The Unique Role of Non-Banks in Emerging Payments: The laws that apply; the rewards and the risks. ACC Legal Quick Hit Judith Rinearson, Bryan Cave LLP Keith Omsberg, Official Payments Corporation Cheryl Slipski, Ubiquity Global Services, Inc. November 20, 2013 1 1
Agenda Introduction What are Emerging Payments and how are non-banks involved? The Key Five Legal Areas Consumer Protection AML Money Transmitter Licensing Abandoned Property Privacy / Data Security And don t forget Banking Regulations even if you re not a bank - - they impact on you 2
Agenda Introductions Keith Omsberg and Cheryl Slipski What are Emerging Payments and how are nonbanks involved? The Key Five Legal Areas Facing Issuers or Marketers of Emerging Payment Products Consumer Protection AML Money Transmitter Licensing Abandoned Property Privacy / Data Security 3
What are Emerging Payments? Payment Products Three basic structures for payment products: Pay Later: Credit Cards; 30-day bill pay; lines of credit; charge cards; payday lending Pay Now: Cash (though some say cash is also pay before ); checks; debit. Pay Before: Travelers checks; money orders; tokens; prepaid cards
Emerging Payments Prepaid - Pay before Gift and reward cards Student and Campus cards Payroll Cards General Purpose Reloadable Emerging & Mobile - All of the above Credit, Debit and Prepaid Payments Person-to-person Loads ewallets
Key Players Traditional payments: Traditional Brick & Mortar Banks Traditional Money Transmitters (Western Union; American Express) Emerging payments: Newer Online banks (Bank of the Internet; Everbank) Newer Money Transmitters (Paypal, Google, Square) Newer Payment Platforms for online payments Jointly issued/marketed products: Banks partner with non-bank Program Managers to issue prepaid cards Merchants partner with banks to develop new financial services for customers 6
Closed Loop -- Open Loop 7 7
Prepaid Payroll and General Purpose Reloadable 10 8
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Legislative Landscape: The 5 Key Legal Areas 12
I. Consumer Protection Both federal and state laws Fees, expiration dates, fairness Transparency and disclosures Consumer Financial Protection Bureau Game-changer. 13
Federal Consumer Protection Laws Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act ) Signed into law May 22, 2009 Gift Card Amendment included; Final Gift Card Regulations issued March 23, 2010; Effective August 22, 2010 (limited extension for certain card products until January 30, 2011) Covered both open-loop and closed-loop gift cards, codes and other devices No Expiration Dates on Gift Cards prior to 5 years No Monthly service fees on Gift Cards until after 12 months of inactivity and then only one service fee per month Service fees defined to include any other fees for use of the card includling balance Inquiry fees, ATM fees, decline fees, etc. Specific on-card and packaging Disclosure requirements BUT Exemptions for reloadable general use non-gift cards; and for loyalty, award and promotional cards. CARD Act Federal Preemption issues the Federal Law does not supersede a state law that is both consistent but more restrictive. Note: All open or closed loop gift cards, codes and other devices must comply with these restrictions 14 14
Federal Consumer Protection Laws Regulation E : Implements the Electronic Funds Transfer Act- protects funds in bank accounts from unauthorized transactions - -ATMs, wire transfers, etc Generally applies to bank accounts and other consumer asset accounts Prepaid Payroll cards and cards accepting federal funds covered Reg E Light - SAME PROTECTIONS. Allows no monthly statement but only on certain conditions (6 months of transaction data on requests) Still requires provisional recrediting for claims not resolved in 10 days Expanding Reg E: Consumer advocates have urged to broaden the scope of prepaid products that are subject Reg E; Menendez Legislation; CFPB has announced plans to issue new prepaid consumer protection proposed regulations. Anticipate formal extension of Reg E to other cards, codes and devices 15
Federal Consumer Protection: The CFPB Dodd-Frank established the Consumer Financial Protection Bureau ( CFPB ) as is a new Consumer Protection Agency for financial services including prepaid cards. The FTC for financial services both bank and non-bank Obtained enforcement authority and began most activities on July 21, 2011. Empowered to prohibit a covered person or service provider from committing or engaging in an unfair, deceptive or abusive act or practice. Tracks and monitors complaints Consent Orders and Significant penalties assessed 16
Federal Consumer Protection Laws FTC Federal Trade Commission (FTC) brings consumer protection actions against retailers and businesses (deceptive practices and false advertising) UDAP: Unfair or Deceptive Acts or Practices There must be a representation, omission, or practice that is likely to mislead. The act or practice must be considered from the perspective of the reasonable consumer. The representation, omission, or practice must be a material one. UDAAP: Unfair, Deceptive, or Abusive Acts or Practices. Abusive means that it materially interferes with the ability of a consumer to understand a term or condition or takes unreasonable advantage of: A lack of understanding on the part of the consumer of the material risks, costs, or conditions. The inability of the consumer to protect his or her own interests. The reasonable reliance by the consumer on a covered person to act in the interests of the consumer. 17
Consumer Protection The Durbin Amendment Dodd Frank Wall St Reform and Consumer Protection Act ( Dodd-Frank ) passed May 2010 Interchange Restrictions: The Durbin Amendment Impacts certain debit and prepaid cards not credit cards Lowers interchange to 21 cents plus a multiplier: $50 = 24.5 [21 + 2.5 ($50 x.05 /100) + 1 fraud adjustment] $500 = 47 [21 + 25 ($500 x.05 /100) + 1 fraud adjustment] ] Also for routing transactions, requires at least 2 unaffiliated networks on each card. According to David Evans (Univ. of Chicago) Study, the Durbin Amendment has cost consumers between $22B and $25B since October 2011. 18
Other Federal Consumer Protection Laws impacting on Payments Truth in Lending Act Reg Z Truth in Savings Act Reg DD Fair and Accurate Credit Transactions Act FACTA Equal Credit Opportunity Act Reg B Privacy of Consumer Financial Information Reg P Availability of Funds Reg CC Federal Deposit Insurance Act (FDIC) 19
