Evaluating Dodd-Frank

   The financial services industry, like most other industries, devotes a great deal of attention to the regulatory process. Many of us in school learned the phrase "The president proposes; Congress disposes." The nation's chief executive proposes regulation, but it is the job of Congress to see those legislative proposals embodied in law as Congress sees fit.

   However, the second half of the equation might be "Congress directs; the regulatory agency effects." Congress upon the president signing a bill into law will direct the appropriate executive agency to implement and monitor the law. And this occurs through the regulatory process. How regulations are implemented and monitored is something most executives in the industry pay close attention to. Witness Gramm Leach Bliley, Sarbanes Oxley, and Dodd-Frank over the last decade or so.

   If you've been involved in the regulatory process, either from the perspective of a regulatory agency or an industry subject to regulation, you have to come away with a good deal of respect for the process. For regulators the challenge is to develop rules that conform with Congress' intent on a particular law. For industry the challenge is to protect the commercial viability of whatever is being regulated.

   It is a unique system where regulators seek comment from the public, evaluate thousands of pages of commentary and propose rules which in some form eventually make their way into the Code of Federal Regulations. The regulators I've been fortunate to work with take their job seriously, work hard, and want to get it right the first time. Most of the time the process works pretty well.

   However, it seems that this system, which has worked so well for so long, is struggling under the sheer weight of several pieces of sweeping, magisterial legislation. Among these is the Dodd-Frank Wall Street Reform Act.

   An editorial in the Wall Street Journal earlier this week claims that a new study shows that the quality of federal regulation is declining. It points to Dodd-Frank and the Accountable Care Act as examples. The Journal cites a Government Accountability Office report on the implementation of Dodd-Frank, Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analysis and Coordination.

   The regulatory agencies responsible for monitoring Dodd-Frank have a great deal of discretion and are not required to follow the guidance of the Office of Management and Budget, which states that regulatory agencies should include cost-benefit analyses in their review of existing legislation. Most of the independent regulators involved in overseeing Dodd-Frank told the GAO they try to follow the OMB guidance. But in its review of the agencies' rulemaking procedures the GAO found ten of the 32 rules implemented so far for Dodd-Frank were inconsistent with OMB's guidance on considering the benefits of a rule in light of the cost of implementing it.

      In burying the lead the GAO concluded that Dodd-Frank regulators "may be missing an opportunity to enhance the rigor and improve the transparency of their analyses."

   Perhaps more disconcerting, the GAO goes on to note that while the regulators are required to assess the impact of implementing the financial reform law, "some have not yet developed plans to review their Dodd-Frank rules." Yikes. Here we are, 18 months into Dodd-Frank, and some regulators still don't have a plan for figuring out whether the law is working as Congress intended or if the benefits being realized are worth the enormous costs of the Act. Huh?

   The Journal editorial ascribes political motivation to this decline in regulatory quality, but there may be more to it than that.

   You can blame the regulators for this sad state, but that might be like court-marshaling the troops when the general's battle plan goes awry. The real problem seems to be legislation that is breathtaking in scope, unprecedented in complexity, and  burdened with unrealistic implementation time frames. In fact, the regulators may be the first people who've actually digested and parsed what's in laws like Dodd-Frank or the ACA. It is almost inevitable that the quality of rules making and regulatory oversight would suffer.

   Let's hope that the era of panoramic, three-thousand page legislation is over and that the scope of regulatory oversight returns to its former state.

   That's my opinion. What's yours?

  

  

  

  

Dear Santa, I'd like more regulation for Christmas

   I once heard a a government official make the statement that sooner or later everything in Washington gets regulated. So it only makes sense as we get ready to observe Hanukkah and Christmas that the next thing to fall under the regulator's microscope is holiday shopping. Prepaid cards to be exact. On this past Saturday Sen. Robert Menendez (D, NJ) introduced with great fanfare Senate Bill 2030, titled The  Prepaid Card Consumer Protection Act.

     Let me admit up front: I think prepaid cards are one of the greatest inventions of the modern era. Let's face it, outside of anyone living under your roof, whom do you really feel comfortable buying presents for? Probably not that many people. If you're like most folks you've probably spent too much time agonizing over a present for someone, only to see her stare at an opened gift box with a look somewhere between "Oh, my God," and "What do I do now?" Trust me, when she says, "You shouldn't have," she really means it.

   A network branded prepaid card cuts through all that. At a minimum it says "I at least love you enough to have stopped by the courtesy counter at the Garden State Plaza on my way home from work." Okay, it's not a trip to Paris or diamond earrings. But it can be used at the travel agent, the jewelry story or anywhere that network's cards are accepted, and it's as good as cash. In these times, who can't use a little cash?

