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DT, January 2017

Interesting Times
January 1, 2017

By Jim Daly

With Republicans now in full control of Washington, big changes could be in the offing for laws and regulations affecting electronic payments. But then again, maybe not.

Some say he’s a nominal one, but incoming President Donald Trump officially is a Republican, and when he’s inaugurated Jan. 20 he’ll be working with the Republican-controlled 115th Congress. For many payments-industry executives, the new one-party power structure represents a clear opportunity to undo what they see as the burdensome laws and excessive regulations imposed during the eight years of former Democrat President Barack Obama’s administration.

Those measures include the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Durbin Amendment, which instituted debit card interchange controls and transaction-routing requirements.

Banks and payments companies also want to rein in the Consumer Financial Protection Bureau, a Dodd-Frank creation that’s much reviled in financial circles but loved by consumer groups. In October, the CFPB unveiled an 800-plus-page rule for prepaid cards.

Furthermore, payments executives hope to drive a final stake through the heart of the U.S. Justice Department’s Operation Choke Point, a regulatory effort they say unfairly targeted payment processors serving legal industries disfavored by the Obama Administration. They’ll also be pushing hard for a national data-breach notification law, and will seek more legal clarity on when merchants can contact customers by telephone.

But new government interventions into the payments industry remain entirely possible despite Republicans, supposedly more business-friendly than Democrats, taking control of the White House and continuing to hold majorities after the November elections in the Senate and House of Representatives.

Trump issued his famous call for a wall on the U.S.-Mexico border at the start of his presidential run, and claimed he’d get Mexico to pay for it. How? That’s far from clear, but one possibility is some sort of tax on wire transfers between the two countries—an idea that has the money-transfer industry nervous and seemingly would increase consumers’ costs, at least costs for Mexicans in the U.S. illegally trying to wire money back home.

In addition, Democrats led by Durbin Amendment sponsor U.S. Sen. Richard Durbin, D-Ill., may try to keep the heat on payment card networks by probing network-affiliated bodies such as EMVCo, the chip card standards organization, and the PCI Security Standards Council, which issues rules for card-accepting merchants and other entities.

‘Vitriolic And Acerbic’

Despite the political murkiness created by Trump, there is no doubt that many guns are aimed squarely at Dodd-Frank.

The preliminary work to uproot Dodd-Frank began in the recently adjourned 114th Congress, when U.S. Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, introduced his Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs (CHOICE) Act. The bill would have made major changes to Dodd-Frank, including repeal of the Durbin Amendment.

Of course, the bill faced certain veto had it passed while Obama was still in office, but it generated plenty of discussion about Dodd-Frank’s future. At this writing, Hensarling hadn’t yet re-introduced it in the new 115th Congress, but the CHOICE Act or something similar seems certain to be dropped into the hopper.

“The biggest thing that is likely to come out of Congress is some form of Jeb Hensarling’s Financial CHOICE Act,” says payments consultant and close Washington observer Eric Grover, principal of Minden, Nev.-based Intrepid Ventures.

Grover predicts Dodd-Frank reform could pass with some bipartisan support, especially since a number of Democrat senators in Republican-leaning states are up for re-election in 2018. These Democrats might be amenable to working with Republicans not on a frontal assault on Dodd-Frank, but on revamping specific sections of the sweeping law.

“There are individual issues where you can peel off some Democrats,” says Grover. “I think it’s harder if it’s a package.” (For more of Grover’s views about the new Washington scene, see “What the Age of Trump Means for Payments,” this issue.)

Payment-industry lobbyists agree that Dodd-Frank stands a better chance of being changed piecemeal, or through new regulatory interpretations, rather than in one big bill such as Hensarling’s. But retailers and other merchants, some of whom have challenged Visa and MasterCard interchange and card-acceptance rules in court on antitrust grounds, can be expected to defend the Durbin Amendment vigorously.

The amendment’s debit card interchange price controls cut interchange income just about in half for big debit issuers, bringing grief to them but joy to the merchants that pay interchange. In addition, the amendment as implemented by the Federal Reserve’s Regulation II requires each debit card to give the merchant access to at least two unaffiliated debit networks, a requirement Sen. Durbin intended to promote network competition.

