Recent elections and the swearing in of a new makeup in the House and
Senate mean a different political terrain in our nation’s Capitol.
There will be new committee members, new leaders, and a “new guard”.
So, what will the “new guard” be faced with regarding the transactions industry?
“My short answer is that most of the attention paid to the card business, or more generally the electronic payment business, is to be paid on the issuer side” says Tom Brown, a Partner in the Antitrust/ Competition Practice in O’Melveny & Myers’ San Francisco office and former Senior Counsel at Visa USA.
But regulators aren’t just concerned about the agenda of regulators.
Consumer disclosure and attention to the fine print will likely occupy regulators.
“Most of what is coming out of Washington these days revolves around the card issuing side of the business and full disclosure to consumers” says Greg Cohen, President of Moneris Solutions USA, which offers a complete line of merchant services, online merchant accounts, credit card processing POS software, and POS hardware.
“Even before the recent election gave control of the House and Senate to the Democrats, law makers and policy makers had been spending a fair amount of time looking at or thinking about issues such as disclosures, over limit charges and the like,” adds Brown. “The best, but far from the only example is the report released by the GAO on this subject in September. Given Senator Dodd’s historic interest in the business of lending, particularly the issuance of credit cards, I think that’s where the majority of attention will be paid.”
The General Accountability Office (GAO) report that Brown refers to is entitled Increased Complexity in Rates and Fees Heightens Need for
More Effective Disclosures to Consumers, September 2006, is likely
to have a major influence on regulators. If there is a common denominator in describing the new regulatory climate inside the beltway for the transactions industry, it is likely to be security and fraud prevention.
“From my perspective, the issue most likely to impact acquirers, processors, merchants and ISOs is information security,” says Tom Brown. “Large scale security breaches at merchants and processors have attracted considerable attention from the Federal Trade Commission (FTC) over the last few years. People are, I think, sensitive to the fact that security breaches can lead to identity theft or credit card fraud. Although legislative attention is possible, particularly in the wake of a large breach, I think that the FTC will continue to lead the way.”
Fraud and identity theft is nothing new. In 2005 testimony to a House Subcommittee on Financial Services, Mallory Duncan, Senior Vice President and General Counsel for the National Retail Federation said, “Families receive high-quality meals in exchange for a swipe of plastic. Vacationers are able to take possession of cars hundreds of miles from home merely by presenting out-of-state documents and cards.”
She pleaded with the Congressional committee for a tightening up identity security. ”Individuals are able to secure funds to purchase
their homes from bankers they have never before met”, she testified.
“ These benefits flow not from the credit cards, but rather from the trust our society invests in the identities of the persons seeking credit. If we are to preserve these benefits, society should crackdown on those who would abuse that trust by appropriating the core incidents of identity.
“ Duncan isn’t the first to hammer home the vulnerability of electronic transactions. As Brown mentioned, the GAO’s findings are likely to continue to shape the thinking of regulators, despite a new political climate. The GAO report stated:
“Although issuers must disclose information intended to help consumers compare card costs, disclosures by the largest issuers have various weaknesses that reduced consumers’ ability to use and understand them. According to a usability expert’s review, disclosures from the largest credit card issuers were often written well above the eighth-grade level at which about half of U.S. adults read. Contrary to usability and readability best practices, the disclosures buried important information in text, failed to group and label related material, and used small typefaces. Perhaps as a result, cardholders that the expert tested often had difficulty using the disclosures to find and understand key rates or terms applicable to the cards.”
While this points to the importance of disclosure for consumers, it may pose an unnecessary burden to others in the supply chain of a
card transaction. Some feel that the merchant’s perspective is
being overlooked when discussing disclosure and fraud.
“We are concerned with breach notification laws,” says Julie Fergerson, VP of Emerging Technologies for Debix, The Identity Protection Network and co-founder of the Washington DC-based Merchant Risk Council. “ It has been proven by many companies, including ID Analytics and Javelin Research that most data breaches do not cause identity theft.”
Ferguson feels that an overreaction to consumer protection may thwart free exchange in an eCommerce world.
“From our perspective, even when credit card numbers are compromised, the consumers are protected 100% - they will not lose money,” adds Julie Ferguson. “The new regulations that already exist in many states and continue to be approved in each and every state requiring notification are lowering consumer confidence in the eCommerce world, despite the fact that very few breaches actually have anything to do with eCommerce. We would like to see DC tackle this issue.”
Another area that Washington’s committees will be concerned with are the applications of card transactions. Let’s face it, every year that goes by we see some creative uses for the electronic transfer of funds.
For example, a recent New York Times article cited churches are outfitting their commons and lobbies with a new A.T.M. – an Automatic Tithing Machine. Electronic transactions will ride on the heels of robust consumer spending spurred by lower jobless rate and a decent level of growth in our economy. In addition, the dollar has fallen in Europe, driving Europeans to American malls to cash in on the bargains that standard retail prices allow.
But in other corners of the eCommerce economy, an influx of
transactions may signal a tad of impending trouble. Certain uses of electronic funds transactions have caused the Feds to jump in and regulate.
A GAO report came out in 2002 giving some detail of the perils of Internet Gambling. The result: a new law that prevents credit cards to be used for unlawful Internet gambling.
According to information released when the law came out, our lawmakers stated, “At present, there are more than 2,300 online gambling sites. This past September, the President signed the Leach Internet Gambling Law. The new law prevents the use of credit cards and fund transfers for unlawful Internet gambling and blocks financial transactions associated with illegal gambling.”
The bill was approved by the House by a vote of 409 to 2. It shows that transactions give a ready medium of exchange, but, when something like gambling comes into play, the privilege of electronic fund transfers as a medium of exchange can be taken away.
The climate in Washington is one where every other word seems to have something to do with protecting the consumer from fraud, and also terrorism. One might not think that there could possibly be a terrorist hook to online gambling transactions, but at a hearing before the Financial Services Committee, former FBI Director Robert Mueller called Internet gambling a significant vehicle for money laundering, especially problematic in the post September 11th environment. His view is substantiated by the 2004 GAO report, which stated that large sums of money laundering proceeds could be moved rapidly through Internet gambling websites in order to obscure their origins.
The law also would “preserve the right of states to regulate gambling that occurs solely within state borders; cut off the flow of money to Internet gambling websites by regulating payment systems; authorize state and federal law enforcement to seek injunctions against persons who facilitate illegal Internet gambling; and advance international cooperation in law enforcement efforts against illegal gambling and related money laundering.”
According to a release by the House Subcommittee on Financial
Services: “The Unlawful Internet Gambling Enforcement Act does not change the law: nothing that is illegal will be made legal, and nothing that is legal will be made illegal. It provides law enforcement and private parties, such as credit card companies, with new enforcement tools that will prohibit illegal Internet gambling transactions even when the websites are operated offshore.”
So where does all this point in the months and years ahead?
Creative uses of electronic fund transactions should proliferate and abound. Consumer disclosure will be heightened. Identity theft and fraud will continually be a focus of lawmakers and federal regulators. Compliance will be a continued burden on the players in the financial transaction supply chain, and that is of concern to those players.
“Data security is still a major topic and concern among the acquiring industry”, adds Greg Cohen. “All the major acquirers and processors are actively working with their VARs, ISOs, and Merchants to maintain PCI Compliance however the costs are growing every day. The concern is that with merchant pricing continuing to compress due to market forces the rising costs of compliance will be a major financial burden to all stakeholders. Profitability and innovation are bound to be affected.”
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