Welfare Card Restrictions Redux

An update on the status of implementing restrictions on where and how EBT payment cards used for the federal/state TANF program, known colloquially as welfare, has been posted at the EFTA's eGovernment Payments Council website, www.electronicbenefitstransfer.org, You can access the information there or by clicking this link.

CFPB Update

The 112^th Congress may be winding down, but the Consumer Financial Protection Bureau (CFPB) keeps chugging. Before Congress scurried off home for electioneering in September, CFPB Director Richard Cordray paid a visit to both the Senate Banking Committee and House Financial Services Committee for a biannual update on the Bureau’s activities. House Financial Services Committee Chairman Spencer Bachus (R-AL) even quipped that Director Cordray “made some news” during his appearance on September 20. Yes, it’s news when an Administration official appears before Congress and says something of interest.

The Consumer Financial Protection Bureau is poised to
issue two important proposed rules on overdraft
protection and prepaid cards.

What did Cordray say of interest? At issue is the 2009 CARD Act’s “ability to pay” rule. The Federal Reserve Board had responsibility for the implementing this provision of the CARD Act (the CFPB had not existed at this time). The Board created a uniform standard requiring all consumers to demonstrate “an independent ability to repay.” The Board’s rule took effect October 1, 2011 and almost immediately Congress began asking questions on the rule’s impact on stay-at-home spouses and their ability to obtain credit. Dodd-Frank gave the CFPB rule-making authority over Regulation Z (Truth in Lending). At another House Financial Services Committee hearing during the summer, Gail Hillebrand of the CFPB did not appear very sympathetic to opening up the rule again. But Cordray believe enough evidence had been produced to warrant a new rule that would disadvantage stay-at-home spouses who may ample “household income” to secure credit. CFPB will likely issue the revised rule for public comment later this year or early 2013.

Senate and House leaders also expressed concerns with CFPB’s final rule on international remittance transfers (Sec. 1073 of Dodd-Frank). Several House members wrote Cordray in August asking for a delay in the effective date (February 2013) while the CFPB studies its impact on consumers. The CFPB’s rule on international remittance transfers required several disclosures to be made to consumers including exchange rates and fees charged by other entities and taxes to be charged by foreign governments. The only relief CFPB has given to exempt those financial institutions providing less than 100 remittances annually from the new disclosure rules. I do not expect this will be the last we hear of this issue. How far will consumer choice be limited as institutions exit the business because compliance requirements are not financially viable? Stay tuned.

Looking ahead to 2013, the CFPB is poised to issue two important proposed rules on overdraft protection and prepaid cards. EFTA has provided comment to the Bureau on both subjects in 2012 as part of an Advanced Notice of Proposed Rule-Making. Gov. Mitt Romney also called out the Bureau for slow progress on issuing rules on qualified mortgages. Expect some busy beavers in the hallways and offices of the CFPB in the weeks and months ahead.

Choppy Waters Ahead for Interchange

October 1 marked the one-year anniversary of the Durbin Amendment’s limitation on the amount large financial institutions ($10 billion or greater in assets) can collect in interchange (24 cents) for debit card transactions. Government agencies and industry typically wait several years for an important regulation to sort itself out in the marketplace. But, there’s nothing typical about the Durbin Amendment and one really needs a scorecard to understand who’s on first and what’s on second.

This week, retailers and merchants argued in DC federal court that the Federal Reserve Board’s final rule implementing the Durbin Amendment completely missed Congressional intent. The Durbin Amendment instructed the FRB to set debit interchange rates at par with the cost of clearing an electronic check and that it be “reasonable and proportional” to cost of processing the transaction. The FRB initially proposed to the set the rate at seven cents. But, after a public comment period, the Board settled on 21 cents with an ad valorem and fraud adjustment (effectively 24 cents). Thus, the merchants and retailers want the Board to start anew. In the past, courts have been reluctant to take this type of action under the Administrative Procedures Act. It is difficult to predict when the court will issue a ruling. And, expect the losing party to appeal.

Meantime, in New York, retailers and merchants are throwing cold water on a $7.5 billion proposed settlement with Visa and MasterCard on credit card interchange. The proposed settlement was agreed to in July and must be blessed by a judge before taking effect. Even Senator Durbin took the Senate Floor to suggest the proposed settlement was a grand give-away to the Visa, MasterCard and the banks. The proposed settlement would allow merchants to “surcharge” customers using credit cards as well as temporarily reducing interchange rates. Durbin, the American Bankers Association and the Retail Industry Leaders Association all traded letters to excoriate one another. It’s getting both nasty and personal.

