2013 Prepaid and Emerging Electronics Payments In Review jan 15 2015-v1


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An overview of the whole 2013 prepaid and electronics payment industry reviewed by Bryan Cave legal experts.

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2013 Prepaid and Emerging Electronics Payments In Review jan 15 2015-v1

  1. 1. 2013: Prepaid and Emerging Electronic Payments Year in Review Judith Rinearson - John ReVeal Linda Odom And the Bryan Cave Payments Team: Margo Strahlberg – Jennifer Crowder Alan Solarz - Courtney Stolz – Seyi Iwarere Louise Nutt – Rob Lystad – Karen Neely Louis January 15, 2014 1
  2. 2. Agenda • Introduction “Themes for 2013” – Judie Rinearson • Hot Topics 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. The Consumer Protection Flash Mob – Linda Odom The Payroll and Student Card Drama Scenes – Margo Strahlberg Target and Similar Data Breaches Fall-Out – Courtney Stolz The Tax Refund/Government Benefit Fraud Fears – Jennifer Crowder The Durbin Roller-Coaster – Judie Rinearson The FinCEN AML Reinvention - Seyi Iwarere The Mobile Wallet Tower of Babel – Dan Wheeler The Virtual Currency Hysteria – Louise Nutt and Alan Solarz The Short-Term Credit/Overdraft Siege - Rob Lystad The Money Transmitter Licensing Blitz – Karen Neely Louis Federal Banking Regulatory Angst– John ReVeal International Regulatory Conundrum - Judie Rinearson 2
  3. 3. Consumer Protection Issues “Flash Mob” Linda Odom Washington, DC 3
  4. 4. Q: Why Flash Mob? • Federal Regulators: CFPB pending regulations; FTC Guidance • Federal Legislators: Sen. Menendez proposed legislation (and now Sen. Warner) • State Regulators: Connecticut, Illinois • Consumer Groups: Pew Charitable Trust; Center for American Progress, National Consumer Law Center • Media: NY Times, USA Today 4
  5. 5. What is likely to happen? • Pending federal legislation may impact on CFPB • CFPB Regs now due in May • Expected measures - – – – – – FDIC insurance Regulation E protections (payroll card version) Specific Fee disclosure requirements Some fee prohibitions (balance inquiries; decline fees) Credit access limitations 5
  6. 6. Other top CFPB News for 2013 • • • • Cordray confirmed Remittance rules take effect Enforcement attorneys no longer participate in exams CFPB is criticized for collecting personal consumer data – and argues that it does not monitor accounts • Ongoing Republican efforts to change CFPB’s structure, impose financial oversight – not successful • Guidance issued for “self-policing” and “self-reporting of consumer protection violations 6
  7. 7. Payroll and Student Card “Drama Scenes” Margo Strahlberg Chicago 7
  8. 8. Q: Why Drama Scenes? Payroll – Litigation led to front page NY Times Story • Mandatory Cards • Fees so high that employee gets less than minimum wage – – – – – 16 Senators Send letters to Dept of Labor and CFPB NY Attorney General Send Info Requests to 20 Employers CFPB issues guidance confirming law - - no mandatory cards Class Action in California Payroll card legislation passed - CT, MI, OR 8
  9. 9. Student Cards • Following on from 2012 Higher One and US PIRG report, CFPB investigates University and College financial products offered to students • Democratic House and Senate Leaders send letters to 8 major banks seeking information on student card programs • CFPB calls on financial institutions to “voluntarily” disclose to the public its financial product marketing agreements made with colleges and universities • CFPB holds public forum on student financial products 9
  10. 10. What is likely to happen? • Speculation is that new CFPB GPR regulations will include specific provisions on Payroll and Student Cards • Menendez legislation has new language requiring that employees receive a choice in form of payment, including check or direct deposit • Expect more state activity 10
  11. 11. Target and Similar Data Breaches “Fall-Out” Courtney Stolz Washington DC 11
