When Holli Targan graduated from law school, payments wasn't on her radar. Like many in the payments industry, Targan, a Partner at the firm Jaffe Raitt Heuer & Weiss P.C., got here quite by accident. Her first step out of law school was the Office of the Comptroller of the Currency, an agency of the U.S. Department of the Treasury, which she credits with whetting her appetite for banking.
The next stop along her career path - at what was then Michigan National Bank - was providing legal support for ATM and merchant-acquiring business units. "I really learned it from the inside," Targan said. And since joining Jaffe 17 years ago, Targan has trained many others at the firm in the intricacies of the payments space. Lawyers whose specialties include litigation, bankruptcy, intellectual property rights and other critical areas of law can now apply that expertise to the firm's work with acquirers, processors and ISOs.
One such attorney is Sarah Weston, who is also a Partner at the Jaffe firm. "Payments involves issues that any attorney can handle, but not just any attorney is going to do it properly," Weston said. "You really need to learn this from someone who knows it well." For Weston, that person was Targan.
Paul Rianda and Adam Atlas, two independent attorneys who work with ISOs and processors share similar experiences. "I had the pleasure of getting pulled into this space," Atlas said. "I learned a lot from a client" who wanted to get into acquiring.
Rianda seized an opportunity to work for a startup ISO after working as a litigation attorney. "I didn't like litigation much, so I went to work for this ISO and eventually was made COO," Rianda said.
Eventually that organization was sold, so Rianda went back into litigation and eventually built a clientele of small to midsize ISOs that allowed him to transition out of litigation. Rianda noted that he was drawn to the entrepreneurship of people in payments. "These are very motivated people," Rianda said.
Atlas added that lawyers can be stodgy. "You really have to be the opposite to keep up with this business," he said. "You have to be able to hear the call of a client who wants to do something new and be able to help them to understand how to do it right and be protected from a legal standpoint."
Payments law isn't a line of study offered in law schools, and no books are devoted to the subject either. Rianda said that's why he had to invest time getting to know the business, the people and the issues while building his reputation and business in the industry. During that time he authored articles in industry publications and found other ways to market himself.
Today, Rianda is one of a small cadre of lawyers who are payment specialists. Not just any specialists: specialists who understand the nuances of payment acquiring, the rights and responsibilities of the various players, best practices, and the ever-shifting legislative and regulatory landscape - specialists with expertise that is often called upon for civil litigation proceedings.
"If an ISO were to walk into any big law firm, they'd be hard pressed to find anyone with the kind of experience we have," Atlas said.
So what are ISOs seeking from these experts? Many initially need help with contracts. An ISO can hire any lawyer to review contracts, but most lawyers don't know about the pitfalls common to ISO and merchant level salesperson (MLS) agreements. "When I went out on my own I could tell from the contracts that were coming across my desk that there weren't many lawyers who were good at this," Targan said.
As an ISO grows, however, so does the need for legal counsel. One issue that comes up often is whether MLSs should be employees or private contractors. There's no right or wrong answer, Weston said. It's really more about management style. However, she noted that ISOs are apt to come under added scrutiny as the federal government seeks to boost tax revenues, and that may need to be factored into these decisions.
Portfolio sale as well as merger and acquisition (M&A) work are also common. Indeed, M&A activity is picking up this year, following four years of lackluster activity. Weston said three trends are contributing to this uptick: optimism about the economy; greater investor awareness of the acquiring space; and pent up demand. "We're seeing that people are ready to start moving again," she said. Atlas concurred, saying, "I think 2013 is going to be a good year for [M&A] transactions in this industry."
In addition, as more ISOs endeavor to grow revenues through value-added services, their need for legal guidance grows. "My work extends beyond just acquiring," Atlas said. "As payment processors diversify, I feel it's important for me to have a grasp of the many different kinds of payments models my clients are starting to operate." Weston added that the work she does is very diversified because there are "so many different iterations" to what her clients do.
Deploying money transmitter services, for example, requires significant behind-the-scenes legal work. Because of state licensing requirements, there are at least 50 different sets of requirements. Weston said she's been fielding questions from clients about whether money transmitter licensing requirements apply to Square Inc. and similar initiatives. "Just because they don't have licenses doesn't mean they shouldn't," she said.