Back in Washington, retailers are boasting in the press that Congress is ready to take on credit card interchange reform. The financial services community isn’t so sure given the bruising battle over the original Durbin Amendment in 2010 and the effort to repeal it in 2011 (unsuccessful obviously). Will Congress ever touch credit card interchange? Check back with me after the November elections.

As long as Dick Durbin remains a US Senator and as long as debit and credit card interchange rates remain above zero, the financial services industry needs to be vigilant on Capitol Hill and the media about the value of  electronic funds transfer (safe, secure and fast). And, EFT networks require investments to maintain and grow. 

Examining Social Security's Electronic Payment Program

The Subcommittee on Social Security of the House Ways and Means Committee scheduled a hearing on Wednesday, Sept. 12 to take a look at the impact on Social Security payees of direct deposit of benefits. Among the topics on the table were exemptions from the mandatory electronic payment requirement and the fraud experience following the electronic payment mandate. The scheduled witness list was short and included Margot Saunders of the National Consumer Law Center and representatives of the Social Security Administration.

Before we look into the issues before the Subcommittee, a little history is in order. In 1996 Congress passed the Debt Collection Improvement Act. The DCIA required all federal payments, including Social Security benefits, to be made through electronic funds transfer (EFT) beginning in January 1999.  The law gave broad authority to the Treasury Dept. to grant so-called hardship waivers that would allow Social Security payees to continue receiving checks rather than electronic payments. That ultimately proved the law’s undoing.

To implement the law, Treasury  launched a program dubbed “EFT99.” The goal of the program was to meet the mandate of the DCIA to convert Social Security and other benefit programs to electronic payment by 1999. To do this Treasury contracted with a number of financial institutions to issue EFT99 debit cards that Social Security payees without a deposit account could obtain at a participating financial institution in order to access their benefits.

But perhaps EFT99 was a little too far in front of the electronic payment tsunami we’ve seen over the last decade. In 1999, shortly before the deadline for converting to electronic payments, Congress bowed to pressure on the mandatory nature of the program. As a result Treasury then instituted a program of self-certifying exemptions from the electronic payment requirement.  In effect, the “mandatory” program became an opt-in, rather than an opt-out, program. Banks that had expressed an interest in participating in EFT99 folded their cards and left the table. The opt-in program left them no way to evaluate the risk or the rewards of participating in the government’s program.  Social Security beneficiaries who wanted to participate had limited access to banks that would issue the EFT99 cards. The program foundered, despite Treasury’s game attempts to save it through advertising and outreach to payees.

In 2001 the Government Accountability Office flatly observed that no amount of effort could make the program effective. Treasury pulled the plug.

I bring up EFT99 as a cautionary tale of what happens when legislators or regulators bend to the will of parochial interests at the expense of the public at large. In 2005 Treasury attempted a reset of electronic payment of social security with the launch of the “Direct Express” campaign targeted once again at Social Security payees to emphasize the benefits of electronic payment.  In 2008 Treasury launched the Direct Express® Debit MasterCard. Following the successful example of state electronic benefits transfer projects, Treasury contracted with one bank to handle the program. However, issuers of private label prepaid cards can participate in the program, as long as those card programs meet Treasury’s standards.

Direct Express is a reloadable, debit card that allows payees to receive their Social Security allotments on an electronic card, even if they don’t have a bank account.  Payees can use the card wherever its brand is accepted. They can also get cash at ATMs or by requesting cash back when they make a purchase with the card. 

After 16 years of trying, the Direct Express card program has allowed the federal government to finally reduce the government’s cost of check processing, estimated to be $125 million, according to Saunders’ written testimony. But success always has its skeptics.  Critics have blasted the program for its hard-nose approach to minimizing the remaining number of check payments, for allowing debit card providers other than the contracted bank into the program, and for allegations of fraud and theft of payees’ identities.

In her prepared testimony Saunders generally praised the Go Direct program for its “laudable goal of saving money, saving trees and improving the security of the delivery of federal benefits.” However, she testified that the program needs “an articulated waiver procedure” for those payees for whom electronic payment won’t work. This could be because of a disability or geography. In fact, previous posts to this column have explained the hardships that the Department of Health and Human Services’ new restrictions on TANF EBT transactions might cause in some geographic areas.

