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

Agenda

• Introduction “Themes for 2013” – Judie Rinearson

• Hot Topics

1. The Consumer Protection Flash Mob – Linda Odom

2. The Payroll and Student Card Drama Scenes – Margo Strahlberg

3. Target and Similar Data Breaches Fall-Out – Courtney Stolz

4. The Tax Refund/Government Benefit Fraud Fears – Jennifer Crowder

5. The Durbin Roller-Coaster – Judie Rinearson

6. The FinCEN AML Reinvention - Seyi Iwarere

7. The Mobile Wallet Tower of Babel – Dan Wheeler

8. The Virtual Currency Hysteria – Louise Nutt and Alan Solarz

9. The Short-Term Credit/Overdraft Siege - Rob Lystad

10. The Money Transmitter Licensing Blitz – Karen Neely Louis

11. Federal Banking Regulatory Angst– John ReVeal

12. International Regulatory Conundrum - Judie Rinearson

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Consumer Protection Issues

“Flash Mob”

Linda Odom Washington, DC

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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

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

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

Payroll and Student Card

“Drama Scenes”

Margo Strahlberg

Chicago

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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

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

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

Target and Similar Data Breaches

“Fall-Out”

Courtney Stolz

Washington DC

11

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.

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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

The Tax Refunds and Government Benefits

“Fraud Fears ”

Jennifer Crowder

Kansas City

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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

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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

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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

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Durbin and Reg II

“Roller-Coaster”

Judith Rinearson

NYC

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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

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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

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Of course other option is that Judge Leon’s decision could be upheld in part and reversed in part….

FinCEN AML

“Reinvention”

Seyi Iwarere

Washington DC

21

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

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

Mobile Wallet

“Tower of Babel”

Dan Wheeler

San Francisco

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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

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

Virtual Currency

“Hysteria”

Louise Nutt

Santa Monica

Alan Solarz

NYC

27

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.

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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…

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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

The Short-Term Credit/Overdraft

“Siege”

Rob Lystad

Atlanta

31

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

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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

Money Transmitter Licensing

“Blitz”

Karen Neely Louis

Atlanta

34

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

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

Federal Banking Regulatory

“Angst”

John ReVeal

Washington DC

37

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

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

International Regulatory

“Conundrum”

Judith Rinearson

NYC

40

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

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

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