Many merchants, as well as electronic funds transfer networks, see the routing requirements as a key aid in preserving PIN debit as a payment option in the face of what they see as heavy-handed competition from the global networks Visa and MasterCard.

“For the domestic debit networks, that’s hugely beneficial,” says Liz Garner, vice president of the Minneapolis-based Merchant Advisory Group, an association of 110 e-commerce and brick-and-mortar merchants concerned with payments issues.

The Washington-based National Retail Federation will be on watch “to make sure the benefits” of competition are preserved, says Mallory Duncan, the NRF’s senior vice president and general counsel. The NRF and some other merchant groups would even like to extend Durbin’s interchange price controls to credit cards.

But modifying or eliminating the Durbin Amendment will pit two traditional Republican allies, banks and retailers, against each other. To avoid offending anybody, it’s possible Congress might do nothing.

“The Durbin issue is vitriolic and acerbic, and asks Congress to make very difficult choices between two sets of friends,” says Scott Talbott, senior vice president for government affairs at the Washington, D.C.-based Electronic Transactions Association, a national payments-industry trade group.

Taming the CFPB

The Consumer Financial Protection Bureau, however, seems likely to get some sort of workover by Congressional foes who see it as an unaccountable regulator.

A federal appellate court recently ruled that its leadership structure headed by a single director, currently Richard Cordray, is unconstitutional. And rather than having Congress appropriate its budget, Dodd-Frank has the Federal Reserve providing the CFPB’s funding.

Besides the new prepaid card regulations, the CFPB has drawn fire from the payments industry for taking some processors to court for processing payments from alleged fraudulent debt collectors. The CFPB, in the eyes of some merchant acquirers, took its cue from the DoJ’s earlier Operation Choke Point, through which the government sued various independent sales organizations and processors serving merchants that allegedly defrauded consumers.

Critics complained that the Federal Deposit Insurance Corp. used the program to deny access to electronic payments by legal industries that the Obama Administration didn’t like, including gun dealers and payday lenders.

A Republican-backed bill to outlaw Operation Choke Point didn’t pass in the last Congress, but Hensarling has said his CHOICE Act would rein it in.

‘Only One Arrow’

On some other issues, payments groups are adding their voices to proposals that have broad financial-industry support. One is a call for a federal data-breach notification law to replace the current patchwork of 40-plus state notification laws.

“A single, uniform data-breach law will promote efficiency and predictability if a data breach occurs,” says a November letter to President-elect Trump from ETA president and chief executive Jason Oxman.

Many businesses also are pressing for updates to the Telephone Consumer Protection Act, which Congress passed in 1991 to regulate the telemarketing industry and thwart phone-based scammers. The Federal Communications Commission added regulations in 2013 to limit unwanted robocalls and texts to consumers. But the ETA and NRF say the TCPA and its attendant regulations create a hazy legal environment regarding when it’s legal or illegal for businesses to communicate with their customers by telephone.

“You can only send one text,” says Duncan. “You have only one arrow to make it right.” Adds the ETA’s Talbott: “This outdated law needs to be modernized.”

Meanwhile, the financing of a Mexican wall, should Congress ever approve such a massive project, remains the subject of little more than speculation as Trump prepares to take his oath of office.

Trump has backed off a bit from the hard-core anti-immigration rhetoric he used on the campaign trail, and, according to press reports, has recognized that the Mexican government is not going write a check should he send it a bill for a wall or fence’s construction. But stricter controls on illegal immigration have broad popular and Congressional support.

To David Landsman, executive director of the Great Neck, N.Y.-based National Money Transmitters Association, the groundwork for paying for the wall already has been laid in the form of a bill introduced a year ago by U.S. Sen. David Vitter, R-La. Vitter’s bill, called the “Remittance Status Verification Act of 2015,” would have required wire-transfer firms such as Western Union, MoneyGram, and others to ask money senders about their legal status in the U.S., says Landsman.

People here illegally could still send money, but they’d have to pay a 7% “fine” to the federal government for the privilege. In other words, Mexicans abroad, not their government, would finance the wall.

