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In the wake of debt and a credit crisis looming on economic fronts, credit cards and their transactions are taking center stage. Most of the spotlight follows the steady steam of protection for consumers, however, this protection may well be on the backs of merchants, ISOs, acquirers and others in the mix.
Recently, Michigan Democrat John Conyers and Utah Republican Chris Cannon introduced the Credit Card Fair Fee Act of 2008. The intent of the bill is to allow merchants and the large credit card companies to negotiate interchange fees that ultimately come out of the principal amount that the end-user of the transaction pays. If successful, this bill could put more burden on those within the transaction supply chain; however some are saying it does not appear to be going anywhere.
"Federal legislation being considered currently in the U.S. House of Representatives (H.R. 5546) is nothing short of a price control bill that would result in harm to smaller community banks, credit unions, and ultimately, the customers they serve, as the market would be squeezed to a handful of card issuers that could continue to provide these services in a price-capped environment," says Trish Wexler of the Electronic Payments Coalition. "As competition is reduced, consumer choice is reduced, and access to affordable credit and debit cards is hindered."
This clampdown on consumer credit seems to be here to stay for the immediate future.
Consumer credit disclosures will be an action item for federal regulatory agencies for the next three years says David Thompson, an attorney with the Cleveland-based law firm of McGlinchey Stafford PLLC. "Chairman Bernanke of the Federal Reserve Board recently issued a statement saying that 'improved disclosures alone cannot solve all of the problems consumers face in trying to manage their credit card accounts,' because of credit card plans have become so complex," explains Thompson. "Federal agencies that supervise banks will begin issuing regulations to restrict or prohibit credit card practices that the agencies consider unfair, deceptive, or unsafe. New and different credit card disclosures will supplement or help implement the more substantive regulation of credit card practices by federal regulators."
This and other snippets of legislation and proposals are part of a sweep originating from the new political make up of the Senate and Congress, who are proposing new language in proposed bills designed to protect consumers. Such efforts will be the start of a new hallmark for regulation of the industry.
"Increasing regulation will be the hallmark of the next few years," explains Grant Stephenson, an attorney with the Columbus, Ohio law firm of Porter, Wright, Morris & Arthur, LLP. "Proposed federal regulatory changes are an indication of what will be the focus: proposed legislation and regulation will put an emphasis on increased disclosure and elimination of industry practices like double cycle billing that is now thought to be unfair to consumers."
Specifically, much of the concern over credit card practices, though not all, originates in the Senate.
"Senator Feinstein has introduced legislation mandating additional disclosures regarding minimum monthly payments," says Stephenson. "Senator Dodd has introduced legislation that would broadly regulate credit card industry practice on rate changes and fees. Among on things, the legislation would require a longer billing cycle and long advance notice of contract changes."
So what are some of the drivers behind many of the new proposals?
Many say the public spotlight of a few record bad years of identity theft breaches helped precipitate the push. Randy Carr, Vice President of Marketing for Shift 4 Corporation feels that new legislative proposals like H.R. 5546 could be just the beginning. "Unless breaches and card data theft get under control, we should expect increased Federal and State legislation to implement further safeguards," says Carr. "PCI-compliant merchants being hacked [Hannaford Brothers] further validates that as long as card data exists in the merchant environment, it is at risk. The card brands and acquiring banks should quickly vet and validate new technologies that are based on tokenization or PAN-less processing. The best-case scenario is if the PAN never enters the system at all and tokens are used to process transactions from end to end."
Many feel the same as David Thompson: state legislators will probably continue to wait before applying more pressure on the transaction industry by burdening them with disclosures and interchange fees, until there are further developments in litigation and federal regulations.
"Most states have already enacted a variety of identity theft laws that affect a wide range of businesses, such as security breach notification laws and credit report freeze laws," says Thompson. "States that have not yet enacted identity theft laws will likely do so in the next year or two, unless a federal law is enacted that would cover the same businesses and subject matter. States that already enacted identity theft laws may continue to amend those laws, to expand the scope of their existing laws or address problems they identity in practice. I am concerned about the extent to which state legislators or courts may try to establish new or different rules for liability connected with identity theft claims."
