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A Thing A Bigger Thing

Tuesday, September 18, 2018

Mastercard, Visa offer new terms to settle interchange lawsuit, NRF balks

V isa and Mastercard are one step closer to ending a years-long legal battle over merchant interchange. The two card brands have agreed to pay $6.2 billion to settle portions of a class action lawsuit originally filed by millions of retailers in 2005.

But retailers may not buy into it. The National Retail Federation is complaining the proposed new settlement agreement doesn’t go far enough; it wants to see reforms in how interchange is set.

Terms of the proposed agreement – revealed in Sept. 17, 2018, filings with the Securities and Exchange Commission – amend financial terms of a 2012 settlement in the original case, but do not address sought after changes to network rules. The 2012 settlement, which had been approved by a U.S. District Court judge, was rejected in 2016 by the U.S. Court of Appeals for the Second Circuit.

The Appeals Court ruled that merchants in the case had been “inadequately represented” and sent the case back to the District Court for reconsideration. The proposed new settlement still must be approved by the District Court.

Visa said in a statement that its share of the proposed settlement total is $4.1 billion, which will be covered by funds previously allocated to settle the case. “No additional funds are required for this class settlement,” the company stated.

Merchants, led by mega-retailers like Walmart and merchant trade associations, had claimed in their original lawsuit that Mastercard and Visa, which at the time were owned by banks, were inflating interchange fees in violation of federal anti-trust laws. They also challenged several Visa and Mastercard rules, including a ban on surcharging and honor-all-cards requirements.

Will merchants take cue from NRF?

The original settlement called for a distribution of $7.25 billion to merchants, but thousands of merchants, including Walmart, balked at the settlement, refusing to take their share and setting the appeals process in motion. After those merchants opted out, the price tag on the settlement shrank significantly to about $5.7 billion, according to published reports at the time.

In addition to striking down the 2012 settlement, the Appeals Court split the original case into two separate lawsuits, one focusing on monetary damages related to interchange and the other focused on card brand rules. The proposed settlement revealed on Sept. 17 only addresses the interchange case.

“After years of thoughtful negotiation, we are pleased to be able to reach this agreement and move forward in our partnership with merchants to provide consumers convenient, reliable, secure ways to pay,” said Kelly Mahon Tullier, Visa executive vice president and general counsel. “This outcome benefits all parties and enables us to focus more of our resources and attention to building the future of digital commerce together.”

Stephanie Martz, senior vice president and general counsel at the NRF, was less optimistic. “The monetary settlement doesn’t solve the problem. Swipe fees [interchange] cost retailers and their customer tens of billions of dollars a year and have been skyrocketing for nearly two decades,” Martz complained. “Ending the practices that led to these anti-competitive fees is the only way to give merchants and consumers full relief once and for all.”

Matz noted that the proposed new settlement agreement does address a key concern of merchants who opted out of the original settlement: a lifetime ban on lawsuits related to interchange. Under the new agreement, merchants would face a five-year ban on suing the card companies over interchange.

“NRF will closely watch the next phase of settlement discussions, which merchants hope will make significant changes in the way Visa and MasterCard set the complex matrix of [interchange rates] banks charge merchants,” the trade association said in a statement.

WSAA 2018 charts payments' new horizons
Monday, September 17, 2018

T he Western States Acquirers Association held its 15th annual conference Sept. 12 to 13, 2018, at the Hyatt Regency Scottsdale Resort and Spa at Gainey Ranch. Themed "Driving to New Horizons," the event highlighted trends and emerging technologies in the ever-changing payments industry. WSAA representatives said this year's conference drew 936 attendees and more than 100 exhibitors, exceeding previous attendance records.

In opening comments, WSAA president Pat Ford called the acquiring channel the heart and soul of payments, playing a critical role in the industry's evolution, digital transformation and emerging technology ecosystem. Reaffirming WSAA's core principles of networking, education, collaboration and "mixing in fun," Ford said WSAA collaborates with other regional shows and at the national level through its close ties with the Electronic Transactions Association.

