September 17, 2012
Change Is the Only Constant: Section 1073 Set to Take Effect
If you are reading this post, then no doubt you are familiar with the passage of the Dodd-Frank Act, specifically Section 1073, which is the basis for the new rule pertaining to consumer-originated funds transfers from the United States to consumers or businesses in foreign countries. I recently attended a meeting where representatives from the remittance transfer industry discussed the responsibilities, complexities, and challenges of complying with the remittance transfer rule by the inaugural date of February 7, 2013. Not surprisingly, complying with the rule is a massive undertaking—when you consider that the remittance transfer business is, by definition, a business with a global reach.
One premise behind the rule was to create more transparency in remittance costs and thereby encourage competition in the market, to the ultimate benefit of the consumer. Today’s procedures for sending money abroad are basic. Locate one of more than a half-million domestic locations—in addition to many financial institutions, almost every gas station, drug store, and grocery store offer this service—complete a remittance form, hand money and form to a clerk, and wait a few minutes for confirmation. The funds are then made available to the receiver. A recent report published by the World Bank concluded that the United States currently maintains an average total cost to send a remittance below the global average (6.93 percent of the remittance amount versus 9.3 percent), thanks to the high volume and intense competition among the current large number of products and services available in the United States.
However, unknown to both parties at the time of origination is the exact dollar amount that the recipient will receive, because of hidden fees, taxes, and other costs not necessarily apparent. The rule will replace this "unknown" with a required hard copy receipt outlining, in any language used to market, advertise, or solicit business, all fees, commissions, taxes, the exact dollar amount netted to the receiver, and the time that the funds will be available for pickup. (There are other specifics, but no need to reiterate the entire law in this short blog!) A common pain point yet to be resolved in the compliance effort revolves around the ability of the sending entity to provide accurate receiving-end tax information. As an example, some countries have multiple and changing tax rates for different regions or a variable-fee structure on the receiving end based on the receiver’s status and relationship with the receiving entity. These tax and fee issues suitably demonstrate how achieving compliance will require cooperation from foreign entities in more than 213 country corridors, not under a remittance transfer provider’s control or subject to U.S. jurisdiction. Many in attendance suggested that a central database of tax information may be a way to address the conundrum. Whether provided by a third party in the industry or a government entity, a central database would provide consistent data and minimize research and upkeep costs for all transmitters.
In addition to cooperation, education for all players will be instrumental. Consumers should be made aware of their new right to cancel any transaction within 30 minutes of submitting and that they have contact information on their receipt in the event of any errors. At the same time, all remittance providers, including agents, need to be trained and educated to ensure compliance with this new rule.
With system changes required to produce the disclosures, will remittance providers reduce the number of channels used for remittances until they can modify their systems? With the number of contractual agreements required, will providers reduce the number of countries served or products offered? And given the cost, will remittance providers raise prices? And will U.S. consumers find alternative ways to send money? Only time will tell as the deadline for complying approaches.
The rule may eliminate some existing players from the game, as protection never comes without a price. At the same time, pioneering and innovative competitors might provide new channels and more products that will benefit consumers. Like anything that forces us to reinvent ourselves, change brings with it new threats and challenges, but the opportunities can be vast and rich. With a little imagination and a lot of hard work, the rewards can be enormous.
Remember, "The only thing that is constant is change" – Heraclitus
By Michelle Castell, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
September 17, 2012 in regulators, remittances, Section 1073 | Permalink
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August 06, 2012
Policymakers, Regulators Keep a Watchful Eye on Mobile Payments
Policymakers and regulatory authorities are beginning to turn their collective eye toward mobile payment developments and with good reason. The rapidly changing environment and the entry of nonbanks in mobile-enabled financial services create a new paradigm in regulatory oversight for consumer protections, bank safety and soundness, and regulatory compliance.
In recognition of these environmental dynamics, the Federal Reserve Banks of Atlanta and Boston recently convened a joint meeting of the Mobile Payments Industry Workgroup (MPIW) and regulatory authorities to discuss recent mobile payment developments and potential regulatory gaps. The two Reserve Banks then jointly published on July 30, 2012, a summary of the meeting describing the meeting dialogue between members of the MPIW and the regulatory community.