Note on Small Loans: Increasing regulatory concerns Treasury Interim Final regulations: Prepaid cards that receive federal payments cannot be linked to a loan where repayment is triggered by the receipt of federal funds. Short term lending programs tied to prepaid cards under strict scrutiny CFPB and consumer groups have raised concerns about links between prepaid and loans Recent actions against payday and short-term lending programs 20
State Consumer Protection Laws State Consumer Protection Laws Some states have laws restricting fees and/or expiration dates impacting prepaid cards and other prepaid devices Push for more cash back laws High profile concerns about the Kardashian Kards Florida AG investigates GPR cards for abusive fees State laws on payday loans, payroll cards, use of Government Benefit cards, etc. 21
II. Anti-Money Laundering (AML) Primarily federal laws but some state laws Purpose to prevent financial crimes money laundering and terrorist financing Covers certain non-banks as money services businesses (MSBs) (providers of prepaid access; money transmitters; virtual currency exchanges) Must have fully effective AML compliance program Know your customers, business partners Monitor for suspicious transactions File Suspicious Activity Reports (SARs) File Cash Transaction Reports (CTRs) 22
Obligations of Sellers and Providers of Prepaid Access An Money Services Business (MSB) that is a Provider or a Seller of prepaid access must establish policies and procedures to: Obtain identifying information about a person who obtains prepaid access under a prepaid program, and Verify the identity of that person. Identifying information includes: name, address, date of birth, and identification number. Sellers of prepaid access must also establish procedures to obtain identifying information about a person who obtains prepaid access to funds that exceed $10,000 during any one day, and verify that person s identity. This $10,000 obligation applies to any prepaid access sold, not just prepaid access under a prepaid program. 23
III. State Laws Money Transmitter Licensing State Money Transmitter Licensing Laws are state laws that regulate bank and non-bank entities that receive and hold consumer funds for purposes of transmission or to make payments. These laws can apply to ANY payment product from paper money orders to plastic prepaid cards to mobile, virtual, online, and contactless payments. Often banks are exempt and agents of licensed money transmitters are also exempt Often closed loop cards, or cards usable solely for goods/services, not for cash, are exempt. Problems: Burdensome, expensive and non-uniform laws subject to audit in multiple states. Recent Developments: States are becoming increasingly aggressive in interpreting state laws to require licensing (where no license was required in the past e.g., payment facilitators) and to impose penalties in larger amounts ($50,000, $75,000, or more) even for companies who in good faith apply for a new license. 24
A word about Money Transmitter Licensing laws Disintermediation of banks... Paypal, Google, American Express 48 states have enacted such laws, which usually require: Minimum capitalization ($50,000-$1 million) and bonding Background checks on principals Holding of 100% consumer funds in permissible investments Regular reports; annual renewal filings; fees; audits No restrictions on other lines of business thousands are licensed Difficult to get but still a poor man s bank license 69 25
IV. Abandoned Property Laws State Abandoned Property Laws Dormant accounts, gift cards, uncashed checks PAID TO THE STATE after the Dormancy Period (3-5 years) expires Q: How to keep breakage without breaking the law? Big risks for non-compliance; state auditors seek payment going back 20+ years Abandoned Property Laws apply to all property Non-uniform - - some states more aggressive than others MUST HAVE an Abandoned Property Compliance Program Unique to the US many overseas companies not familiar with these laws 26
V. Privacy and Data Security Under the Gramm-Leach-Bliley Act (GLBA), financial institutions are required to provide annual notices to Customers. What data do you collect? How do you use it? Have customers opted in if you re using for marketing purposes? Data Breach/Privacy Laws and Regulations: Nearly all states have passed data breach laws Every year, new efforts to establish federal law over data breaches none yet successful However, the FTC recently suggested that businesses that provide B2B services are responsible for ensuring that their clients have good data security, and that their clients are not hacked (i.e., liability for downstream breaches). PCI Compliance standards don t hold onto credit card or bank account numbers! 27
Insiders Perspective Keith Omsberg Money Transmitter Licensing laws Cheryl Slipski AML laws; Durbin Risks and Rewards in Emerging Payments 28
Qs & As Contact Details: Judith Rinearson Bryan Cave LLP judith.rinearson@bryancave.com Keith Omsberg Official Payments Corporation Keith.omsberg@officialpayments.com Cheryl Slipski Ubiquity cslipski@gmail.com 29 29
Prepaid Program Third Party Risks Who is the issuer? Only an insured depository institution can issue Visa/MasterCard branded cards or access the ACH network Who owns the accounts? The accounts should be FDIC-insured deposit accounts held by the Bank and the Bank therefore would have all regulatory and contractual obligations to the cardholders. Who has primary control and the final decision-making role for the proposed card programs? Ensuring that the program does not involve impermissible, and unsafe and unsound, charter rental on the part of the Bank. 30
Third party relationships Under the Truth in Savings Act and the Electronic Funds Transfer Act The bank has very specific obligations to consumers with accounts. The bank can subcontract obligations to third parties, but the bank remains the only party liable to the consumers for compliance matters Under GLBA Because the bank has the contractual relationship with the customer under terms and conditions, the customer is the bank's "customer" for purposes of the Gramm-Leach-Blilely consumer privacy protections 31