Amy Zirkle, the ETA's vice president of industry affairs, agreed with Ford that collaboration is essential to payments industry growth. Her presentation, titled "Defining a New Role," referenced the ETA's vantage point at the epicenter of "payfacs, ISVs, card brands, financial institutions, technology companies, acquirers, ISOs and VARs." Zirkle said the ETA wants to be a resource and serve the industry in unique ways, bringing new functionalities and value-added solutions to the collective payments value chain.

Evolving form factors

Panel discussions further explored emerging technologies and their impact on the traditional ISO community. Concurrent breakout sessions addressed new trends in integrated POS and cardless payments, as follows:

Top-trending initiatives get fast track

Rotating 20-minute sessions highlighted four top-trending initiatives, providing insights and updates on the following initiatives:

  1. Understanding the difference between cash discount and surcharging with Ryan Sills, director of risk and compliance at Pivotal Payments

  2. Nutraceuticals and continuity with Mastercard's Jeff White, vice president of acquirer channel management.

  3. Bitcoin, cryptocurrency and blockchain – What are these? What do they mean for your business? With Tyler Wayne Sandford, owner of 10x ICO.

  4. What is the deal with payment facilitation? With Garima Shah, chief business development officer at Direct Connect.

Keynote addresses differentiation

Brand visionary and keynote speaker Ken Schmidt was former director of communications strategy at Harley-Davidson Motor Co., where he played a key role in the motorcycle company's turnaround. He recalled Harley-Davidson had just filed bankruptcy when he joined the marketing department. "I immediately called my wife and advised her to start cutting corners," he said.

The first order of business was to compare what people were saying about Harley-Davidson with what we wanted them to say about us, then figure out what we needed to do to get them to say those things, he noted. This approach helped get the job done at Harley and other leading brands, he said. Schmidt summarized his philosophy as "never do what's expected; make yourself as noticeably different as possible and have a lot more fun than you're supposed to."

WSAA conference organizers thanked event sponsors, exhibitors, committee members for their significant contributions to making the event a success, as well as digital agency DYAD Ventures for helping to brand and differentiate the annual conference on social media. Photos from opening and closing receptions and other conference highlights can be found on LinkedIn, Twitter, Facebook and Instagram under hashtag #WSAA2018.

Consumers, issuers really like debit
Friday, September 14, 2018

D ebit card issuers are reporting on-gong strong fundamentals as consumers’ nearly 10-year love affair with debit cards continues. According to the 2018 Debit Issuer Study, just released by PULSE, the debit card network owned by Discover, issuers saw year-over-year debit transaction growth increase by more than 5 percent last year.

The survey of issuers, conducted by the independent consulting firm Oliver Wymann, also revealed increases in debit card penetration, activation and usage rates in 2017 vis-à-vis 2016.

The study, which queries banks and credit unions that, combined, issue about 42 percent of debit cards in Americans’ wallets, also pointed to increased efforts by issuers to support mobile payments. In all, 86 percent of issuers support at least one mobile payment option, up from 74 percent previously, the survey found.

Changing preferences, options drive performance

After becoming a widely accepted POS option in the late 1990s, debit cards had long languished in the back of consumer wallets. But that began to change in 2008 as recessionary pressures forced many to shift away from relying on credit in favor of debit cards that access their deposits at financial institutions.

Federal Reserve payment studies reveal that U.S. consumers made 25 billion debit card payments valued at $970 million in 2007; nine years later, in 2016, they made 69.5 billion debit card payments totaling $2.56 trillion in value. At 111.1 billion payments valued at $5.98 trillion, credit card payments still outstripped debit in 2017, but the gap was narrowing.

The Fed’s data makes no distinctions between debit card payments authorized using PINs and those authorized by signatures. The distinctions aren’t that important to issuers anymore, either, the PULSE survey findings suggest.