You can read the paper on the Atlanta Fed and the Boston Fed websites, but below are some quick highlights.
The complexity of the regulatory framework for mobile financial services requires further ongoing analysis—While regulators recognize supervisory elements common to both mobile and Internet environments, they say that the fast pace of change requires them to more closely monitor mobile payment developments. Regulators have an interest in ensuring safety and soundness as well as consumer protections in the emerging mobile payments environment. Both these objectives require that financial institutions adequately manage vendors when they outsource and partner with third parties in new mobile payment business models.
Education is needed to teach all stakeholders about the mobile environment, from regulators to consumer advocates to consumers themselves—Security, privacy, and consumer protections are important themes that all stakeholders should understand in order to be able to communicate appropriately with policymakers in mobile payments regulation. As mobile payment systems evolve, it will be important to engender cross-industry dialogue at both the industry and regulatory levels to ensure risks in these key themes are sufficiently addressed.
Next steps
The MPIW plans to continue to meet on regulatory issues with regulators as the mobile payments market matures. These meetings will serve to educate the regulators about mobile payment developments and risk mitigation initiatives. At the same time, regulators will be able to share early insights and concerns about mobile payments with the MPIW, while hearing their input and perspectives on future policy and regulatory decision making.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
August 6, 2012 in innovation, mobile payments, regulators | Permalink
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July 23, 2012
The debate on credit card surcharges
Late Friday the 13th, Visa and MasterCard announced that they, along with several major issuers, reached a $7.25 billion class-action settlement with U.S. merchants. In addition to being party to the largest monetary antitrust settlement in U.S. history, the networks agreed to permit retailers to impose a surcharge on credit transactions subject to a cap and a level playing field with other general purpose card competitors. Previously, the no-surcharge rule (NSR) had been a staple for both MasterCard and Visa, ultimately prohibiting merchants from charging consumers more to pay with credit cards. Merchants claim that because of the NSR, all consumers, regardless of their payment method, incurred higher costs. Now, in theory, merchants should be able to lower their prices and pass along the costs of a credit card transaction only to those consumers paying with a credit card.
Theory versus practice
However, in the payment card market, theory and practice can differ. Look no further than the Durbin Amendment. In theory, Congress intended for this legislation to benefit consumers, assuming that merchants would pass along their savings through lower prices. However, the debate continues whether merchants who received interchange relief—some actually experienced increased rates and are in fact passing along these costs to consumers—are really passing on the savings.
Should the settlement be finalized, I believe we will see another debate about whether the consumer actually benefits, as with the Durbin Amendment. Will many merchants actually choose to impose a surcharge on credit-card-paying consumers? Will the surcharging merchants actually drop prices from their current levels or simply add a surcharge on top of existing prices? Will networks lower the effective interchange rates thus making it less costly for consumers to use credit cards should merchants choose to actually surcharge?
Will credit card surcharging take place in the United States?
Again, we have to look at theory versus practice. In theory, the surcharging provision seems like a win for merchants, but in practice, will the surcharge provision have any impact at the point of sale? And what will prevent surcharging from being put into widespread practice in the United States?
For starters, 10 states with 40 percent of the U.S. population—including California, Florida, New York, and Texas—currently prohibit retailers from charging customers a fee for using a credit card. Keeping the consumer in mind, remember the backlash that one bank experienced when it proposed a new debit card fee? Will any merchant that attempts to implement a surcharge—actual implementation of a surcharge with various types of cards and payment environments is worthy of an entire discussion itself—face similar scrutiny?