“It’s a large amount,” says Landsman, noting the proposal would generate $70 on a $1,000 transfer. The U.S.-Mexico wire-transfer corridor is valued at $25 billion or more, although how much is sent by illegals is unknown, says Landsman.

Vitter’s bill sat in the Senate Banking Committee all year, but Landsman fears it could be revived in the new Congress despite the many questions about to whom and how it would apply in practice.

“To me, it’s already a done deal, unfortunately,” he says. “We’re going to fight it. The political trends of the day would make it likely to pass. We have an anti-immigration sentiment in our country.”

While the Vitter bill seemingly would extract more payments from consumers, the new Republican regime in Washington is more likely than Obama’s to eliminate or at least trim regulations affecting payments, thereby reducing costs for consumers and businesses, according to consultant Grover.

“The administrative state has gotten enormously more powerful,” says Grover. “That trend is going to be reversed, but I don’t think it is going to be precipitously reversed.”



The Feds Plan To Create a National Bank Charter for Fintechs

The Office of the Comptroller of the Currency, which regulates national banks, plans to create a special-purpose national bank charter for financial-technology companies, a booming field in which payments firms play prominent roles.

Comptroller of the Currency Thomas J. Curry divulged the planned charter during a Dec. 2 speech. In it, he noted that the United States and United Kingdom alone have more than 4,000 fintech companies, and that worldwide investment in the sector has ballooned in just five years from $1.8 billion to $24 billion.

“The reality today is that the 4,000 fintech companies out there are already competing with national and state banks, without regard to any of the national bank responsibilities and under a patchwork of supervision,” Curry said.

Creating the limited-purpose bank charter could enable fintechs to better serve America’s 85 million Millennials, Curry said. “These consumers expect to be able to transact basic banking and financial business anywhere, anytime, from the palm of their hands,” he said.

A fintech charter also could give companies greater ability to offer financial services to unbanked consumers or those underserved by the current banking system, he added. A third advantage would be the ability of regulators and companies to openly vet risk, ensure that fintech applicants have adequate capital and liquidity, and employ adequate risk controls and consumer protections.

The new national charter does not mean that fintechs already providing financial services must apply for it, Curry said.

Exactly how the charter will affect payments-oriented fintechs was not immediately clear. A 16-page OCC document outlining the charter plan makes only a few passing references to payments.

Boston-based independent payments analyst Aaron McPherson sees parallels between the OCC charter and the European Union’s Payment Service Directive, which established a special category of regulated institution called a Payment Service Provider.

“PSPs have certain advantages of access to the banking system,” McPherson says by email. “The big difference here [in the U.S.] would seem to be that it is optional. I would expect there to be legislation at some point requiring fintechs engaged in banking services to get a charter.”

McPherson says he wouldn’t be surprised if companies such as PayPal Holdings Inc. apply for a charter to improve customer trust and gain access to the Federal Reserve System.

As national banks, he says, fintechs “would probably be able to get direct access to the credit card networks, removing the need for an agent bank. This could be bad news for some existing banks, which profit from giving fintechs access to the banking system, but addresses the concerns that banks have about a level playing field.”

The OCC document notes that the agency could, in the process of chartering a fintech bank, impose some rules that currently apply only to financial institutions insured by the Federal Deposit Insurance Corp. One is a requirement that institutions comply with the Community Reinvestment Act and lend in all areas where they take deposits.

The Electronic Transactions Association, a merchant-acquiring trade group, favors the OCC’s proposal—so far.

“We like it, in general we’re in favor of the idea because it creates a positive environment for fintech companies, payment companies,” says Scott Talbott, the ETA’s senior vice president for government affairs.

That view could change, however. If too many do’s and don’ts are piled on during the charter’s development process, “the less attractive the charter becomes,” Talbott says.

In October, Curry established the OCC’s “Office of Innovation,” which he called a “central point of contact and clearinghouse for requests and information related to innovation.”

The OCC is taking comments on the fintech plan until Jan. 15 through specialpurposecharter@occ.treas.gov.

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