PIN transactions were once the sole domain of EFT networks, while signature-authorized debit card payments were routed through the credit card networks. But these days, issuers are more focused on where their debit cards are being used (in-store or online, for example) as opposed to which networks they clear through, said Steve Sievert, executive vice president of marketing and brand communications for PULSE.

“The debit landscape continues to change dramatically,” Sievert said. “We’ve moved from the simple world of ‘PIN or signature’ to an array of options, including PINless and signatureless transactions at the point of sale and biometric authentication in digital commerce and mobile wallets. Meanwhile, advances in payments and a stronger overall economy are resulting in improvements in debit’s key performance indicators,” he added.

Improved performance indicators uncovered by the study include:

Revenue improvements best pre-Durbin

All of these factors combine to make debit a more profitable proposition for issuers. According to the survey, total issuer revenues now exceed revenues reported prior to debit interchange caps, which were ushered in by the Durbin Amendment to the Dodd-Frank Act. “Although per-transaction interchange has declined since the regulation was implemented, card usage has risen every year,” PULSE noted in a presentation on the survey findings.

Federal Reserve regulations that implement the Durbin Amendment cap debit card interchange at 22 cents plus 0.05 percent of the transaction. But the rule applies only to issuers with $10 billion, or more, in assets. Issuers subject to interchange caps earned an average blended rate of 24 cents per transaction, or $69 per debit card, in 2017 the survey found. Issuers exempt from the cap earned 39 cents per transactions, on average, or $118 per card.

AmEx under scrutiny for alleged foreign exchange scam
Wednesday, September 12, 2018

A merican Express Co. stock fell $1.61 per share on Sept. 6, 2018, following reports of an FBI investigation of the company's foreign exchange business unit. Unconfirmed rumors of a bait and switch scheme were first reported July 30, 2018, by the Wall Street Journal. In "American Express Gave Small Businesses One Rate, Then Secretly Raised It," WSJ journalist AnnaMaria Andriotis alleged the company's foreign-exchange unit was recruiting small business clients with offers of low currency-conversion rates, then "quietly raising prices."

Andriotis suggested the practice may have been going on since 2004, presumably as a ploy to boost revenue and employee commissions. Her sources include current and former AmEx employees, who attribute the practice to the company's "commissions-driven culture." In one example, Andriotis reported a former AmEx employee said he was told during forex training to "sign up as many accounts as he could in his early days and to go back later and adjust the rates upward to hit revenue targets."

Androitis went on to state that salespeople "would often tell potential clients that AmEx would beat the price they were paying banks or other financial institutions to convert currency and send money abroad. The salespeople didn't inform customers that the margin, a markup that AmEx tacks on to the base currency exchange rate, was subject to increase without notice, they said."

Shop Small fallout

Payments analysts noted that AmEx has championed small business causes, both as a payment card issuer and as founder of the Shop Small Movement, a nationwide initiative designed to encourage consumers to support local businesses. They find it odd that a company that has dedicated resources and revenue to small business owners would reward salespeople for unfairly targeting the same demographic.

"It must be the same training school that Wells Fargo used for its salespeople," said George Sarantopoulos, CEO and founder of Access One Solutions. "This corporate doublespeak is fairly typical in this day and age; a big company says one thing and acts completely different."

From a revenue standpoint, the forex unit represents "less than half of a percentage point of AmEx's total revenue," but is integral to the company's suite of services for small and midsize business owners, according to Andriotis.

AmEx spokeswoman Marina Norville said the company takes the allegations seriously and will investigate further to determine if sales practices are consistent with the company's training, control and compliance standards. "If we find that we fell short of the mark, we will fix the problems and take appropriate actions to make sure it doesn't recur," she stated.