I also wonder: if a merchant chooses to charge consumers a fee for using a credit card, would the fee and the merchant then fall under the authority of the Consumer Financial Protection Bureau? The surcharging debate around this potential settlement and ultimate outcome will no doubt be interesting moving forward.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 23, 2012 in card networks, cards, regulators | Permalink
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July 16, 2012
Oh, SNAP! Benefit trafficking costs millions
As I watched the local evening news several weeks ago, one particular story caught my attention. A local convenience store owner had been arrested for the repeated abuse of the Supplemental Nutrition Assistance Program (SNAP), formerly known as the food stamp program. The store owner allowed SNAP recipients to exchange their electronic benefit transfer (EBT) cards for such items as cigarettes and alcoholic beverages, charging a premium of anywhere from 25 to 50 percent of the items' values. This type of SNAP fraud is known as "trafficking." Another form of trafficking fraud occurs when the program recipients sell their cards on the black market in exchange for cash. These cards are then reported as lost or stolen, so recipients receive a replacement card.
Upon performing an Internet search on this topic the next day, I was surprised to discover that SNAP trafficking is actually a $300 million-a-year problem. According to a 2011 report of the USDA Food and Nutrition Service, trafficking diverted an estimated $330 million annually from SNAP benefits, or about one cent for each SNAP dollar redeemed. Interestingly, this figure is down significantly from earlier reports published by the USDA. In 1993, trafficking resulted in more than $800 million of fraud, or nearly four cents per SNAP dollar redeemed. Since the first report, the trafficking rate has fallen, leveling off at its current rate of 1 percent. Still, fraud levels for this EBT program are significantly higher than for general purpose credit and debit card cards.
The main reason for this decline has been the electronification of the old food stamp program. During the mid to late 1990s, some states began replacing food stamps with EBT cards. And since June 2004, all states have used EBT cards to distribute SNAP funds.
Though taking this program from paper payments to plastic payments has dramatically reduced trafficking fraud, fraud is still an issue at 1 cent per dollar redeemed—so much so that the USDA recently proposed a new rule that would allow state agencies to deny replacement cards to recipients who make four replacement requests over a 12-month period.
The USDA's proposed rule is currently open for comment through July 30. I encourage anyone with thoughts or ideas on this particular rule and on trafficking fraud in general to make their voice heard and provide feedback to the USDA. The SNAP EBT fraud rate, which is substantially higher than credit and debit card fraud rates, is the burden of all taxpayers. What else can or should we do to further tackle this particular payments fraud?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 16, 2012 in crime, fraud, regulators | Permalink
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June 25, 2012
An interview with a risk expert: The costs of complying with Dodd-Frank 1073
This week's post features an interview with Devon Marsh, senior vice president and treasury management risk manager at Wells Fargo Bank, N.A. We asked Devon for his thoughts on recent amendments to Regulation E as a result of Section 1073 of the Dodd-Frank Act.
P&R: Devon, what is the interest of Dodd-Frank 1073 to a risk manager?
Devon Marsh: I'm interested for a couple of reasons. First, it imposes a compliance obligation—and a steep one. The second reason I'm interested, and the reason that concerns me more than our ability to comply, is that this rule poses risk to consumers and financial institutions.
P&R: How can a rule aimed at consumer protection pose a risk to consumers?
Marsh: There is a risk that familiar services may become harder to find if some remittance providers such as banks can no longer afford the new compliance costs imposed by 1073. Remittance services are vital to some consumers, and they are at risk of having fewer providers from which to choose.
P&R: The new rule is designed to improve consumer protections in remittance transfers. What are some of the specific challenges that remittance providers will face?
Marsh: The new rule requires very detailed disclosures with a lot more information, so that consumers on both sides of the remittance transaction can better understand how fees reduce the payment transfer. The problem that arises is that remittance providers may not know the exact amount of all the fees. For example, they may not know the tax rates on a given day in a small municipality in another country. In certain countries, tax rates change depending on the day or the total volume of remittances over a period of time. You can't disclose what you can't possibly know.
The new error resolution process defined by the rule is another example where providers will be challenged to comply. In the new rule, remittance providers are responsible not only for their own mistakes, but for errors committed by consumers. If a consumer happens to enter the wrong beneficiary account number, for example, the remittance provider must cover any loss associated with the transaction, even though the consumer error was out of its control.