   And since they're as good as cash, prepaid cards are valuable as a shopping instrument, especially with kids. Kids learn how to pay with plastic, how to safeguard their cards, and how to meter out their money. I'd rather have my kids wandering that Garden State Plaza with a prepaid card, rather than a Tony Soprano wad of cash.

Sen. Robert Menendez (D, NJ), on
one of the busiest shopping days
of the year,  blocking
the concourse of a busy NJ shopping
mall as he announces his
proposal to regulate prepaid cards.

  Sen Menendez was joined in his announcement by a cohort of "consumer" groups. These are people I feel sorry for. They must be the most depressed, miserable feeling,  anti-consumer people in the country. Because it seems to me that these self-appointed consumer saviors actually have very little faith in the American consumer. They seem to hold consumers in such low regard that unless they step in to help, even when they weren't asked, consumers will be rendered financially destitute by big business.

   So Sen. Menendez and merry band of consumerists seem to think that prepaid cards are just another scam by the financial industry to get rich quick, one fee at a time.  Their answer is a very prescriptive piece of legislation. The bill requires "full disclosure" of fees prior to card purchase. It prohibits a variety of fees being charged, and provides protection of Regulation E of the Electronic Funds Transfer Act.

   Now, I'm all for full disclosure, and it might surprise Sen. Menendez and his buddies who take it upon themselves to speak for all consumers, that so are most people in the financial services industry. In fact JPMorgan Chase even received props this week from Sen. Richard Durbin (D, IL), an industry nemesis, for its policy on consumer-friendly, plainly written disclosures.

   But Sen. Menendez apparently shares none of his colleague's new found rosy optimism towards the financial services industry. His bill would micromanage the fee issue down to specifying the size of the disclosure statement. I say, why stop there? Why not specify the type face, size and font? How about Times Roman 10 in PMS 363?

   Perhaps the most troubling aspect of the bill is placing prepaid cards under the umbrella of Reg E. Debit cards, which are tied to a bank acccount differ from prepaid cards. Congress, in its wisdom in the 1970s, protected debit cards against loss since an unauthorized user of a debit card could potentially clean out the account to which it was tied.

   Prepaid cards are like cash. If Tony Soprano loses his wad of cash, ill-gotten or not, he's out of luck. There's no Reg E for cash. Sen. Menendez and his fellow travelers on the road to irresponsibility would like to extend a banking protection to something that's not a bank function. But I say, why stop there? After all, one of the consumerists at Sen. Menendez' announcement said, echoing the earlier point about regulation, "now that prepaid cards are becoming increasingly popular," it's time to regulate them. Apparently, whether they need to be regulated or not.

   So why not regulate everything that's become popular? Take eating. It's popular. We all do it. When someone steals my son's lunch at school, why not have Reg E protection for that? $5.95 for the turkey sandwich, $1.69 for the Snapple and a quarter for the apple.

   Or Justin Bieber? He's popular. Why not regulate him?

   In the payments world,  how about simply doing away with all cards and just applying Reg E to cash? If Tony Soprano drops that wad, he can just apply to Treasury for a replacement. If I need money, I'll just tell the Treasury I lost it and I need more. Kind of like a universal entitlement program. No cards, no eligibility requirements, no work, just universal Reg E protection. When you need money, go to Uncle, tell him what you "lost" and what you need, and you're on your way.

   The problem with Sen. Menendez' legislation, along with laws like Dodd Frank, the Durbin Amendment and the CARD Act are that they stem from a world view where there are big guys and there are little guys. And the big guys are big guys because they're always taking advantage of the little guys. So the little guys need a bigger guy to take care of the big guys.

   But the problem with that--other than its blissful simplicity--is that most often the big guys know they need the little guys. So they treat the little guys right. But when the bigger guy decides he's going to kick around the big guys anyway, pretty soon a lot of big guys become little guys. And eventually the bigger guy starts picking on the little guys.

   Senator, do yourself a favor and focus on something a little more important this holiday season. Like getting people back to work. Have a little faith in us. We're a nation that put men on the moon. I think we can figure out for ourselves that a five dollar fee is more expensive than a four dollar fee. And if a card issuer charges one of us too much, it risks losing us as a customer. And I think we can keep our cards and cash safe. If we lose them, as my son did this summer, we'll learn from the experience.
  
   That's my view. What's yours?

