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© 2014 Venable LLP
Payment Systems Today: Latest Legal and Regulatory Challenges
October 14, 2014
Jon Genovese, Vantiv
Ellen T. Berge, Esq., Venable LLP
Ed Wilson, Esq., Venable LLP
Andrew E. Bigart, Esq., Venable LLP
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Growth and Diversity of Payment Systems
– Faster, more efficient, safer clearing &
settlements
– Electronic payments & end of checks
– Mobile banking
– Virtual currencies
Growth of Payment System Regulation
– Focus on consumer protection
– Higher compliance standards
– Aggressive enforcement
Best Practices, Preparedness, and Red Flags
© 2014 Venable LLP
Agenda
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Information is transferred before value
Information travels end to end, value
does not
How does information flow?
International Financial Information
SWIFT
Credit/debit card networks &
processors
Cash & Next GEN: Virtual
currencies
© 2014 Venable LLP
Growth and Diversity of Payment Systems:Faster, more efficient, safer clearing & settlements
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Value moves bank-to-bank
Currency and alternatives exception
How?
FedWire
CHIPS (“Clearing House Interbank
Payment System”)
ACH (“Automated Clearing House”)
Credit/debit card
Alternative currencies
© 2014 Venable LLP
Growth and Diversity of Payment Systems:Faster, more efficient, safer clearing & settlements
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Customer
Merchant(Website)
Acquirer/
Processor
Card IssuerBank
Card
Network(V/M/D/Ax)
Credit or
Funds
Available?
Accept or Decline
Purchase(authorization code) (12
seconds RT)
Growth and Diversity of Payment Systems:Credit Card Example: Information
© 2014 Venable LLP
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Customer
Merchant(Website)
Acquirer
Processor
Card Issuer(Bank)
Customer’s Account
Card
Network(V/M/D/Ax)
Processor’s
Account at
Processor’s
Bank, FBO
Merchant
Merchant’s
Bank
Growth and Diversity of Payment Systems:Credit Card Example: Information
© 2014 Venable LLP
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© 2014 Venable LLP
0.00
20,000,000,000.00
40,000,000,000.00
60,000,000,000.00
80,000,000,000.00
100,000,000,000.00
120,000,000,000.00
140,000,000,000.00
2009 2010 2011 2012
Non-Cash Transactions Per Year - 8.5% per year increase
Growth and Diversity of Payment Systems:Electronic Payments & End of Checks
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© 2014 Venable LLP
2009 2010 2011 2012
Non-Cash $ Value of Transactions $60,518,809,125 $66,140,775,000 $72,285,000,000 $79,000,000,000
$0.00
$10,000,000,000,000.00
$20,000,000,000,000.00
$30,000,000,000,000.00
$40,000,000,000,000.00
$50,000,000,000,000.00
$60,000,000,000,000.00
$70,000,000,000,000.00
$80,000,000,000,000.00
$90,000,000,000,000.00
Non-Cash $ Value of Transactions
Growth and Diversity of Payment Systems:Electronic Payments & End of Checks
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© 2014 Venable LLP
2009 2012
Prepaid CardTransaction Volume
1,300,000,000.00 3,100,000,000.00
0.00
500,000,000.00
1,000,000,000.00
1,500,000,000.00
2,000,000,000.00
2,500,000,000.00
3,000,000,000.00
3,500,000,000.00
Prepaid Card Transaction Volume
Growth and Diversity of Payment Systems:Electronic Payments & End of Checks
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© 2014 Venable LLP
0%
10%
20%
30%
40%
50%
60%
70%
80%
2003 2012
CARDS V. CHECKS -- % OF NON-CASH
TRANSACTIONS
CARDS (ALL TYPES) CHECKS
Growth and Diversity of Payment Systems:Electronic Payments & End of Checks
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Mobile Banking
Mobile Payments
Virtual Currencies
Spotlight on Payment Processing Industry
– Why is the government scrutinizing the
payments industry?
– What are the specific concerns?
– What are you expected to do?
– What happens if you don’t do them?