Because remittance providers are now responsible for consumer error, the rule may create the risk of intentional fraud, whereby a criminal could send a remittance to an accomplice who collects the money. Then the person sending the funds could claim that the funds never reached the intended beneficiary, saying they provided the wrong account number. In such a situation, it would be exceedingly difficult for a remittance provider to prove that an error did not take place, and even more difficult to recover funds.
If fraud losses increase for remittances, the price of remittances will increase. The risk of fraud loss, added to the cost of compliance on the front end, may prove too great for some providers to bear, so they may exit the business. Consequently, consumers could have fewer options for sending remittances, and higher costs for the service due to fraud losses.
P&R: What can remittance providers do to address the challenges in this rule?
Marsh: Given the tight time frame, it looks like remittance providers can't do much to change the rule. Hopefully, more dialogue with regulators and policymakers can influence understanding and lead to new industry perspectives on how remittance providers will deal with compliance challenges imposed by 1073. If not, the consumer may have fewer choices and higher prices than they have today.
June 25, 2012 in consumer protection, regulators | Permalink
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May 07, 2012
Regulating mobile: Distinguishing the payment from the channel
The handset is just a device, not a payment
Policymakers and regulators are just beginning to discuss the regulatory environment for mobile banking and payments in the United States. The added dialogue to existing industry conversations can lead to mixed messages about where regulatory and policy action may be needed. Recently we've heard from industry and regulatory agencies that the payments industry should carefully consider introducing new regulations and supervisory guidance.
The mobile handset is "just a device, not a payment," noted Mallory Duncan, senior vice president and general counsel at the National Retail Federation. Duncan, who spoke at the workshop "Paper, Plastic...or Mobile," hosted by the Federal Trade Commission, also said that regulation should be no more stringent than that of the underlying payment. In essence, the laws, regulations, and rule sets associated with a payment type—be it a credit card, debit card, or online payment—should follow that payment through the mobile channel for clearing and settlement. I offered similar conclusions in a previous Portals and Rails post on dispelling myths in mobile payments, adding that "while new networks...may emerge in the future, at present, the payment network systems remain the same."
Fragmented framework on an expanded landscape
One problem the payments industry faces as technology enables new intermediary payment methods (they all start off as something we already use: cash, checks, or cards) is that the legal and regulatory framework includes different consumer protections, disclosure requirements, and error resolution provisions depending on the payment type. While all these payments are used in an Internet environment—whether the Internet is accessed by phone or a traditional PC—the addition of the mobile channel and its telecom partners has seemingly created a tipping point for confusion and speculation. Many of the issues raised about consumer protection for prepaid cards, for example, exist now and have nothing to do with a consumer's ability to use a prepaid account with a mobile device.
Can existing regulatory infrastructure handle new mobile payment business models?
The United States has a more complicated banking system than most countries. National laws, for example, govern national banks, which are preempted from state law. State-chartered banks and nondepository money service businesses (like payday lenders and money transmitters), on the other hand, are responsible for complying with the laws of every state in which they do business. These laws are different from state to state, and sometimes even conflict.
Industry players in each of these separate chartering authorities are stepping into the mobile channel as a way to expand their footprint. While telecoms and technology firms are entering into partnerships with banks to establish new business models in the delivery of mobile payments, so far they're sticking to their knitting and leaving the clearing and settlement, and the extension of credit, to the financial services industry. As long as banks remain the payment issuers in these still nascent business models, caution in rethinking the regulatory infrastructure is probably a good idea as well.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
May 7, 2012 in innovation, mobile banking, mobile payments, regulators | Permalink
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March 19, 2012
Balancing payments risk management and regulation with innovation
Government must be careful not to overreact to, or stifle, new innovations that can greatly benefit the consumer and the American economy. Government should take advantage of marketplace solutions to issues where appropriate. To do this, and at the same time to be in a position to act appropriately, it is important for government to maintain expertise in electronic money and payments development, and to consider carefully major questions presented by these developments. (Excerpt from 1996 paper prepared by the Department of Treasury on emerging electronic money and banking innovations.)