Legislating Consumer Behavior

   Sen. Ron Wyden (D, OR) today introduced a bill that would use electronic payment technology to radically alter the Supplemental Nutrition Assistance Program, or SNAP, formerly the Food Stamp Program. To a lesser extent it would also affect the smaller Supplemental Nutrition Program for Women, Infants and Children, known as WIC.



The program formerly known as Food Stamps
could be in for big changes if Ron Wyden's
FRESH Act becomes law.

    The FRESH Act of 2011 would do a couple of things. First, it would require large stores that accept SNAP payments through electronic benefits transfer, or EBT, to report annually to USDA on exactly what they sold to customers who pay with EBT cards. USDA, which administers both the SNAP and WIC programs will have to collect that data from thousands of stores and report back to Congress on how taxpayer dollars are spent on the SNAP program.

   Second, Sen. Wyden's bill would force states to allow SNAP and WIC customers to use their smartphones or tablet computers as a payment device in food stores that participate in those programs. This would be analogous to the way some fliers use their smartphones rather than a paper boarding pass to board airplanes.

   Third, if enacted into law, the bill would require that USDA  for the first time allow online food retailers to accept SNAP EBT benefits. Current USDA regulations allow only SNAP EBT sales over the counter at participating retailers. USDA has for some time been investigating the use of online retailing to open up access to the program. But this has been a slow slog. One can only guess that Sen. Wyden has become frustrated with the pace and wants to bypass the bureaucratic route through an Act of Congress.

    Finally, the Act would require that 50% of food purchased for use in USDA's child nutrition feeding programs, such as the School Lunch Program, be grown locally where the food is being provided to young consumers.

SNAP EBT cards like these could have company
if the FRESH Act becomes law. The bill,
introduced today, would allow SNAP shoppers
to use smartphones to authorize their purchases.

   The FRESH Act is part of a trend in government and the nutrition community to move USDA's food programs beyond their traditional role of income maintenance subsidies and into engines of public health. It's an interesting concept and one still open to debate. On one side you have the large food retailing lobby which will complain loudly and vociferously about being the ones stuck monitoring what their SNAP customers eat. (If you don't think that the SNAP reporting requirements are the first step in turning that program into a WIC-type program where every item to be purchased has to be pre-approved,  you've in for a surprise.)

   In addition, retailers will be faced with expensive upgrades to their cash register systems in order to be able to authorize SNAP transactions with a smartphone or tablet. They'll be joined in the lobbying trenches by the makers of salty snacks, packaged dessert cakes and sweetened beverages - all routinely purchased today with SNAP benefits. Throw in the Tysons and ADMs of the world who process billions of pounds of food that are shipped around the country in lengthy supply chains. They can't like the fact that they'll be faced with giving up half their USDA sandwich to local growers. Good bye chicken nuggets. Hello arugula.

   But on the other hand you have an impressive array of progressive Democrats who see childhood obesity as a serious public health threat. They're led by the technocrats who never saw a problem that enough electrons couldn't fix. They also have a long and abiding faith in these programs and want to see them updated and preserved. Their view is shared by many in Congress.

   And this is a case where opposites attract. Fiscally conservative Republicans see the use of technology as a way to be able to peek in recipients' market baskets to see just exactly where those millions of dollars go each year. The ability to monitor spending makes them strange bedfellows to the Democrats who want to use the same technology to update the mission of the programs.

   It sounds odd, but this is the same coalition that launched the Food Stamp Program in the first place: progressive Democrats with urban populations to feed and conservative Republicans from farm states with food  to sell. If these two groups were to come together on Sen. Wyden's bill the retail lobby would meet its match.

   The whole thing is interesting to me, although I'm skeptical whenever government tries to legislate healthy behavior. For nearly 50 years the government has legislated, punished, and harrassed the tobacco industry and people still smoke. A lot of them at high speeds behind the wheel. By the way, how'd that 55 mile per hour thing work out?

    I don't have a horse in this race, but if I did, I'd bet on the unholy alliance of urban progressives and rural conservatives in a 1-2. I'd bet on the producers and the consumers of food and against the middlemen. This might be where the retailers' incredible run of lobbying success comes to an end.

   That's my opinion. What's yours?


  

  
  

Dueling Piano Players

Anyone who has been to New Orlean's French Quarter, San Antonio's Riverwalk, or any of a number of other tourist traps, er, destinations, is familiar with the dueling piano players. These are musicians who took Billy Joel's Piano Man way too seriously. They set up shop with a couple of grand pianos in bars and play a series of pop songs, show tunes, naughty nursery rhymes and other ditties that well liquored tourists sing along to. It's a non-techno version of karaoke.

