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Article published in Issue Number: 061202

Payments issues go to Washington

By Patti Murphy, The Takoma Group

It's time to dispel any notions that companies in the retail payments space are immune to legislative and regulatory oversight.

And while we're at it, let's get real about interchange. It isn't the big bugaboo it's been made out to be. True, retailers for years now have been grousing about interchange pricing, and this year they actually managed to get some members of Congress to hold hearings on the topic.

But for the most part, those hearings dwelled on the connection between interchange and oil prices. Now that the spiral of increasing gasoline costs has slowed, it seems unlikely Congress will return to issues related to interchange anytime soon.

Besides, retailers don't exactly enjoy favored status with many of the ranking Democrats who will be running things in Congress beginning in January.

Rep. Barney Frank (D-Mass.), the presumed new chair of the Federal Deposit Insurance Corp. (FDIC). The appeal to retailers is that ILCs can be used for issuing and/or processing credit cards.

To date, several dozen ILCs have been chartered in seven states, including one that's owned by high-end retailer Nordstrom Inc. and one owned by Nissan Motor Co., the automaker. The loophole had existed for decades, but nobody in Washington paid much attention until last year when Wal-Mart Stores Inc. applied to own an ILC in Utah.

Wal-Mart says it wants an ILC so it can handle its own credit and debit card processing. Its application has been in limbo now for more than a year.

Earlier this year, Frank introduced a bill that would place a permanent ban on ILC charters and impose strict oversight of those chartered in the past. On Dec. 7, he led a bipartisan delegation of 107 House members in urging the FDIC not to approve any ILC applications until Congress takes action.

Congress takes on data security, Internet gambling

This year Congress took on two controversial issues related to payments: data security and Internet gambling.

Most forms of gambling are banned in the United States, but many Internet companies have been able to circumvent the prohibitions by physically locating outside the country.

With Americans wagering an estimated $6 billion a year online, Internet gambling had become a large and lucrative trade for some American businesses.

That is, until Congress passed a law prohibiting banks and other payments companies from processing or transferring transactions that involve Internet gambling. The prohibition was signed into law in mid-October.

By early November, experts familiar with offshore enterprises were reporting massive layoffs at companies servicing gambling-related Web sites.

The results of the get-tough stance Congress has taken on data security have been less compelling. No fewer than five data security bills were considered in the House and the Senate this year, but none made it to the President's desk.

One of the most sweeping bills - introduced by Sen. Tom Carper (D-Del.) and Bob Bennett (R-Utah) - called on all entities that touch consumer data (financial institutions, retailers and others) to better protect data they hold, to quickly investigate any breaches of data they control, and to promptly notify government and the public "when there's a real risk of harm," according to Carper.

These, along with scores of other bills, were left on the table when Congress adjourned earlier this month. However, Washington insiders say it's a safe bet that data security legislation will resurface in the new Congress.

Federal Reserve and Reg E

As the year draws to a close, the Federal Reserve has issued a new final rule regarding electronic payments that should signal relief for some companies.

And in a related move, the Fed has asked the industry and the public to weigh in on a proposal to eliminate consumer receipt requirements for certain small-dollar electronic payments.

The proposal, announced in late November, would exempt POS debit transactions of $15 or less from receipt requirements under Regulation E. Reg E is the body of rules implementing federal electronic funds transfer laws.

"The proposed exception is intended to facilitate the ability of consumers to use debit cards in retail environments where the receipt requirement may not be practical or cost-effective," the Fed said.

The Fed has requested public comments on the proposal by early February.

The Fed's new final rule addresses the authorization required to collect fees when consumer checks converted to electronic automated clearing house (ACH) transactions are returned unpaid.

It makes clear that it is the merchant's responsibility to provide fee notices to consumers who tender checks at the POS that subsequently get converted to ACH debits.

Specifically, the rule requires conspicuous notices posted at the POS and on customer receipts explaining that the merchant reserves the right to collect fees (such as NSF charges) electronically. Most aspects of the rule change are effective Jan. 1, 2007.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at

Article published in issue number 061202

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