This quote appeared in a presentation given last week by John Carlson, executive vice president at BITS, a nonprofit group that fosters communication around technology issues that affect the financial services industry. John used this quote to demonstrate that, even in 1996, the Treasury Department recognized the need to not over-regulate at a time when financial institutions were beginning to experiment with Internet banking.
In the presentation "Hardening Payments for the Next Generation," which he gave at the BAI Payments Connect conference, John stressed that we still have to exercise care as financial institutions continue to innovate. The industry must still consider how it will balance the benefits of innovation in payments with the need to manage changing risks and ensure that regulators keep up with the changes. John warned that, despite the myriad of new threats, the temptation to overreact to these with regulation and legislation may stifle payment innovations. He emphasized that, instead, payment stakeholders must collaborate and share information.
Following are a few other noteworthy points from the presentation.
Rise in fraud and security issues in payments
John noted that as more nonbanks enter the marketplace and new innovative alternative products are introduced, payments fraud is evolving alongside. We need to keep looking at emerging payment issues involved with EMV-enabled payments, for example, as well as mobile payments, cloud computing, and payments conducted via social media. At the same time that these products are entering the marketplace, fraud is evolving in new and unexpected ways. And as global crime rings increasingly engage in cross-border activities, for example, a rise in cyber-security threats will likely continue.
We are also seeing some conflicting trends in consumer trust of security issues, according to John. While many consumers respond conservatively in surveys on payments security, for example, consumers generally are becoming increasingly willing to share personal information with "friends" in social media sites like Facebook and LinkedIn. And while consumers are gradually warming up to alternative payments in the mobile channel, most fail to employ general protections such as mobile device password locks.
A challenging regulatory environment
John mentioned that U.S. financial institutions are subject to independent regulatory oversight by a host of federal and state agencies, but the regulatory environment for nonbanks is not well understood. This lack of clarity around the nonbanks results in unclear liability for financial institutions and their customers alike. Consumers are likely to go to financial institutions for error resolution because of trust and familiarity, even when the risk and liability belong to the nonbank partner.
Third-party risk will continue to be a significant concern going forward, said John, as banks recognize the economic benefits they can get from outsourcing. As a result, regulators will focus on banks' vendor management programs to ensure that banks exercise comprehensive due diligence when they engage with vendors, and that they continue to provide oversight of the vendor throughout the duration of the relationship.
John noted that while there is a great deal of discussion on regulation of the emerging mobile channel, it is likely that such regulatory guidance will be embedded in vendor oversight guidance, of which there have been many iterations over the years.
Trust is necessary element of a successful payment system
John's presentation concluded in saying that "trust is central to everything we do." Financial institutions and other stakeholders with access to payment data and personally identifiable information have a growing responsibility to protect that data as the risk grows for network and device compromise. With more personal information exposed via social media, we will need to consider incentives for stakeholders to safeguard information by banks and other competitors in the payments space. Furthermore, those nonbank competitors and outsourcing partners need to be held to similar business practice standards for security and safety and soundness.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
March 19, 2012 in innovation, regulators | Permalink
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December 12, 2011
Retail Payments Risk Forum conference explores the role of government
In light of the many legislative and regulatory changes affecting the payments industry that are already underway, how and when does government intervene in today's highly dynamic marketplace? To answer this question and more, a mix of regulators, legal professionals, and law enforcement representatives participated in the Risk Forum's fifth annual signature conference, "The Role of Government in Payments Risk and Fraud," held November 17–18 at the Atlanta Fed.
Marie Gooding, first vice president of the Atlanta Fed kicked off the event with some opening remarks. Next up was Louise Roseman , director of reserve bank operations and payment systems at the Fed's Board of Governors, with the conference's keynote address. Roseman offered some historical perspective on the relevance of government in the nation's payments systems. The conference continued with five key sessions relating to the governance of risk and fraud in retail payments. We present the highlights of each session in this post. You can get the presentation materials on the Atlanta Fed website.