© 2014 Venable LLP
Growth and Diversity of Payment Systems:Mobile Banking, Payments & VCs
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Mobile Banking
• 12 million people in 2009
• 45 million by end of 2014
Mobile Payments
– Explosive Developments
• Apple Pay
• MCX
• In-app payments
– Explosive Growth Predicted
© 2014 Venable LLP
Growth and Diversity of Payment Systems:Mobile Banking & Mobile Payments
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Growth and Diversity of Payment Systems:Mobile Banking & Mobile Payments
© 2014 Venable LLP
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Virtual currencies
– Modern barter
– Taxed in US as property, not currency
Issues
– Safety and Soundness
• Storage
• Money Laundering
– Cost will increase as regulation catches up
to product
• NY State Rulemaking
– Transaction speed:
• Bitcoin: x not less than 5 minutes
• Credit/debit: x between 2 & 12 seconds© 2014 Venable LLP
Growth and Diversity of Payment Systems:Virtual Currencies
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Why Focus?
– Regulators view processors as “gatekeepers”
• Provides merchants and consumers with
access to financial systems
• The “means and instrumentalities” for
merchants to extract money from consumer
accounts
• Processors viewed as “enablers” for
fraudsters
– New technologies (mobile, virtual currencies)
and regulatory application of existing consumer
protections standards
– Data Security
© 2014 Venable LLP
Growth of Payment System RegulationSpotlight on Payment Processing Industry
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Meet the regulators:
– Federal Trade Commission
– Consumer Financial Protection Bureau
– Department of Justice
– Office of the Comptroller of the Currency
– Federal Deposit Insurance Corporation
– Task Forces Made Up of All Five (at least)
– State attorneys general
– Money Laundering: FinCEN
– Economic Sanctions: OFAC
– Mobile Payments: FCC
– Data Breach: USSS
© 2014 Venable LLP
Growth of Payment System Regulation:Focus on Consumer Protection
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Conducting due diligence on merchants, or ignoring
strong signals of potential risk uncovered by due
diligence
Sustaining merchants with high return rates and
chargeback rates
Ignoring or failing to see other evidence of unauthorized
charges
Participating directly in a merchant’s deceptive conduct
Failing to act upon warnings from regulators and
consumers
Beneficial Owners – Coming Requirement?
© 2014 Venable LLP
Growth of Payment System RegulationHigher Compliance Standards
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Subpoenas, civil investigative demands, other
investigative inquiries
Third party defendant in a case against merchant
Law enforcement action as a direct target
Penalties
– Financial – disgorgement of fees, consumer
redress, civil penalties
– Injunctive – restrictions or prohibitions on future
conduct
© 2014 Venable LLP
Growth of Payment System RegulationAggressive Enforcement
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In re: Wachovia, N.A. (OCC) (2008)
Older FTC cases focused on ACH processing
Recent cases focus on credit/debit card processing
– FTC v. CardFlex (2014)
– FTC v. IRN (2014)
– FTC v. Process America (2013)
– CFPB v. Global Client Solutions (2014)
– CFPB v. Meracord (2013)
© 2014 Venable LLP
Growth of Payment System RegulationAggressive Enforcement
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Know your merchants
– At the underwriting stage
– While they continue to process with you
Comply with the rules and regulations of the
card networks
Comply with the contractual requirements of
your sponsoring banks
Stay current with regulatory developments
– Bank regulators
– CFPB
© 2014 Venable LLP
Best Practices, Preparedness, and Red Flags
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Resources
– Electronic Transaction Association,
Guidelines on Merchant and ISO
Underwriting and Risk Monitoring &
Mobile Payment Solutions Best Practices
and Guidelines,
www.electran.org/professional-
development
– Vantiv, Insights & Resources, www.
Vantiv.com/insights
© 2014 Venable LLP
Best Practices, Preparedness, and Red Flags
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Payment Systems Today: Latest Legal and Regulatory Challenges
Jon GenoveseDirector of Regulatory Compliance, Vantiv
P: 513.900.5209 [email protected]
Ellen T. Berge, Esq.Partner, Regulatory Group, Venable LLP
P: 202-344-4704 [email protected]
Andrew E. Bigart, Esq.Associate, Regulatory Group, Venable LLP
P: 202-344-4323 [email protected]
Ed Wilson, Esq.Partner, Regulatory Group, Venable LLP
P: 202-344-4819 [email protected]
© 2014 Venable LLP
