank’s exercise of its powers. The Barnett standard also applies to federal thrifts. Dodd-Frank also provides that subsidiaries and affiliates of national banks no longer have the same preemptive rights as national banks, potentially subjecting them to regulation by all 50 states. Ultimate effect: preemption is significantly weakened. 16 Conclusion What are firms impacted by the DFA, Durbin Amendment, and CFPB to do to restore profitability to their businesses? Debit card and reloadable gift card issuers with assets of over $10 billion should participate in the rulemaking process on the subject of how interchange transaction fee amounts will be deemed “reasonable and proportional to the costs incurred” with transactions. Issuers with assets of less than $10 billion should watch the implementation or regulatory initiatives arising out of the DFA especially in the areas of capital requirements and consumer lending. Consider modifying pricing policies in response to the negative revenue impact from compliance with forthcoming regulations. 17 Links for Additional Reading Digital Transactions – Trends in the Electronic Exchange of Value: http://www.digitaltransactions.net/ Payments News – Analysis by Glenbrook partners: http://www.paymentsnews.com/ Javelin Strategy – In-depth research on the payments industry https://www.javelinstrategy.com/ Credit Slips – A discussion on Credit, Finance and Bankruptcy http://www.creditslips.org/ BuckleySandler – InfoBytes Regulatory Restructuring Report http://www.buckleysandler.com/infobytes/ 18 Questions? Andy Sandler BuckleySandler LLP 1250 24th Street, NW Washington, DC 20037 202-349-8000 firstname.lastname@example.org www.buckleysandler.com 19
"A New Regulatory Era for Financial Services Impacts to the "