Changes in regulatory oversight and self-governance crucial
Government oversight of the nation's retail payment system is delivered through different models at the federal and state levels. Complicating matters further, regulatory oversight depends on whether the payment service provider is a bank or a nonbank third party. As the payments environment grows more complex with new nonbank entrants in the payment system and many new alternative payment alternatives, it will be challenging for traditional governance to fully understand the emerging risks Alongside regulatory oversight, self-governance in the form of compliance programs, rules, and standards can contribute to effective alternative models. This panel also explored the role and scope of the new Consumer Financial Protection Bureau and how it plans to fulfill its newly established mission.
Law enforcement challenges
Panelists discussed the importance of collaboration among law enforcement agencies as payment crimes become more sophisticated and proliferate across global geographies. Cross-border financial transactions will demand collaboration among international and domestic law enforcement organizations, as well as among the industry participants themselves and their respective regulators. The panel addressed the growing need for law enforcement to collaborate with regulators who have fragmented state-level authority and are not required to exercise prudential supervision.
The need for better fraud data
Panelists discussed the growing incidence of payment crimes, noting that the United States' efforts to address payments risk and fraud may be hindered by a lack of supporting data on the costs of prevention and the losses incurred. The United States is virtually the only country that does not keep comprehensive data on such losses and costs. The panel discussed how the industry could benefit from complete quantitative information. Armed with such information, the industry could more effectively allocate resources to payment mechanisms and channels posing the most significant risks. This knowledge will become increasingly necessary as payment providers and businesses plan future investments in payment fraud risk management programs.
Changes in the U.S. regulatory environment
2011 witnessed significant regulatory efforts such as the CARD Act, overdraft legislation, the Durbin amendment, and the effects of these initiatives on the behaviors of such stakeholders as the merchants, banks, and even consumers. Panelists engaged in a comprehensive discussion on the current state of these initiatives and what to expect. The audience participated in the dialogue on noteworthy issues such as payment authentication methods and fraud management systems resulting from the industry's response to the Durbin amendment, and the response from Congress to marketplace changes such as new bank fees.
Payment laws and regulations in a dynamic payment environment
Panelists in this session explored how a complex matrix of federal and state laws for retail payments in the United States poses challenges as the industry migrates to alternative payment mechanisms. At issue is the lack of a common playing field for banks and nonbanks regarding legal compliance and safety and soundness. Also at issue is the inapplicability of some laws and regulations to specific payment methods. While many panelists agreed that it is desirable to harmonize efforts under Dodd Frank, they noted that small changes in some payment systems can create significant complications in others. Finally, the panelists discussed the current need for commercially reasonable security methods to limit a financial institution's liability within the current legal and regulatory framework.
Conclusion
This event provides the Retail Payments Risk Forum with critical business intelligence from participants to drive our thought leadership and strategic planning as we move forward into 2012. Look forward to further discussion on these topics as our team explores these evolving issues, and as always, we invite your dialogue in the conversation.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
December 12, 2011 in regulators | Permalink
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October 24, 2011
Keeping pace as money transmitters proliferate
As the United States migrates from paper-based retail payments to electronically enabled methods, we are witnessing a proliferation of entrepreneurial and innovative nonbank stakeholders entering the retail payments market. As my colleague discussed in a previous post, these nonbanks provide a variety of services that banks can use to create more efficient payment systems. But the fast pace of technological change and the ease with which these new companies can enter the retail payments arena may also be translating into new risk vulnerabilities for the nation's retail payments systems.
There are many different types of nonbanks in U.S. payments systems today, including technology developers, aggregators, agents, third-party service providers, and money service businesses (MSB) and transmitters. As technology enables more nimble and innovative payments, the role of MSBs and, in particular, money transmitters is growing more important.
Am I an MSB?
According to this table from the Financial Crimes Enforcement Network (FinCEN), certain products or service offerings may dictate the capacities in which a business might fit the definition of an MSB. Note that money transmitters represent a specific type of MSB that engages primarily in funds transfer services.