  12. 12. Q: Why Fall-Out? • • • • Sen. Blumenthal called for the FTC to investigate Sen. Schumer urged CFPB to investigate. Sen. Leahy reintroduced data security legislation. Sen. Menendez asked the FTC to recommend further legislative action to ensure consumers are protected. • Media calls for EMV - - USA Today – 1/10/14: – Data breaches like the one at Target that exposed information for up to 110 million customers would be pointless for criminals if U.S. banks switched to the secure [EMV] … • Senators call for hearings about EMV adoption – Banks are under no mandate to issue EMV cards but are likely to issue EMV-compliant cards widely by 2015 to be ready for the fraud liability shift in October 2015. 12
  13. 13. What is likely to happen? • Calls for earlier adoption of EMV – Could impact on Durbin Reg II Routing requirements – Major payment networks and banks oppose – Recent poll of merchants indicates that merchants would prefer to invest in mobile phone POS and not anti-fraud systems • Potential federal legislation to protect consumers • Potential new wave of state breach notification laws • Class Actions and litigation 13
  14. 14. The Tax Refunds and Government Benefits “Fraud Fears ” Jennifer Crowder Kansas City 14
  15. 15. Q: Why Fraud Fears? Tax Fraud • Sen. Nelson introduces the Identity Theft and Tax Fraud Prevention Act of 2013 – distinguishes between “at risk” and “verified” accounts – limits number of refunds to the same account. • IRS Crackdown on “Refund Fraud & ID Theft”; IRS warnings on pervasive telephone scam • Congressional hearings on IRS Tax fraud • FinCEN issues Tax Fraud Advisory 15
  16. 16. Other fraud-related items • Massive global cyber fraud hits Omani Bank - $42 million withdrawn • Congressional Hearings on Jamaican Lottery Scam • FTC issues warning bulleting on utility bill scam • Internet Crime Complaint Center (IC3) issues warning on gift card tampering • Three states pass laws restricting usage of government benefit/EBT cards at liquor stores, race tracks, and other inappropriate locations 16
  17. 17. What is likely to happen? • Increased pressure to monitor transactions • Increased pressure for more internal controls at government agencies such as IRS • Banks scrutinize their prepaid tax refund programs • Concerns that regulators might limit or restrict which cards can accept government payments • Potential new regulations on warning notices to consumers • Potential push for EMV as a fraud deterrent 17
  18. 18. Durbin and Reg II “Roller-Coaster” Judith Rinearson NYC 18
  19. 19. Q: Why Roller Coaster? • • • • • • • • • • Dodd Frank Act – Passed in May 2010 Proposed Regulations Issued December 16, 2010 Final Regulations issued June 29, 2011 Exclusivity for Payment Networks - October 1, 2011 Routing and Exclusivity generally for issuers - April 1, 2012 Routing and Exclusivity for HSA / FSA / HRA cards (those using transaction substantiation systems) – April 1, 2013 Effective Date for general use prepaid April 1, 2013 Revised FAQs issued March 13, 2013; May 2013 NACS Litigation decision issued July 31, 2013 NACS appeal pending – oral arguments Friday Jan 17th 19
  20. 20. What is likely to happen? • If Judge Leon’s NACS decision is upheld…. – Business as usual until new regulations are proposed and finalized; expedited regulatory process likely, with comment period – Interchange rates likely to be lowered – Multiple routing options will likely create operational nightmares – No changes anticipated in the exemptions for small banks and for certain GPR cards • Potential increase in GPR usage • If NACS is not upheld…. – Most likely back to business as usual – Industry still grappling with PIN issuance at point of sale or prior to card issuance or usage Of course other option is that Judge Leon’s decision could be upheld in part and reversed in part…. 20
  21. 21. FinCEN AML “Reinvention” Seyi Iwarere Washington DC 21
  22. 22. Q: Why Reinvention? • New Director Jennifer Shasky Calvery – former DOJ prosecutor – institutes changes - meets with industry • Cross-border regulations that would designate prepaid as “monetary instruments” – has been a OMB for months and is now apparently being reconsidered. • 314(b) Guidance responsive to requests from MSBs for clarification on ability to participate in the 314(b) information sharing process under a safe harbor • Issues Guidance that secondary market for closed loop cards does not change the intrinsic status of the card • Takes on virtual currencies with new guidance on exchanges and administrators in March 2013 22