So we had dueling piano players this week in the Senate Banking Committee following the Democrat's unsuccessful vote to break the Republican's filibuster over the nomination of Richard Cordray to head the new Consumer Financial Products Bureau.

First up was the ever intemperate Dick Durbin (D, IL) who chairs the Banking Committee. Sen. Durbin decried the Republican's successful filibuster of Mr. Cordray's confirmation. In full throat and a belligerent baritone Sen. Durbin rounded up the usual suspects on which to pin the blame: "...the big banks and their backers in Congress have done all they can to hamstring [the CFPB] and prevent it from having the tools and leadership necessary to be an effective consumer watchdog."

Not so! Not so! mellifluously sang Alabama's Richard Shelby, the ranking Republican on the Committee chaired by Sen Durbin. On the Senate floor he sang a woeful tale of a Bureau with nearly unlimited power, funding that amounts to a virtual unchallenged blank check, and a Titan director to whom lesser gods would answer.

"It should be common sense that the more power an agency has the more accountable it needs to be," sang out Sen. Shelby.

But in a second verse, Sen. Durbin accused his opposite number and the Republican conference of voting "to protect the status quo rather than...putting consumers interests first."

Not to be outdone Sen. Shelby's baleful rejoinder told of the need to broaden the governance of the Bureau by replacing the sole Director with a Board of Directors and to make the funding of the agency more transparent and less CIA-like. " In light of the reasonableness of the reforms we have requested, the question remains: why are the Administration and the [Democrats] so insistent that the Bureau be unaccountable?" he crooned. 

I think I can answer that. The Administration and the Senate Majority have little faith that the American people know what's in their best interest. They believe that consumers need a deus ex machina, on standby 24/7, to swoop down and save us from ourselves.

I'll go even further. I think the CFPB shows how little respect some in Congress have for the American people and, frankly, for the institution of the Congress itself. By their design of the agency and by their attempt to jam Richard Cordray through the confirmation process, they are telling American financial consumers and their elected representatives, we're going to put a bunch of smart people in a room and they're going to figure all this out. Don't bother your pretty little heads about it.

Well, we don't need more regulation and we don't necessarily need less regulation. We need the right regulation. And a bunch of smart people unanswerable to the institution of the Congress and led by a Director answerable to no one ain't it.

And the boys and girls gathered round Sen. Shelby's keyboard don't get a pass here. Granted, there's nothing more limiting than being the minority party in the House or Senate, but they're in the minority right now for a reason. They were sent to Washington to govern, not to tickle their keys.  This he sang-she sang, dueling piano routine gets old fast.

So pardon me if I don't stick around. I'll do my drinking elsewhere. Maybe a little dive where there's an old guy with 12 teeth and a beat up Gibson belting out the blues from somewhere between his gut and his heart.

That's my opinion. What's yours?

Can Carriers Recapture the Mobile Mojo in the Battle over Mobile Payments?

   Get the women and children off the field. The big boys are attacking. The war of the wallets--as in mobile wallets--is underway. Some of the biggest names in payments and mobile communications are engaged. As Amir Efrati and Anton Troianovski write in today's Wall Street Journal the object of the war is to settle once and for all who gets to control your money that you spend using your smartphone.

  On one side is a coalition led by Google that includes payment powerhouses MasterCard and Citigroup, as well as mobile carrier Sprint Nextel. They've lined up big box retailers like Toys R Us, Gap and American Eagle Outfitters to accept Google wallet payments.

   On the other side isVerizon Wireless. The largest mobile network in the U.S. is partnered with competing carriers AT&T and T-Mobile USA in a payment venture called ISIS. Their vision is a mobile wallet that consumers would use to make payments, as well as redeem coupons on their smartphones.

   Like many combatants, Google and Verizon were once allies. Verizon's marketing of smartphones that use Google's Android operating system provided a bulwark against its rival AT&T, which had exclusive marketing rights to Apple's game-changing iPhone until this year. Verizon and other carriers were enormously successful in pushing Android into the market place. Today Google's Android is the leading mobile phone operating system, installed on more than half of all smartphones sold worldwide.

    However, Google tried to change the rules of the game itself last year when it marketed its own phone, the Nexus One directly to consumers, in competition with the carriers that had helped make Android a success. But its effort to smash the American mobile market model, where the carriers control consumer sales. failed. Google was forced to retreat on Nexus One.

   So now both sides are bogged down in negotiations that revolve ostensibly around security. Verizon says if Google's wallet were to be included on its phones it would need to be integrated into Verizon's hardware. But Google says it has its own "Security Element," a chip that limits access to your security information to only those trusted programs on the chip itself.

