The Arkansas legislature has weighed in on the long-simmering feud over merchant processing fees. With no fanfare and little public debate, state lawmakers overwhelmingly approved a bill in April that imposes strict disclosure requirements on merchant processing agreements.
The legislation caps the fees that can be assessed Arkansas merchants for early termination of card processing contracts.
Arkansas Act 911, which takes effect July 31, applies only to nonbank providers of merchant services. As enacted, the new law caps at $50, or one month's minimum charge, fees that can be assessed an Arkansas merchant for early termination of a contract with a nonbank processing company.
Experts note that $50 is substantially less than prevailing industry charges for early contract terminations. "Almost every merchant agreement that an ISO or MLS [merchant level salesperson] would be selling would be in violation," said Mary Dees Griffith, President and Chief Executive Officer of Creditranz.
Griffith and others also pointed out that the $50 cap on termination fees fails to take into account staffing and technology costs processors incur ramping up and maintaining operations that support contractual obligations.
The text of Act 911, at about two pages in length, has been described by experts who have studied it as ambiguous and unreasonable. "The unreasonableness of this is quite frankly staggering," said Rob Drozdowski, Electronic Transactions Association Senior Director for Research and Information.
Drozdowski said the ETA is particularly concerned about the lack of time provided so that ISOs and MLSs doing business in the state can ensure their merchant contracts are in compliance with the new law.
The act, for example, dictates specific terms that must be included - effective date, monthly minimum and termination fees - as well as the print size that must be used (8 point) in any processing agreements entered into with merchants in the state beginning July 31.
Typically, lawmakers and regulators when mandating changes in legal business contracts will establish implementation windows (normally between six and 18 months) during which time businesses can make the required changes to contracts, Drozdowski said.
Not so this time: The effective date of Arkansas Act 911 was 90 days from the date of final passage. Introduced in February by Rep. Susan Schulte, R-District 48, the act, as originally drafted, would have applied to banks and nonbanks, alike.
But one of two amendments approved before the bill's final passage excluded from coverage state and federally chartered financial institutions, their parents, and affiliates that offer credit card processing services. (The other amendment reduced the minimum text size required in disclosures from 10-point to 8-point type.)
Griffith, however, said it's unclear how the new law will be enforced. "The law, as written, is very ambiguous," she said.
Under MasterCard Worldwide and Visa U.S.A. rules, card processing agreements must be between merchants and acquiring banks. The ISO/MLS who signs a merchant is an agent of the acquiring bank, even though the name of the acquiring bank may not be obvious to the merchant.
Griffith, however, said it's unclear how Arkansas Act 911 will apply to contracts involving processors that partner with multiple acquiring banks. For example, is a contract involving First Data Corp., a partner bank based in New York, and an Arkansas merchant covered, or is it exempt? "I think you'd have trouble in Arkansas," she said.
The Arkansas legislature adjourned on May 1 and is not scheduled to reconvene until January 2009.
Schulte, who is completing her third and final term in the state Congress, said she was prompted to introduce the bill by complaints she had received from area merchants about contract disclosures that were difficult to read ("even using my bifocals") and about steep contract termination fees. Many of the contracting companies were "from out of state," Schulte noted during a telephone interview.
One of the most troubling aspects of the legislation is that it seems to have garnered no public debate or discussion. Repeated searches of news sources in Arkansas make no mention of the new law.
"The really frightening thing is that this passed without a whisper," Griffith said. "It concerns me that something with provisions this specific to our industry, along with items that most industry agreements would be in violation of, could pass into law with very little media coverage."
Schulte said there are no initiatives planned to tell merchants and processors about the new law. Nor is the state on the lookout for companies in violation of the law. It's on the books; if merchants feel they've been wronged, there's now a law under which they can sue the offending party, Schulte said.
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