When Treasury’s final regulations become effective next year only payees 92 years old and older and those who live in areas where electronic payment infrastructure is not convenient will be allowed to continue receiving paper checks. I don’t have any problem with those parameters. Frankly, I think there are a lot of people who are 70 years short of their ninety-second birthday who should probably think twice about having a debit card. But Saunders raises another interesting issue: the cumbersome, bureaucratic procedures for requesting a waiver.

Her testimony outlined the waiver process: Call and have a chat with a customer service rep. Then articulate exactly why you need a waiver. Then, once in hand, fill out the form. Take the completed form and find a notary to stamp it. Then mail it off to the Social Security Administration. Then wait. 

It’s not beyond possibility that a ninety-something year-old payee might get a waiver out of this world before she gets a waiver out of the Direct Express program.

There is a line between an efficient program and a bureaucratic one. And that line isn’t real fine. In fact, it’s pretty easy to see. I could never support any changes to the Direct Express program that results in another EFT99 opt-in fiasco. But Direct Express is hardly the camel’s nose under the tent flap. And it is nothing like EFT99. It is a well-conceived, well executed card program. Having a reasonable, well-articulated exception policy and an efficient adjudication process for waiver requests seems reasonable, provided it does not impact the objectives or ROI of the program.  

If the waiver process somehow starts reminding observers of EFT99, Treasury can always tighten ratchet down on requirements. It is Social Security and the churn in the program is not unsubstantial.

That’s my take. What’s yours?

The Boys are Back in Town

After a five week recess, two party conventions and a nasty Gulf hurricane, Congress is back in session on September 10. How long will they stick around? What can they do before taking off to campaign back home? [Quick fact: The boys may be back in town, but women currently constitute 17% of the 112^th Congress. Apologies to Thin Lizzy.]

At most, Congress will be in session three weeks with a scheduled adjournment date of October 5. The only “must do” agenda item is to pass a measure to fund the government when the new fiscal year begins October 1. At this writing, no individual appropriations bills have been sent to the President’s desk for signature into law. No one is even sure if a lame duck Congress can agree on 2013 spending levels. The budget can could be kicked into early 2013 and a new Congress. It’s happened before in recent years. The only positive news here is that the House and Senate agreed to the temporary funding measure back in July.

When we last saw the Senate in session, no agreement could be reached to move forward on comprehensive cyber-security legislation. News reports popped up periodically in August that some Senators believed a deal could be reached in September. Count me in the doubtful column. We do know, however, the Obama Administration is actively considering either a revised Homeland Security Presidential Directive 7 or an entirely new executive order on cyber-security. PaymenTrends will keep close tabs on all things cyber. We should also bear in mind that Congress may be in and out of session with a blink of an eye, but federal agencies such as the Consumer Financial Protection Bureau remain open for business. CFPB is currently digesting public comments on overdraft protection and prepaid cards (just to name two).

I do want to give a “shout out” to one piece of legislation that has passed the House of Representatives 371-0 and that has more than 60 Senate cosponsors. This legislation (H.R. 4367/S. 3204) would eliminate the requirement that an ATM need a physical placard fee notice to accompany the on-screen fee notice to a consumer. This is one issue where Republicans and Democrats have united behind common-sense legislation to eliminate a burdensome and unnecessary regulation. The Senate needs to act on S. 3204 before leaving for home in October.

EFTA’s Legislative & Regulatory Council will be tackling all these issues (CFPB, ATM signage, overdraft protection, cyber-security) this September 27 in Washington DC. Speakers include Stuart Pratt, President & CEO of the Consumer Data Industry Association, Nicole Muryn, director of regulatory and legislative affairs for BITS and Catherine Galicia, counsel to Chairman Tim Johnson of the Senate Banking Committee.

Federal Reserve Final Rule on Durbin Amendment (Reg II) Fraud-Adjustment

Last week, the Federal Reserve Board (Board) published the final rule on fraud-prevention cost adjustments allowed under Regulation II (the Durbin Amendment). As you may recall, the Board’s Durbin Amendment final rule issued last July allowed for a provisional, one cent fraud-prevention adjustment in addition to the 21 cent and ad valorem rates. The Board asked for additional information and comments on fraud-prevention standards in the marketplace and suggested it may increase the adjustment depending on the data received.