   But my first rule of business is that everything in this world comes down to money--in this case, yours. So the security issue is a proxy for the real battle, which is who gets to own you, the customer, and your  money. Karen Webster, in a post on pyments.com, writes that the dispute may "be about security, certainly, but is also about control--control who has access to [the] customers and the services they are provided."

   Efrati and Trioanovski are more blunt. They say that the standoff between Verizon and Google is an example of how mobile carriers have lost control of the content that their phones deliver. The iPhone saw to that. Developers who pump out apps like Angry Birds and word games seem to have more influence over consumers than the carriers who have those consumers locked into contracts. So the carriers, say Efrati and Trioanovski, have chosen the mobile wallet as the battlefield where they will make their counterattack to recapture that control.

   For now Verizon and its allies seem content to sit on their massive retail networks and begin trials for the ISIS concept next year. Google and Sprint, on the other hand, seems to be relying, for now, on the creative destruction of the market place to vault it to dominance. Its goal is to make Secure Element the de facto standard for near-field communications, writes Webster. If Google's planned acquisition of Motorola's mobile business goes through, expect to see Motorola phones featuring NFC, according to Efrati and Trioanovski.

   Webster believes that the flaw in all of this is that regardless of who wins the battle, a carrier will remain the gatekeeper that controls your access to your money and how you make mobile payments. The third rail here might be a cloud solution, she writes, where your mobile wallet can follow you regardless of which carrier or communications technology is involved. 

   At one time in the U.S. the standard was that your mobile number went with your phone and your carrier, rather than with you. It took some intervention to change that thinking but today I have the same mobile number that I've had with three different carriers. The question is whether there is enough creative-destructive force in the universe to drive the mobile payments away from carrier-based solutions to the Cloud. One thing is for certain: Just like with number portability, there are probably regulators and multiple committees in Congress that would probably be willing to help the carriers figure all this out if they can't do it themselves.
  
  
  

ATM Fee Disclosure: Updating Regulation to Limit Jackpot Justice

   In July of this year Kurt Helwig, president and CEO of the Electronic Funds Transfer Association and Dennis Ambach, director of the Association's Legislative and Regulatory Council, met with the staff of the House Financial Services Committee regarding a regulation that requires ATM owners to display a sign specifying the fee charged to use the machine. There has been evidence of unscrupulous gold diggers ripping the fee signs off of ATMs and then attempting to file class action lawsuits against the owners of the ATMs for failing to post notice of the fees. There are even websites that troll for alleged victims and encourage the filing of these suits.
   Members of the EFTA, which represents a wide spectrum of companies involved in electronic payments, believe that the sticker requirement is an antiquated requirement since modern ATMs post the fee on the ATM screen and ask the user whether he wishes to accept the fee before continuing. They are joined in this belief by members of various other groups including the ATM Industry Association (ATMIA).
   Following the July meeting the Committee's chairman, Rep. Spencer Bachus (R, AL) wrote to Raj Date, a special advisor to Treasury Secretary Tim Geithner and the interim head of the new Consumer Financial Protection Bureau. Chairman Bachus asked whether the CFPB has the authority to amend Regulation E of the Electronic Funds Transfer Act to eliminate what amounts to dual notification.
   The CFPB recently published what the government calls a "Notice for Comment." This is an invitation for the public to comment on some pending regulatory action. In this case, the CFPB is looking for public input on regulations that fall within the Bureau's authority and which could use a little streamlining. Specifically, the CFPB is looking for regulations which it has "inherited" from other regulatory bodies, and which could be updated or modified because they are "outdated, unduly burdensome or unnecessary."

HFSC Chairman Bachus contacted
 the CFPB concerning its authority
to amend the EFT Act to
eliminate dual notification

   Among the suggested areas for comment in the Notice is ATM fee disclosure. The Bureau is looking for comment on whether the requirement to post a sign on the ATM should be eliminated and whether other disclosures, such as the on-screen fee notice, are adequate for informing consumers.

   The Bureau's desire to quickly identify the regulations for which it is now responsible and to streamline those requirements is welcome news. How the newly minted CFPB manages this comment period and deals with the public comment will go a long way in establishing the Bureau's credibility with consumers and with industry.
   In you are interested in commenting to the CFPB on this issue the comment period is open for 90 days. It's hard to believe that we can't find a way to ensure that consumers' rights to know upfront the cost of using someone's ATM can't be balanced with the right of that ATM owner to avoid financial calamity through the jackpot justice of frivolous lawsuits.
   That's my opinion. What's yours?