On the federal level, there are anti-money laundering rules, as well as new federal customer disclosure requirements. "It's just a question of time before third parties like ISOs will be obliged to have some kind of anti-money laundering procedures in place," Atlas said. "Even if the law doesn't require it, it's going to be advisable to have something in place."
According to a report in The Hill, a daily newspaper covering Congress, the Financial Crimes Enforcement Network (FinCEN) is readying a proposal that would require customs declarations by individuals carrying prepaid cards with more than $10,000 in value. Currently such declarations are required only when someone passes through U.S. Customs with $10,000 or more, in cash. Financial services providers also are required under federal anti-money laundering rules to file reports with FinCEN when someone attempts to deposit $10,000, or more, in cash to a bank account. These all can have implications for clients, Atlas said.
Also, the shifting legislative and regulatory landscape creates a level of uncertainty in the acquiring sector that can't be ignored. "For the longest time, this industry flew under the radar," Targan said. "Legislators really didn't know much about what we did." Not so these days, as evidenced by the recent mandates on debit card interchange and IRS requirements for reporting merchant card payment receipts.
Targan, who is Chairman-elect of the Electronic Transactions Association, said the likelihood for additional interchange legislation out of Washington is minimal, at least during this session of Congress. However, more than a dozen states have proposals under consideration that would ban merchants from surcharging card payments, and at least 10 states already prohibit this type of surcharging.
Visa Inc. and MasterCard Worldwide had long-standing rules against merchant surcharging, but those rules were recently scuttled under a proposed legal settlement between Visa, MasterCard and millions of merchants.
The states also have been actively pursuing data security legislation and privacy legislation, with dozens of laws already in place. These are on top of requirements, like the Payment Card Industry (PCI) Data Security Standard (DSS).
The scope and breadth of complying with these myriad rules can be a major challenge for ISOs. How to structure business practices, marketing and even customer service so as not to run afoul of dozens of individual laws that can vary greatly by geography are current concerns. Internet commerce also creates unique problems, some that cut across jurisdictions, others that don't. Electronic consents are an example. How you manage and format opt in/out and other consent agreements all factor into the enforceability of contracts and other legal requirements, Weston said.
Risk and underwriting are also important. "These are things that need to be managed," Weston said, adding that her firm often helps clients determine the best approaches. Consider the mobile arena: "When people say mobile payments, they can mean so many different things," Weston noted. Mobile payments can be done using text messaging or contactless technologies, smart phones or mobile wallets.
Each of these needs to be managed differently; associated risks and compliance issues, for example, can vary depending on technologies and processes. And then there's the likelihood of new legislation as mobile adoption spreads. "There's definitely interest in Washington," Targan said. Cash advance businesses are also a tricky line of business because numerous states and the federal government are reevaluating the legal landscape for this sphere.
The changing legal and competitive environment can also create inequities that lawyers are often called upon to help resolve, especially with respect to pricing. Rianda and Atlas both said the small to midsize ISOs they work with are finding it increasingly difficult to compete with larger companies, especially in the wake of pricing changes ushered in by legislation and by the card brands - what Atlas refers to as "shifting ground rules."
Since becoming public companies, both Visa and MasterCard have changed pricing strategies, introducing new fees like the Fixed Acquirer Network Fee, which in the case of brick-and-mortar establishments, increases as the number of locations accepting card payments increases.
"ISOs and their agents just seem to be getting worse and worse deals," Rianda said. Many of his clients are finding they need to pass on to processors and acquirers increasingly larger shares of the fees collected from merchants. "It's becoming a serious issue because the folks who are selling to small dry cleaners and the like can't compete on price anymore," he added.
Atlas concurred. "Not all ISOs are getting a fair shake," he said, adding that many feel they're being forced to accept unrealistic fees. "I don't think we've heard the last of this," he said. "I think there's a possibility we'll see some kind of litigation" around the way merchant fees are divvied up.
This pressure has spurred increased focus on value-added services, which is often beneficial, because ISOs tend to be motivated entrepreneurs. "Some ISOs stick to their knitting, but many take a long view," Atlas said. "They look beyond the horizon and think of novel products and offerings for merchants, and ways to increase loyalty and revenues" for themselves and their merchants. Targan agreed. "The clients and companies we work with are so entrepreneurial, innovative and smart," she said. "It's really fascinating working with them."
There are many times when businesses in the acquiring space turn to attorneys for assistance. Here are several common needs addressed by legal counsel who have experience in the payments realm:
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