Despite a hangover from security breaches and some new proposals from our existing House and Senate, we cannot forget that we are in the midst of an election year. How much difference does a new president make to the card industry?
"Regardless who the new president is, our national security is at risk and this concern needs to be the driving force behind new technologies designed to protect our electronic payment infrastructure," says Randy Carr. "Securing our electronic payment process and systems is now an issue of national security and can no longer be pushed and pulled by business interests."
Grant Stephenson emphasizes the importance of staying vigilant, particularly in times like these in an election year, a new political landscape and a proliferation of identity theft breaches that have made their way into the press for all to see and hear. Legislation is bound to creep up from federal sources as well as states sources. He feels that professionals in the transaction industry should monitor local, state and federal legislative and regulatory proposals proactively and make state and national trade representatives aware of potential adverse legislation and regulations.
David Thompson points out that federal regulatory agencies receive regular feedback and criticism from consumer advocates, large financial institutions and trade associations, but those agencies may not realize the effect of new regulations on smaller or unrepresented participants in the card industry. A response from smaller industry participants will not prevent regulation, but can definitely affect its final content. "At the state level, card industry participants have to rely on more traditional lobbying efforts by trade associations to affect state legislation that will often overlap with federal laws," says Thompson.
"A sense of compromise will help because, almost certainly, many common industry practices will have to change under the current legislative spotlight," says Stephenson. "And a sense of humor will also help during the next twelve to eighteen months as legislators engage in one-upmanship on credit card reform."
Legislative Snapshot
This year has been tumultuous with proposed legislation and invitations for public comment. Many of the following items may directly or indirectly affect the acquiring side of the card industry as they are consummated.
Credit Card Fair Free Act (HR 5546)
This bill was recently introduced and has many new requirements, including that interchange fees-charges paid by merchants to Visa and MasterCard banks for handling credit card transactions-be negotiated.
For more information:
http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_cong_bills&docid=f:h5546ih.txt.pdf
The C.A.R.D. Act: Credit Card Accountability, Responsibility and Disclosure Act
The Credit Card Accountability, Responsibility and Disclosure Act (the C.A.R.D. Act) is aimed at stopping abusive credit card practices that deepen or prolong credit card debt held by consumers. The bill has many proposed stipulations on how interest and fees can be applied.
For more information: http://dodd.senate.gov/index.php?q=nod/4401
H.R. 5244 - The Credit CardholdersÕ Bill of Rights
Rep. Carolyn Maloney (D-NY) has proposed The Credit Cardholders "Bill of Rights. It takes a moderate and balanced approach to reforming major credit card industry abuses and improving consumer protections without resorting to price controls, rate caps or fee setting."
For more information:
http://maloney.house.gov/documents/financial/consumer/20080304CCBORBilDescriptLong.pdf
Invitation for Public Comment
Proposed rule on unfair and deceptive practices (UDAP) involving credit cards.
Office of Thrift Supervision (OTS) request for public comment on a proposed rule on unfair and deceptive practices (UDAP) involving credit cards and overdraft protection services. These deceptive practices include timing of payments, interest, fees and practices. These comments will include banks, savings and loans and credit unions.
For more information: http://www.ots.treas.gov/docs/7/778014.html
Invitation for Public Comment Ð IRS Tax Code regarding electronic payments
The Senate Finance Committee is seeking public comment on proposed amendments to the IRS Tax Code requiring more detailed reporting for merchants that accept electronic forms of payment, including credit and debit cards. This is part of an effort aimed at narrowing the tax gap of some $345 billion in Federal taxes legally owed but uncollected each year. ISOs and acquirers could be indirectly affected by the burden placed on issuers and merchants to report such information.
For more information: http://www.senate.gov/~finance/PublicComment2008/Bipartisan%20Staff%2Discussion%20Draft%20Reimbursement.pdf
Office of Thrift Supervision and the Federal Reserve Bank Statement on Credit Card Reform
The Federal Reserve has initiated a full court press on clearly disclosing transaction terms and conditions. This crackdown is intended to protect consumers; however, it could indirectly affect
ISOs and acquirers involved in the transaction. 
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