The Green Sheet Online Edition
December 22, 2008 • Issue 08:12:02
Insider's report on payments
What history teaches about change
What a difference a few years can make. As recently as 2006, bankers were fighting to keep retailers and other nonbanks off their turf. At the time, Wal-Mart Stores Inc. wanted to own a special purpose bank in Utah - an industrial loan company, ostensibly to bring its credit and debit card processing in-house.
With strong support from members of Congress and key regulatory agencies, the banking industry was able to stop Wal-Mart and several other nonbanks queued up to follow in its path.
Now, with some of the nation's largest banks circling the drain, and others already out of business, might the nation's leaders be having second thoughts about the walls that have separated banks from other businesses for years?
No one can say for sure. But these are unusual times, and stranger things have happened.
New doors opening
In a year that has seen the effective dissolution of Wall Street's investment banking powerhouses (including fire sales of Bear, Stearns & Co. Inc. and Merrill Lynch & Co. Inc.), the near collapse of mega-bank Citigroup Inc., and an estimated $1 trillion in government funds earmarked for financial institutions saddled with toxic mortgage-backed securities, almost anything seems possible.
Consider, for example, that the consumer lender GMAC Financial Services - owned by private equity firm Cerebus Capital Management LP and the ailing automaker General Motors Corp. - wants to become a bank holding company, in part so that it can benefit from government largesse related to toxic mortgage loans.
Yes, one of the "Big Three" looking for a government bailout of the ailing auto industry wants a piece of the banking industry's bailout. Hmm, isn't that double dipping?
Never in my 30-plus-year career in the banking and payments space have I witnessed so much uncertainty, or such upheaval in an industry notoriously slow to change. And as I look back on 2008 and anticipate what 2009 might hold, I see change is everywhere and is destined to continue for the foreseeable future.
Reading headlines in a financial daily last month, I was struck by one stating the Office of the Comptroller of the Currency, the U.S. Treasury Department agency that charters and regulates some of the nation's largest banks, was "opening a charter door to nonbanks."
Legal barriers between banks and other types of commercial enterprises have deep roots, dating back to the Great Depression. Banks, for many reasons (not the least of which is their collective role in supporting payment systems and monetary policy), need to be held to different standards than nonbanks.
The mortgage meltdown illustrates what happens when lawmakers and regulators lose sight of this principle. The meltdown also has wiped out much of the industry's available capital. So, the OCC has created a new type of bank charter, in essence a preliminary approval for private equity investors willing to pump capital into the banking system.
These "shelf charters" can last for up to 18 months or until the group is ready to bid on a failed institution, the agency said. That's when the OCC and the Federal Deposit Insurance Corp. would make final, up-or-down decisions about the financial and ethical fitness of winning bidders.
It's akin to being pre-approved for a consumer loan, only there's a lot more scrutiny involved. Observers say the move could end up saving the FDIC a bundle since it broadens the pool of prospective bidders for troubled banks.
What's the big deal?
Nevertheless, it is a major change in the way bank charters are granted - usually a long and arduous process. Add to that the turmoil in financial markets and changes in the political make up of Washington, and it begins to look like we could be in for some even bigger changes ahead.
The last time the nation faced a similar crisis of confidence was in the late 1980s, when hundreds of savings and loan associations went bankrupt. There also was significant progress being made at the time with electronic payment technologies (for example, ATMs were becoming pervasive, and consumers were dabbling in POS debit).
But checks were popular, too, and consumers couldn't understand why, if ATM card transactions could be settled at least by the next day, they sometimes had to wait a week or more to receive available funds on their check deposits. Soon, consumers won allies in Congress, and in 1987, the Expedited Funds Availability Act (EFAA) was signed into law.
The EFAA made sweeping demands on the way banks handled checks and ran their back offices - and, most experts would agree, paved the way for electronic check collections.
I bring this up because it suggests Congress isn't apt to debate bailouts of the banking and auto industries without adding some pro-consumer legislation to the mix. And interchange is looking like it might fit the bill.
The House Judiciary Committee approved interchange legislation already: the Credit Card Fair Fee Act. The legislation, which would need to be reintroduced and considered in the new Congress that begins in January 2009, would allow merchants to band together to negotiate interchange directly with acquirers and the card companies.
The Merchants Payments Coalition has been talking the issue up in the press, and Mallory Duncan, the group's chief spokesperson and Chief Counsel for the National Retail Federation, has said he's optimistic the upcoming Congress will move on interchange legislation.
Let us not forget the country is in the throes of a credit crisis; when we discuss interchange, we're talking about credit cards.
Adam J. Levitan, a Georgetown University Law Professor, explained the situation in an editorial published in The San Diego Union Tribune on Nov. 30, 2008, as follows:
"Because interchange is based on transaction volume, it creates an incentive for banks to issue as many cards as possible, regardless of the creditworthiness of the borrower. By creating a huge revenue stream unrelated to credit risk, interchange encourages card issuers to engage in reckless lending - and virtually every credit card loan is a 'liar loan' with no income verification."
Opponents of the interchange status quo have readied their lobbying machines. It's time for the merchant acquiring sector to craft its collective response to this assault and take a proactive, reasoned position on this important public policy debate. The business you save may be your own.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at email@example.com.
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