By Patti Murphy
Several bills targeting the fintech and payments sphere will seek a path to enactment during the 118th Congress, which spans 2023 and 2024. Senator Mike Crapo, R-Idaho, who wants to nix a special merchant category code (MCC) for firearms dealers, proposed a bill to stop any form of "discrimination by financial services providers against constitutionally protected industries and law-abiding businesses such as firearms dealers."
To date, 35 senators have signed on as co-sponsors of Sen. Crapo's Fair Access to Banking Act.
MCCs are created by the International Standards Organization and assigned by the card brands. They identify specific verticals, and interchange rates generally get assigned by MCC. Sometimes, however, MCCs describe catch-all categories, like "specialty retail," an MCC that includes firearms and ammunition stores.
When the new MCC specific to firearms dealers was announced in September 2022, the major card brands—Visa, Mastercard and American Express—said they would comply. Sen. Crapo wants them to back down. An ardent champion of gun rights, Sen. Crapo railed against banks during the Obama Administration when gun manufacturers and sellers got caught up in the Justice Department's Operation Choke Point, which closed off banking to several high-risk verticals.
The Secure and Fair Enforcement (SAFE) Banking Act, approved by the House in 2022 but stalled in the Senate, is expected to try again during the 118th Congress. Like Crapo's bill, the SAFE Banking Act seeks to guarantee access to banking by specific types of business, in this case state-licensed sellers of cannabis products.
Most financial institutions reject cannabis businesses because pot remains illegal under federal law, and to qualify for federal deposit insurance FIs must abide by federal laws. The SAFE Banking Act would provide a safe harbor for banks and credit unions doing business with pot shops that operate legally under state laws.
And it would prohibit federal regulators from punishing FIs that serve cannabis companies, their owners and employees with onerous risk management requirements.
According to industry observers, the fact that lawmakers in both parties stepped up late last year to try and get SAFE across the finish line bodes well for the bill now. "It almost has to pass," said James Huber, attorney at Global Legal Law Firm. "Otherwise, they're forcing legal businesses to act like criminal enterprises."
Senator Dick Durbin's office confirmed the Illinois Democrat will re-introduce the Credit Card Competition Act "this Congress" but offered no further details. That legislation would require that merchants be given the option to route credit card transactions through networks other than those owned by Visa and Mastercard. Many of these networks (such as ATM/POS networks) are considered less expensive.
The Merchants Payments Coalition (a confederation of merchant groups) used the occasion of a House hearing titled "Combatting the economic threat from China" to push for the Durbin proposal in the name of national security.
In a Feb. 14, 2023, letter to the House Banking Committee, MPC pointed to a little-known provision in the legislation that would prohibit card networks backed by hostile foreign governments (like China's UnionPay) from processing payments in the United States.
"Currently, there is no federal law that prevents any financial institution from doing business with China UnionPay to process payments," the group wrote. MPC described the prohibition as a "vital provision of the legislation that would significantly serve our national security interests."
The American Bankers Association is not in favor of the legislation. "It is a tall order convincing Congress to enact card routing mandates that would lead to higher costs for consumers, less access and less competition," said Sarah Grano, ABA spokeswoman.
The organization launched a multi-media campaign opposing the scheme, with ads running on radio and TV stations in the Washington, DC metropolitan area, and elsewhere. "With inflation eating away at your food budget, the big plan from big grocery is to make things even worse by making it harder to earn credit card rewards when you try to feed your family," one radio ad intones. "That isn't competition. It's a money grab by big grocery."
With control of Congress split between the political parties, Washington insiders expect little in the form of substantive legislation during the next year and a half. "They [proponents of the Durbin bill] might have more of an uphill battle than they did a year ago," said Paul Davis, director of market intelligence at the advisory firm Strategic Resource Management (SRM).
Davis expects a bevy of legislative activity affecting financial institutions and fintech. "The CFPB [Consumer Financial Protection Bureau] and other regulators are showing no signs of slowing down this year," Davis said.
The CFPB was created under the Dodd-Frank Act and given supervisory authority for FIs with assets over $10 billion, including affiliates, as well as nonbank financial services firms.
In a report released last fall, the CFPB said it has concerns about buy now, pay later (BNPL) products and the potential risks posed to consumers. The consumer watchdog agency said it was considering "interpretive guidance" to ensure providers understand they must abide by the same laws and regulations that apply to credit card companies.