Legal recourse

Adam Webb is partner with Atlanta-based Webb, Klase & Lemond LLC, the law firm currently representing plaintiffs in a class action against Wells Fargo Merchant Services LLC for alleged unauthorized, excessive payment card processing fees. Webb said the allegations against AmEx are much like practices that are widespread in the payment processing realm. Such increases to rates and fees very likely represent breaches of contract and breaches of the implied covenant of good faith and fair dealing, he stated.

"At least when companies send advance notice they can argue that customers chose to accept the higher fees rather than terminating their account," Webb said. "But when there's no notice, the original terms govern, especially where there is no outside basis for the increase, just padding profits. This smacks of bad faith."

Attorneys at Bragar Eagel & Squire P.C. are directing AmEx shareholders and potentially affected individuals to an online submission form to contact attorneys directly and apply for additional information concerning the ongoing investigation. Applicants who acquired AmEx stock and suffered a loss, or anyone who may have questions, concerns or has information related to the investigation is encouraged to apply at no cost or obligation, the attorneys stated. Additional information can be found at .

Mobile banking startup snags fintech bank charter
Monday, September 10, 2018

A federal bank regulatory agency is opening its charter approval process to financial technology firms, and a mobile banking startup appears to be the first to garner approval. The Office of the Comptroller of the Currency, the Treasury Department agency that oversees national banks, announced in late July that would begin accepting applications for "special purpose" charters from fintech firms. Just over a month later, on September 4, Varo Money Inc. announced it had received a preliminary okay for an OCC charter, putting Varo Bank N.A. on track to become the first all-mobile national bank in the country.

Colin Walsh, co-founder and CEO of Varo Money, said it is a historic moment that "marks the start of a new era in banking." Varo describes itself as combining "mobile technology with a mission" to provide consumers with no-cost bank accounts and automated savings tools. Founded in 2015 by Walsh and CTO Kolya Klymenko, Varo reported raising more than $79 million in funding from private equity firms.

"We founded Varo because we saw that banks weren't serving the majority of their customers very well, and we wanted to fix that," Walsh said. He pointed to a 2017 Federal Reserve report finding that 40 percent of adult Americans would be unable to cover an unexpected $400 expense without selling something or borrowing money. "So we decided to build a bank from the ground up with the goal of improving consumers' financial health through better technology and a more efficient business model," he added.

Jo Ann Barefoot , CEO of Barefoot Innovation Group, said, "This preliminary approval from the OCC is a signal that regulators recognize the value technology can bring to banking for all Americans," Barefoot is a former regulator herself. Following passage of the Community Reinvestment Act, in 1977, she was appointed the OCC's first deputy comptroller for consumer and community affairs. That put her in charge of overseeing bank compliance with that law, which required banks to do more to meet the credit needs of their local communities.

In recent years, Barefoot has focused on advising banks and others on leveraging technology to support better financial inclusion. "New technology can make the world look a lot more like the one CRA's sponsors originally hoped for," she explained in a recent blog post.

OCC charter just one option for fintechs

"The decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America," Comptroller of the Currency Joseph M. Otting said in heralding the new charter application process. "Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank."

The OCC said allowing fintechs to apply for bank charters followed a two-year consideration process that included "extensive outreach with many stakeholders" and public comments on a proposed policy statement on regulating fintech banks. The agency also published a licensing manual for fintech companies interested in pursuing national bank charters.

National banks are full-service commercial banks that include some of the largest (think Bank of America, Citibank, Chase) as well as thousands of smaller banks (First National Bank of Anytown, U.S.A.). The OCC also has authority to charter limited purpose banks, such as credit card banks, trust banks and bankers banks.

In opening the new fintech charter route, the OCC stressed that fintechs will be regulated and examined the same as the thousands of other banks it oversees. An OCC charter isn't the only option for fintechs that want to be banks. They also can pursue state banking charters, state money transmitter licenses and partnerships with existing financial institutions, the OCC noted.

"Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition," Otting said. "It also provides consumers with greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition."

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