Now that the 2012 elections are behind us and a new Congress is about to descend on Washington, financial services companies are bracing for a potential onslaught of new legislative initiatives. Some will take aim at issues raised by the Dodd-Frank Act of 2010; others are being triggered by concerns over network security and protection of individuals' confidential information.
And then there is continuing controversy over payment card interchange, as well as prepaid debit card rules. Here's a look at what's at stake.
Elizabeth Warren, newly elected Senator from Massachusetts, hasn't even taken her seat on the Senate floor, and lobbyists already are working behind the scenes to block her from getting assigned to the Senate Banking Committee.
According to reports published by Salon.com and other media outlets, Sen. Tim Johnson, D-S.D., Chairman of the Senate Banking Committee, is considering the newly elected Democrat for assignment to the Banking Committee, which has two seats to fill when the 113th Congress convenes in January 2013. (Those seats are being vacated by outgoing Democratic Senators Herb Kohl of Wisconsin and Daniel Akaka of Hawaii.)
Certainly Warren, as chief architect of the federal Consumer Financial Protection Bureau, has real-life experience the panel could benefit from. And that's primarily why banking lobbyists are lining up to object, according to the reports.
Typically, Washington lobbyists refrain from such deliberations, and the conventional wisdom is they don't have the clout to block an assignment if Warren really wants it. And even if Warren gets appointed to one of the two vacant panel seats, she's apt to have several new priorities, noted Mary Bennett, Director of Government and Industry Relations at the Electronic Transactions Association.
But the fact that reports like these are surfacing before the new Congress even convenes demonstrates just how controversial the Dodd-Frank Act remains two years after passage. And from the vantage of acquiring banks and their merchant servicing partners, the most contentious part of that legislation was the Durbin Amendment.
That amendment, named for its chief sponsor, Sen. Dick Durbin, D-Ill., instructed the Federal Reserve to regulate debit card interchange: the fees debit card issuers receive from merchant acquirers for each merchant transaction processed through the card networks.
The legislative edict resulted in a controversial rate-capping plan that more than a year after implementation still elicits near visceral reactions from affected parties. In a letter sent to congressional leaders in September 2012, for example, the American Bankers Association complained that "nothing is ever enough for some in the retail community," and that the only beneficiaries of the Durbin Amendment thus far have been big-box retailers.
The letter went on to urge lawmakers to reject additional calls for interchange regulation. "It is time for Congress to say enough is enough," ABA President and Chief Executive Officer, Frank Keating, wrote.
Sen. Durbin quickly shot back with a scathing rebuke, countering that the card companies and big banks have been "rigging the systems to avoid competitive market forces," and that it's now up to Congress to set the market straight.
"While Congress' interchange reform law has helped curb these abuses when it comes to debit cards, the credit and mobile payment systems still suffer from excessive swipe fees, a lack of transparency and a dearth of real competition," Durbin wrote in a letter of response to Keating.
"Based on your letter, it appears your association wants to keep things that way." The senator went on to insist he wasn't giving up the fight against credit and debit card interchange.
Despite the rhetoric, legislation that addresses interchange may end up on the back burner as lawmakers take on more pressing issues such as the evolution of mobile payments and ongoing efforts to better secure payment networks and protect consumer privacy.
"I think it's possible that interchange fatigue will set in with Congress," said the ETA's Bennett. "It's an ugly fight between banks and retailers" and most members of Congress don't want to be put in the position of taking sides.
Bennett also referenced the recent legal settlement under which Visa Inc., MasterCard Worldwide and a group of card-issuing banks agreed to pay more than $6 billion in cash to disgruntled merchants, plus create additional savings through interchange fee reductions. The lawsuit, filed in 2006 by a large group of retailers, alleges that Visa and MasterCard engaged in price fixing in violation of federal anti-trust statutes, resulting in at least eight years of what retailers consider interchange overcharges.
A federal judge gave preliminary approval to the settlement in November 2012; final approval is expected in early 2013. But not if a large portion of the plaintiffs have their way. According to Doug Kantor, a Partner in Steptoe & Johnson LLP, which represents the National Association of Convenience Stores, the settlement is opposed by a majority of the named plaintiffs.
Mallory Duncan, Senior Vice President and General Counsel for the National Retail Federation, complained that the money being paid out "represents less than three months' worth of swipe fee collections." However, he noted that provisions of the settlement which limit future legal remedies available to retailers regarding interchange practices were the real deal breaker.
Duncan said that although the NRF is not a party to the present lawsuit, the trade association (which was party to a previously settled challenge to interchange, dubbed the Wal-Mart case) has been authorized by its members (many of which are part of the suit) to file legal challenges to the settlement on their behalf. Duncan gave no indication of what exactly the NRF will do.
While there's no broad consensus on what, if anything, Congress will do with regard to interchange, there is a real sense that widespread concerns over cyber security and the protection of personal financial information accessible online will result in legislative action during the upcoming Congress.
As the 112th Congress winds down, there are at least three privacy and security bills with broad support in the Senate; each would establish a national data breach notification standard. Plus, the White House has said it also backs a national breach notification standard. Cyber security is also an aspect of homeland security, so there's less of a chance Congress will drop the ball on this.