  23. 23. What is likely to happen? • Likely there WILL BE some cross-border regulations requiring certain prepaid cards to be declared. – Perhaps only anonymous cards. Hard to say. • Increased focus on ID verification – when needed; looking for 21st century solutions. • Expect some high-profile law enforcement proceedings • Increased interest in off-shore products, banks, and issuers. • Increased interest in mobile payments and virtual currencies 23
  24. 24. Mobile Wallet “Tower of Babel” Dan Wheeler San Francisco 24
  25. 25. Q: Why Tower of Babel? • NFC and Contactless payments – ISIS - A mobile payments venture owned by AT&T, Verizon Wireless and T-Mobile USA – partners with American Express – studies suggest 50% of smart phones to be NFC enabled. NFC is being used by Android, Samsung, BlackBerry and Windows Phone operating systems • Apple has rejected NFC: – Apple uses iBeacon; Touch ID; Rumors say iPhone6 may have NFC • Paypal also uses iBeacon – Bluetooth wifi communicates with a “beacon” installed at retailers locations • MCX – Retailers’ Network: cloud-based-relies on bar codes • Square Wallet – Combines GPS and Photo ID 25
  26. 26. What is likely to happen? Hard to Predict - - Not a legal issue…. • Possible that new laws or regulations or more major data security breaches will lead to EMV (chip and pin) technology in order to reduce fraud • Nevertheless, consumers and merchants seem to both want the convenience and innovations brought through the use of mobile wallets/apps • What Apple decides will impact industry • One suggestion: EMV can be compatible within NFC mobile devices – through the use of “EMV contactless” - If the payments industry will be upgrading for EMV, why not do both? 26
  27. 27. Virtual Currency “Hysteria” Louise Nutt Santa Monica Alan Solarz NYC 27
  28. 28. Q: Why Hysteria? • March 18, 2013 – FinCEN Guidance – Exchangers and Administrators must register as “money transmitters” • Senate Hearings on “Potential Risks, Threats and Promises” of Virtual Currencies -November 2013 • Bitcoin value exceeds $1200 in November; New York Times publishes 17 articles on Bitcoin and other virtual currencies between in less than 3 weeks. • California DFI issues a cease and desist order against the Bitcoin Foundation. Questions of state licensing arise. • Law enforcement: : TX Ponzi scheme; Liberty Reserve; Silk Road; Mt.Gox. 28
  29. 29. Current Status • FinCEN Rules – “User” - A user is a person that obtains virtual currency to purchase goods or services. – “Exchanger” - An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. – “Administrator” - An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. • NY DFS issues subpoenas; hearings on “BitLicenses” scheduled for January 28-29th. • At least one state issues license; most are waiting… 29
  30. 30. What is likely to happen? • Tax issues – IRS is studying. Is it a “currency”? A “capital asset”? A commodity? • Global acceptance – Thailand prohibits; China bans; UK’s FSA considering regulatory position • Overstock.com - - as merchant acceptance grows, usage will grow, call for regulation will grow • Possible outcomes: – Optimists: “Internet” for money; changes the entire payments infrastructure; becomes ubiquitous – The middle road: Acceptance and growth through a network of “compliant” licensed exchanges around the globe. – Pessimists: The bubble bursts; globally outlawed. 30
  31. 31. The Short-Term Credit/Overdraft “Siege” Rob Lystad Atlanta 31
  32. 32. Q: Why Siege? • March 2013 Federal legislation introduced in March 2013 to regulate banks' overdraft protection plans • Spring 2013: Fed and OCC “crackdown” on payday lending; CFPB white paper highly critical of payday and deposit advance loans • August 2013: NYDFI Targets Online Payday Lenders; Pressures from Federal Regulators Increase regarding Banks that Process their Transactions • October 2013: Consumer groups urge federal agencies to take “further strong action to protect consumers and the integrity of the payment system by stopping [banks] and payment processors” from facilitating electronic payments on behalf of Internet and tribal payday lenders • November 2013: OCC and FDIC jointly issued final guidance on deposit advance products • November 2013: CFPB begins accepting payday lending complaints 32