The innovations that PayPal introduced illustrate the value that transmitters add to the payment system through the provision of nimble service offerings that respond to consumer payment needs. Over time, PayPal has evolved into a mainstream payment service provider and household name, and has demonstrated a commitment to risk management and regulatory compliance across all the jurisdictions in which it operates. But PayPal's commitment contrasts with the overall state of the industry of MSBs, whose efforts are not completely transparent. MSBs and transmitters today operate in a fragmented regulatory environment determined by the specific governing laws, licensing requirements, and permissible business activities of each U.S. state.
As money transmitters become more prevalent players in our nation's payment system, is it time to reassess their regulatory environment and consider the potential benefits of a national supervisory framework?
Transmitters and the U.S. regulatory structure
Money transmitters are required to register with FinCEN and to comply with federal laws for anti-money-laundering and counterterrorist-financing provisions of the Bank Secrecy Act. In addition, 48 states require the licensing of money transmitters before they can do business. For money transmitters that operate in more than one state and across state lines, differences in state legal requirements create challenges to developing effective enterprise-wide compliance and risk-management programs. Furthermore, monitoring changes in various state legal regimes can be extremely complicated, not to mention costly.
Ironically, state regulatory authorities governing money transmitter businesses are generally budget-strapped in today's economically distressed environment, and lack the financial resources for taking action against all but the most egregious of bad actors. Unlike the prudential regulatory governance employed by the agencies of the Federal Financial Institutions Examination Council for the nation's mainstream financial institutions, regulatory response for the oversight of money transmitters is prompted instead by complaints to state authorities, or by the filing of suspicious activity reports to FinCEN.
Future regulatory considerations
There are many risks to consider in this nascent segment of the retail payments industry. With the ease of entry into the market for money transmitters and the potential lack of funding in some states for comprehensive regulatory oversight, some startups may circumvent licensing and capital requirements by merely opening for business, undetected by state authorities. FinCEN has issued advisories requesting that financial institutions that discover such businesses file suspicious activity reports (SARs) as a means of mitigating unlicensed and potentially illegal activity. Unfortunately, as technology supports more sophisticated advancements in electronic payments as well as new alliances between carriers and money transmitters, regulatory efforts will become increasingly difficult.
The newly established Consumer Financial Protection Bureau is empowered to exercise enforcement authority for improper conduct on behalf of money transmitters, but the task is daunting, considering the disproportionate state-by-state regulatory framework currently in place. Is it time to consider a more consistent, national approach to the legal and regulatory oversight of money transmitters? And, considering the onerous compliance costs that the current environment imposes, would money transmitters in fact welcome a more consistent, uniform environment?
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
October 24, 2011 in money services business (MSB), payments risk, payments systems, regulators, transmitters | Permalink
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October 29, 2011 at 04:58 AM
September 26, 2011
I can’t use my prepaid card for that now?
The focus of the Portals and Rails blog is usually related to fraud or operational risks to the payments system. Today's blog will take a look into a different type of risk, the risk of reduced functionality for general purpose reloadable (GPR) prepaid cards. An interesting development with GPR prepaid cards has risen out of the recent Regulation II (Reg II) ruling. Considering that 1.3 billion general purpose prepaid card transactions were conducted in 2009, according to the 2010 Federal Reserve Payments Study, changes affecting GPR prepaid cards could affect many people.
Reg II, which was instituted in response to the statute commonly referred to as the Durbin Amendment, has an unintended consequence. Consumers risk losing some payment functionality with prepaid cards, including the ability to have funds auto-drafted via ACH from GPR prepaid cards. The risks of unintended consequences such as this one has not gone unnoticed by the Federal Reserve Board. In fact, during the June 29 Open Board Meeting, Governor Duke expressed her concern on this topic and would eventually like the Board to "undertake a study to quantify the overall effect of this rule on consumers."