The Board’s final rule that takes effect October 1, did not change the one cent fraud-prevention adjustment standard. The final rule requires an issuer to develop policies and procedures reasonably designed to detect fraud in order to receive the fraud-prevention adjustment. Required elements of these policies and procedures should include:

• Identify and prevent fraudulent electronic debit transactions

• Monitor the incidence of, reimbursements received for, and losses incurred from fraudulent electronic debit transactions

• Respond appropriately to suspicious electronic debit transactions so as to limit the fraud losses that may occur and prevent the occurrence of future fraudulent electronic debit transactions

• Secure debit card and cardholder data

Issuers must inform its payment card networks annually of its fraud-prevention compliance program in order to receive the one cent adjustment under Reg II.

I will provide additional thoughts on the Board’s final rule during the next Legislative & Regulatory call on Wednesday, August 8 at 2 p.m. EDT.

GAO Weighs in on Congressional Effort to Block Use of Welfare in "Sin" Locations

As followers of PaymentTrends and its sister blog, The Wall, on the website of the eGovernment Payments Council know, EFTA and eGPC have been very active in working with states, transaction processors, the Department of Health and Human Services and the Government Accountability Office on the issue of restricting access and use of TANF, commonly called welfare, payments at businesses inconsistent with the mission of the TANF program.

In its Middle Class Tax Relief and Jobs Creation Act earlier this year, Congress restricted the use of TANF payments, prohibiting their access or use in liquor stores, casinos or adult-entertainment establishments. The GAO launched a study back in December 2011 of the issue. Recently the Office released the results of its study. You can find those results and corresponding analysis over on our sister blog, The Wall, part of the eGPC's website www.electronicbenefitstransfer.org.

House to Debate Bill Modernizing ATM Signage Requirements

On Wednesday, June 27, the House Financial Services Committee is scheduled to consider H.R. 4367 which seeks to eliminate Regulation E’s current dual fee notification requirement. If this bill becomes law this year, consumers will not be impacted. Any individual wishing to draw cash at an ATM or inquire on his or her balance will receive the required fee notice on the screen. And, he or she must affirmatively acknowledge the fee before the transaction can be executed.

Prospects for the committee approving H.R. 4367 on Wednesday are strong. The House bill currently has 120 cosponsors including more than half the Financial Services Committee. The Senate companion bill (S. 3204) has 16 cosponsors. The House and Senate bills are enjoying strong, bipartisan support. If the Committee approves H.R. 4367 on Wednesday, it moves to the full House for consideration (mostly likely in July).

In recent years, ATM owners and operators have been beset by a spate of lawsuits from plaintiff attorneys alleging Reg E violations. In many of these cases, unscrupulous individuals are physically removing (vandalizing if you will) the ATM stickers and forwarding photos to these attorneys. Many ATM operators  deploy small fleets of ATMs and face the option of costly litigation or settlement (not a good option either way for small business in America).

Please come back next week for a status on the Committee’s consideration of H.R. 4367 is its next steps along the legislative process.

May Legislative Roundup

There are a wide variety of legislative and regulatory initiatives in which EFTA is involved this spring. These include a movement to change the Electronic Funds Transfer Act to eliminate the requirement that usage fees be posted on the outside of an ATM. This is a vestigial requirement that has outlived its usefulness as modern ATM technology permits a much more detailed, convenient notice on the ATM screen itself as part of an ATM transaction.

Also on the EFTA legislative and regulatory calendar are regulations governing the restrictions on the use of TANF benefits at liquor stores, casinos and adult-oriented entertainment clubs, cybersecurity and overdraft protection.

In an informal interview Kurt Helwig, EFTA CEO, and Dennis Ambach, the organization's senior director for government relations, discuss prospects and strategies for these issues.

We pick up the interview with a discussion about pending legislation in the Senate and House (S. 3204 and H.R. 4367) that would eliminate the dual ATM notice requirement. Can the bills, now under consideration, become law?

Coming to Grips with Overdraft Protection

The Electronic Funds Transfer Association has put together a task force of industry veterans to tackle the tough issue of overdraft protection. The task force's mission is to focus on the legal and operational issues of extending overdraft protection.

In a quick, three-minute video, Kurt Helwig, president and CEO of EFTA talks about the issue.

Spring Legislative Calendar for the Electronic Payments Industry

Dennis Ambach is the senior director for government relations for the Electronic Funds Transfer Association. On a recent visit to Capitol Hill he talked about pending legislative issues of importance to the electronic payments industry.

Time's Running Out to Comment on the Impact of Overdraft Protection

June’s end also marks the end of the Consumer Financial Protection Bureau’s extended comment period on the impacts of overdraft programs on consumers. What’s CFPB’s end game here? Will ATMs and point-of-sale (POS) devices need to deliver a real-time “insufficient funds” warning to consumers before a transaction causing an overdraft takes place?