  33. 33. What is likely to happen? • Banks will be very hesitant to offer short-term, small dollar loans • Banks will be strongly discouraged from issuing prepaid cards with lending lines or overdraft features • It is possible that CFPB regs will prohibit prepaid cards from offering credit features, even on a opt-in basis with full disclosures. • Credit will be harder to get, and more consumers with poor credit history may be forced to go to unregulated sources 33
  34. 34. Money Transmitter Licensing “Blitz” Karen Neely Louis Atlanta 34
  35. 35. Q: Why Blitz? • Florida: Square Fined $507,000 for operating without a money transmitter license from February 2010 until Nov. 13, 2012, when it applied for a license • Illinois: Issued cease and desist orders from January 2013 against six entities for alleged unlicensed activities, including NetSpend, Square, TouchPay and Skrill • Wave of new laws: 23 new state money transmitter licensing laws passed in 2013, from 19 different states. • Non-Uniform and Inconsistent: State laws are not uniform, and are interpreted disparately. But under 18 USC 1960 it is a federal crime to conduct an unlicensed money transmitter business. 35
  36. 36. What is likely to happen? • More state licensing laws applicable to both traditional and emerging payments. • More enforcement actions and cease & desist orders. • More licensed money transmitters partnering with payments businesses to sponsor licensed payment services • There have been calls for a national federal licensing law to supplant the patchwork quilt of state laws. 36
  37. 37. Federal Banking Regulatory “Angst” John ReVeal Washington DC 37
  38. 38. Q: Why Angst? • OCC/Fed Guidance on Managing Outsource Risks: Seen as a warning to the banking that third-party relationship management to be a significant focus in coming examinations. • FFIEC Guidance on Social Media Risks: Banks must adopt a risk management program to help identify, measure, monitor and control the risks related to social media. • FDIC Guidance on Customers that Engage in Higher-Risk Activities: Banks providing payment processing services directly or indirectly to merchants engaged in “higher-risk” activities must perform appropriate due diligence to ensure that the merchants operate in accordance with applicable law. 38
  39. 39. What is likely to happen? • Heightened focus on a bank’s relationships with program managers and other third-party service providers • Third party service providers can expect their bank partners to increase demands and expectations • Banks (especially small banks) may feel pressured by their regulators to terminate prepaid and emerging payment programs. 39
  40. 40. International Regulatory “Conundrum” Judith Rinearson NYC 40
  41. 41. Q: Why Conundrum? • • • • • • • Canada : New regulations covering “prepaid payment products” China: The central bank of the China for the first time issued third party payment licenses to foreign payment companies. Hong Kong: Proposed a new regulatory framework for device and non-device stored value products. EU: Revised Payment Services Directive intended to enhance transparency, innovation and security in the field of retail payments. The EC also recommended capping debit and prepaid card interchange fees to 0.2 percent, and capping credit card interchange at 0.3%. France Adopts Second E-Money Directive. The French Parliament recently adopted the Second European Directive on Electronic Money U.K banks: . Reported to no longer willing to offer banking services to a electronic money and payment companies, including money services businesses, merchant acquirers, and prepaid card issuers. FATF: Issues Guidance for a Risk-Based Approach to Prepaid Cards, Mobile Payments and Internet-Based Payment Services 41
  42. 42. What is likely to happen? • Similar forces impact international laws: – Major data security breaches and fraud losses – Consumer and consumer group complaints about high fees, unfair terms, misleading advertising • Competitive pressures as well are evident in global payment developments – Central banks and well entrenched financial services companies protecting their turf – Dominant mobile carriers and phone manufacturers can set the rules for others. • Laws will seek for more transparency, lower fees, and (hopefully) risk-based AML controls 42
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