Requirements for notifying consumers who have had their personal financial information compromised by network security breaches vary considerably among the 46 states and U.S. territories that have enacted breach notification laws, according to the National Conference of State Legislatures.
On top of that, numerous federal statutes contain data security and privacy provisions, said Linda Grimm, Director of Consulting Services at Compliance Solutions & Resources. And running afoul of some of these (such as the Health Insurance Portability and Accountability Act) can be a lot messier and costlier than Payment Card Industry Data Security Standard violations, Grimm added. "There are so many more potential implications with the FTC and states coming down on [acquirers and their partners]," she said.
The Federal Trade Commission, which has federal authority to pursue legal action in cases related to privacy and breach notifications, has created a stir over the last few years by imposing serious audit requirements in response to breached companies that fail to properly notify consumers when their personal information has been compromised. Google Inc., for example, has 20 years of comprehensive privacy audits to look forward to under a 2011 settlement with the FTC regarding alleged violations of its own privacy commitment to Gmail accountholders.
The Dodd-Frank Act, meanwhile, handed the CFPB broad authority for enforcing rules regarding the security and privacy of nonpublic personal financial information.
Mobile banking and payments may become a legislative issue, as suggested by Sen. Durbin's comments regarding interchange (mentioned earlier in this article), as well as by other lawmakers' comments. For example, Rep. Shelly Moore Capito, R-W.Va., Chair of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, convened a subcommittee fact-finding session in March 2012 titled "The Future of Money."
"We are, I think, on a precipice of some fundamental change in the way money is exchanged between consumers and businesses," Capito said in her opening remarks.
But many more issues must be resolved before Congress can make a serious attempt at legislating in the mobile arena. "There's a lot of confusion," said Bob Bucceri of Chaddsford Planning Associates LLC and the Electronic Funds Transfer Association. "I don't think Congress has figured out how to deal with this. It's a jurisdictional issue, and it's going to be hard for them to step in until that's figured out."
The jurisdictional issue pits leaders of the House and Senate Banking Committees against those that focus on commerce and leaders of the House and Senate telecommunications committees. As it stands now, there is no direct government oversight of mobile payments, although plenty of existing laws and regulations can be applied.
The Gramm-Leach-Bliley Act of 1999, for example, governs the use of personal information banks maintain on consumers. The Electronic Fund Transfer Act provides protections for consumers who have funds electronically deposited or withdrawn from their bank accounts. The FTC Act prohibits "unfair or deceptive acts and practices" in commerce, and the Truth-in-Lending Act governs consumer credit transactions. And then there are the telecommunications statutes that govern the mobile carriers.
Although there is likely to be legislative arm wrestling over banking and payment issues, there is a greater likelihood of action on the regulatory front, according to Bucceri. "There are still hundreds of pages of regulations that have not been written yet," Bucceri said.
For example, the CFPB will be scrambling to meet several rulemaking deadlines established under the Dodd-Frank Act. "They're going to have to get into a rulemaking mode pretty quickly," he added.
Regulation of reloadable prepaid debit cards is a certainty. The CFPB took its first steps in that direction in May 2012 with an Advanced Notice of Proposed Rulemaking (ANPR) on extending Reg E protections to prepaid debit cards. The bureau has said it is particularly concerned about rapid consumer adoption of prepaid debit cards in lieu of checking accounts despite the existence of little to no cardholder protections.
More than 200 consumers and organizations responded to the bureau's request for comments on the ANPR. One theme that arose often in those comments was the necessity of adopting a broad definition of prepaid cards, so as to address mobile and other new form factors.
"Increasingly, GPR card products are now accessible via cell phones and smart phones, and such expansion is expected to continue over the long term," wrote L. Cary Whaley, Vice President of Payments and Technology Policy at the Independent Community Bankers Association in Washington. "Any regulation should avoid tying disclosure to the physical card."
Other comments urged the bureau to prevent certain new twists to prepaid cards, such as overdraft protection and savings products. "Mixing credit and prepaid deposits undermines the integrity of the prepaid card market and the safety of the consumers who use the cards," wrote a trio of consumer advocates: the National Consumer Law Center, the Center for Responsible Lending and the Consumer Federation of America. "'Prepaid' should mean prepaid," their joint letter stated.
Also up at the CFPB: federal consumer protections for people using banks and nonbanks to send remittances overseas. In August 2012, the CFPB issued strict new disclosure requirements for international remittances, which were initially to take effect in February 2013.
In late November 2012, however, the bureau said it was taking another look at the plan and it put implementation on hold.
Bucceri said that in addition to the CFPB, he expects to see more involvement of both the U.S. Department of the Treasury and the Federal Reserve on the regulatory front in 2013. The Financial Crimes Enforcement Network (FinCEN) is expected to issue final rules that require travelers to declare balances in excess of $10,000 on prepaid cards at U.S. border crossings.
FinCEN, which operates out of the Treasury Department, is responsible for enforcing money laundering rules, which currently are limited to requiring that travelers declare cash holdings of $10,000 or more.
Cash deposits at banks and person-to-person remittances involving $10,000 or more in cash trigger similar reporting requirements by banks and other providers of financial services.
Some of the goings on in Washington will affect the merchant acquiring chain. So make your voice heard: contact your elected representatives, both state and federal.
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