The CFPB’s notice for comment on overdraft is fairly sweeping in scope. Questions range from quantifying overdraft opt-in rates, the economics of overdraft programs and long-term impacts to consumers. Of particular concern to EFTA members are questions related to consumer alerts and balance information. EFTA membership hits all the touch points of a shared network transaction: the bank, the processor, the network switch, card processor and host processor. If the CFPB were ever to require some type of overdraft notification at an ATM or POS, EFTA members would be in ground zero for compliance.

But, let’s not get too ahead of ourselves here. EFTA will provide the CFPB with comments before the June 29 deadline. Though not finalized, EFTA will emphasize three main points in the comment letter:

·       Most POS devices at retail stores or gas pumps currently lack the ability to deliver any meaningful message to the consumer with respect to a possible overdraft occurrence

·       ATMs are a bit more sophisticated than POS terminals but, again, delivering an overdraft notice message in a shared network transactions (versus on us) is challenging

·       A greater burden will be placed on community and independent banks versus the larger institutions

Once the comment period closes on June 29, the CFPB will take several weeks (probably months) to read over and formulate a proposed rule on overdraft protection. At this writing, the CFPB has received more 235 comments (see them here at regulations.gov). EFTA’s final comment letter will be posted soon.

Restricting Access to TANF Benefits

EFTA and its eGovernment Payments Council have provided their comments to the Department of Health and Human Services on the agency's impending rules for restricting access to TANF benefits. To see the EFTA/eGPC comment letter, click here.

eGPC has spent a great deal of time over the last six months on this issue. This included two nationwide surveys, a white paper, and a webinar. Our goal has been to inform the rules-making process so that the rules developed by DHHS actually accomplish the goals of the legislation in such a way that the administration of public funds for eligible households is not adversely affected.

Our fear has been that without a firm understanding of the problem and how public benefits are administered any resulting restrictions on TANF use may be only sporadically effective and could be discriminatory against TANF participants who play by the rules. Compliance with the Section 4004 requirements, as they're called, could also sap valuable resources from the administration of public aid in many states.

We believe that the most effective way to achieve the goals of the Middle Class Tax Relieve and Job Creation Act (Section 4004) is to give states maximum flexibility in developing and managing their own plans that work best for their states and their program participants This is definitely not a situation where one size fits all.

That's how we see it. Check out our comments and let us know if you agree.

LinkedIn, eHarmony and the Politics of Cybersecurity

Another week, another major data breach hit the airwaves. The most recent causality was LinkedIn. Six million passwords were reportedly hacked. Internet dating Web site, eHarmony, also reported hacked passwords posted online.

Rest assured whenever a major data breach is reported, a slew of Senators and Representatives fire off press releases [old school] and tweets [new school] arguing for their data security bill. In reality, data security has taken a back seat to its bigger and more ominous brother, cybersecurity. For companies in the financial services space, good data security is already the law (Gramm-Leach-Bliley’s Safeguards Rule and more than 45 state data breach notification laws).

As a reminder, the following is a roster of data security bills reported by the Senate Judiciary Committee last September:

·       S. 1151, the Personal Data Privacy and Security Act, sponsored by the Committee Chairman Pat Leahy (D-VT).

·       S. 1535, the Personal Data Protection and Breach Accountability Act of 2011, sponsored by Sen. Richard Blumenthal (D-CT)

·       S. 1408, the Data Breach Notification Act, sponsored by Sen. Diane Feinstein (D-CA)

All three bills would require companies to implement data security programs to protect sensitive personal information as well as setting a national standard for breach notification. S. 1151 and S. 1535 provide for criminal penalties for failing to notify individuals of a data breach. S. 1535 allows for private rights of action against companies failing to notify of a data breach. The Senate Commerce Committee continues to discuss its data security and breach notification bill (S. 1207). On the House side, the Energy and Commerce Committee has yet to schedule a markup and vote on H.R. 2577, the SAFE Data Act authored by Rep. Mary Bono Mack (R-CA). Her subcommittee approved H.R. 2577 in July but negotiations continue on the preemption, data minimization and liability provisions in the bill. It is uncertain whether the full Committee will markup H.R. 2577 this summer.