CFPB Director Rohit Chopra, newly confirmed to a five-year term, even suggested routine examinations of BNPL companies, similar to the examinations banks and credit unions undergo. BNPL has existed under one name or another for generations, but really took off with ecommerce in response to the COVID pandemic. A BNPL arrangement constitutes a short-term loan which, if paid over time and on time, carries no interest. Instead, merchants pay between 4 and 8 percent of the ticket to the BNPL company.
The CFPB reported that in 2021 the five leading BNPL providers—Affirm, Afterpay, Klarna, PayPal and Zip—originated a combined 180 million BNPL transactions totaling $24.2 billion, with an average loan size of $135. The number of originations rose at a combined annual growth rate (CAGR) of 227 percent between 2019 and 2021, the CFPB said. In terms of value the CAGR was 245 percent.
Consumer Reports said 28 percent of adults it surveyed in August 2022 had used BNPL at least once, up from 18 percent in January 2022.
In remarks delivered last fall, Chopra said he's concerned about BNPL customers getting overextended. He pointed to a CFPB finding that the charge-off rate on BNPL loans rose from 2.9 percent in 2020 to 3.8 percent in 2021, and that growth trajectory had continued "through the first half of 2022."
The Federal Trade Commission also raised concerns about BNPL. "If your business offers BNPL payment options as a retailer or BNPL company – or if you play a role in the BNPL ecosystem as a marketer, collector, etc. – remember that basic consumer protection ground rules of the FTC Act apply," Helen Clark, an FTC attorney wrote in a blog post. The FTC Act empowers the agency to take down companies that engage in unfair or deceptive activities affecting consumers and commerce.
There's also a campaign brewing in Washington to curtail junk fees. President Biden, in his Feb. 7, 2023 state of the union address, called on Congress to pass legislation that would limit extraneous fees in consumer-facing businesses. "There's certainly going to be a lot of pressure on financial institutions when it comes to these kinds of fees," Davis said.
The CFPB began scrutinizing junk fees in the consumer finance sector last year—fees like those charged for late bill payments, out-of-network ATM access and NSFs. On Feb. 1, the bureau published a proposal to rein in "excessive" credit card late fees, and suggested other fee-related regulatory proposals were planned.
"It will be interesting to see how [the campaign against] junk fees trickles into our industry," Huber said.
The dramatic fall in crypto's market value—from a peak of about $3 trillion in late 2021 to about $1 trillion now—prompted renewed calls for regulations specific to digital assets. In a January briefing paper, the White House said it had instructed financial regulators to "ramp up enforcement" of crypto firms.
Bank regulators got the message and quickly issued a joint bulletin on crypto-asset risks to financial institutions they oversee. They stated they had "significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector."
The White House is against the idea of traditional FIs playing in the crypto world. "In the past year, traditional financial institutions' limited exposure to cryptocurrencies has prevented turmoil in cryptocurrencies from infecting the broader financial system," the White House paper stated. "It would be a grave mistake to enact legislation that reverses course and deepens the ties between cryptocurrencies and the broader financial system."
A bipartisan proposal to regulate the crypto industry was floated in Congress last year. But that legislation, written with help from disgraced crypto executive Sam Bankman-Fried, isn't expected to resurface.
During a Feb. 14 hearing before the Senate Banking Committee, Senator Sherrod Brown, D-Ohio, chair of the panel, described cryptocurrencies as "speculative products run by reckless companies" that need a regulatory framework.
Senator Tim Scott, R-S.C., countered that regulators (notably the Securities Exchange Commission) have had the authority to oversee these markets but have dropped the ball. "To date, the SEC has failed to take any meaningful, preemptive action to ensure this type of catastrophic failure does not happen again," he said.
Senator Elizabeth Warren, D-Mass., a vocal critic of the crypto industry, said she is working with Senator Roger Marshall, R-Kan., on a bill to tighten anti-money laundering rules around crypto. Warren noted that in 2021, $14 billion in digital assets were transferred to criminals and individuals evading sanctions.
"With strong rules and enforcement from tough regulators, we can give the crypto industry a chance to prove whether it can deliver on its promises of innovation without robbing investors or laundering funds for drug traffickers and terrorists," Sen. Warren said.
SRM's Davis pointed out that a regulatory framework "for digital assets will help bring it into the mainstream.
Patti Murphy, senior editor at The Green Sheet, has spent more than 40 years reporting on the legislative and regulatory landscape for financial institutions and financial technologies. A self-described payments maven of the fourth estate, she also co-hosts the Merchant Sales Podcast, www.greensheet.com/podcasts.php.
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