With the Reg II interchange cap set to go into effect on October 1, many institutions are implementing new checking account fees and debit card fees that will undoubtedly make checking accounts and debit cards costlier for consumers. However, outside of eliminating or reducing rewards, institutions will offer consumers the same benefits and functionality for debit cards as they did before Reg II. It does not appear that the same can be said for the functionality and convenience of GPR prepaid cards.
To be exempt from the interchange cap, a GPR prepaid card must be the only means for a consumer to access the funds on that card or the card issuer must qualify for the small-issuer exemption (assets of less than $10 billion). If the consumer can access funds on a GPR prepaid card issued by a large issuer (assets of $10B or more) with a check, ACH, wire, or other account transfer method, then the card is viewed as a "deposit account" and therefore not exempt from the Reg II interchange cap. It was critical that the regulation include this language concerning GPR prepaid cards to prevent the widespread evasion of the interchange cap by issuers labeling traditional debit cards and their underlying deposit accounts as prepaid cards.
Conceivably, a GPR prepaid card issuer could be exempt from the Reg II interchange cap by eliminating payment functionality beyond the purchasing function of the prepaid card. Under this scenario, consumers would no longer be able to use their GPR prepaid cards to auto-draft funds via ACH from the card to pay recurring bills, such as utility bills.
According to recent comments by the CEO of Green Dot, the largest GPR prepaid card program manager, "all Green Dot managed programs, including our Walmart MoneyCard program, will be exempt from interchange restrictions under the Durbin interchange amendment and therefore, our programs will not be subject to lower interchange." A recent article in the American Banker noted that Green Dot would need to either remove features of its cards or switch bank issuers (neither of Green Dot's current issuers can qualify as small) for its cards to be exempt from the interchange cap.
Implications for GPR prepaid card users
With Green Dot cards set to be exempt from the Reg II interchange cap, many GPR prepaid card users should prepare for the loss of the direct debit functionality of their cards. And with the loss of this payment option, prepaid card users that currently use their cards' direct debit functionality to pay bills will now be more at risk of making late payments and having to pay the accompanying late fees. Furthermore, because many recurring billers, including utility companies, often charge a fee for card-based payments, GPR prepaid card users can expect to pay a service fee for paying some of these bills. To avoid these service fees for card-based payments, GPR prepaid card users may be forced to make cash payments in person, which can be both inconvenient for the consumer and costly for the biller.
A final thought
Perhaps the most surprising information from the Green Dot announcement is the fact that the WalMart Money Card will also be exempt from the interchange cap. With merchants being some of the biggest proponents of the Reg II interchange cap, it's interesting to learn that a merchant cobranded prepaid card will be stripped of a feature that provides consumers with a free, safe, and convenient way to pay bills all in the name of earning the higher interchange and presumably maintaining low costs for consumers. Given the utility of GPR prepaid cards for the un- and underbanked population, will removing electronic payment functionality from the cards further disenfranchise these consumers from banks? Or would increasing consumers' cost for the product to maintain its current functionality lead this segment away from electronic payments and back to cash?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
September 26, 2011 in payments, prepaid, regulators | Permalink
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Comments
Although article focuses on loss of direct ACH debit from prepaid cards, these same programs are also eliminating their web billpay offerings -- this is probably an even bigger customer impact as web billpay usage exceeds that of direct debit.
Posted by:
dave fortney |
October 03, 2011 at 10:25 AM
How absurd that a piece of legislation intended to curb debit interchange earnings for banks is singling out transactions that do not generate any interchange (ACH, checks).
Under-banked people encouraged by the government to receive their tax refunds into prepaid cards will be delighted to learn that they can no longer pay their bills conveniently with the money received...
There are plenty of non-evil large banks that will think twice before offering prepaid cards as an entry product, if the cards loose a large part of their usefulness.
Posted by:
Patrice Peyret |
September 27, 2011 at 09:02 PM
You are right to ask the question Cindy. A national framework that works to separate payments and other banking businesses ought to be a straightforward first step toward a more efficient payment sector. Innovation in the "money transmitter" segment should be decoupled from the areas of systemic risk (eg, credit creation).