Even in an active Congress, passing cybersecurity, data security or privacy legislation would all be a tall order. Consensus just does not exist on whether more regulation will be of any benefit. Meantime, companies (especially in financial services and payments) spend great resources (human and capital) to stay one step ahead of the fraudsters, hackers and government officials wanting to punish companies for lax data security.

You’re Going to Need a Bigger Boat

For some reason, I cannot shake this classic line from Jaws (uttered by Chief Brody to Quint upon first seeing the shark) when I read the daily comings and goings of the Consumer Financial Protection Bureau. The question is not who or what the Bureau is attempting to regulate. But, who or what aren’t they wanting to regulate. Or, so it appears.

Like it or not, the Bureau is around to stay. It’s still in its infancy, but growing bigger and more powerful by the day. The Bureau hit a major growth spurt when President Obama recess appointed Richard Cordray to be its first director (controversially I might add). Since January, the Bureau has been one active federal agency. And, it’s not even fully staffed yet.

Here’s a quick, non-exhaustive run-down on the Bureau’s recent activities:

·       Request for Information on overdraft practices

·       Examination of overdraft programs at the largest nine financial institutions

·       Advance Notice of Proposed Rulemaking on General-Purpose Reloadable Prepaid Cards

·       Proposed Rule for Supervision of Nonbanks that Pose Risks to Consumers

·       Proposed Rule on express statutory protections of confidential information in bank examinations

·       Notice for Comment on updating and streamlining regulations

·       Proposed Rule to supervise debt collectors and consumer reporting agencies

Ready to cry “uncle” yet? One can certainly make the case the Bureau is so active because it is so young. But, is haste making waste? Case in point may be the Bureau’s final rule on international remittance transfers issued late last year. The Bureau assumed responsibility for the final rule from the Federal Reserve Board (who had issued the proposed rule). Without going into a detailed analysis of the final rule, many banks providing remittance services are stating the 2013 compliance date for new consumer disclosures and error resolution cannot be achieved. The message appears to be getting through to the Bureau. It may revisit the issue in some fashion.

We ought to be somewhat sympathetic to the Bureau and other federal banking agencies under strain to implement the more than 400 rules and studies required by Dodd-Frank. The Bureau must also find its way in working with the Fed, the OCC, FTC etc on bank examinations and enforcement actions. The Bureau must balance its requirements and obligations under Dodd-Frank against being spread too thin and possibly hurting the financial services industry’s ability to help the economy recover.

Does the Bureau go for the “bigger boat” option or focus on issues beneficial to consumers and the recovering economy? Time will tell.

Never a Dull Moment in Durbinville

Last month I wrote about the recent comings and goings with the Durbin Amendment and interchange. I obviously did not consult with the Federal Reserve Board about timing. On May 2, the Fed did a little Durbin data dump from the fourth quarter of 2011 regarding the effects of the Durbin amendment on exempt and non-exempt issuers.

I have been working Google over-time reading through the various news reports and analyses of the Fed’s numbers. The most prominent concern with the Durbin Amendment was its possible impact on exempt issuers (those lower than $10 billion in asset size). Would merchants incentivize their customers to pay with debit cards from non-exempt issuers thus realizing the lower interchange rate? Could they? The Fed did not answer these questions. The Fed was quite clear that exempt issuers averaged 43 cents in interchange fees (the same number as reported in 2009). The general chorus of those opining about the Fed report was “…it’s too early to tell.” True. We may not even have good trend data for a year or so since the non-exclusivity provision of Durbin took effect at the start of the second quarter this year.

The Fed will continue to collect and publish this data annually. We can also expect a similar report from the Federal Trade Commission by year’s end on the impact to exempt issuers thanks to provision Senator Durbin added in last year’s Omnibus appropriations bill. It’s certainly not a bad thing that the Fed is building trend data on this issue.

The other Durbinville news of the week came from Visa’s quarterly earning call. Visa disclosed a “civil investigative demand” from the Department of Justice regarding its new fixed fee it is now charging merchant banks. We’ll have to see how this one plays out.

I certainly will pass along any more Durbin musings on interchange as they come along.

Redundant ATM Signage: Summarizing the Issues

In a five-minute interview, Kurt Helwig, president and CEO of the Electronic Funds Transfer Association, analyzes the issues involved in the recent spate of lawsuits involving fee notification signage on ATMs. For a background on the issue, scroll back to previous posts "ATM Fee Signage (Continued)," posted January 2012 and "ATM Fee Disclosure: Updating Regulations to Limit Jackpot Justice," posted December 2012.

Last week Representatives Blaine Leutkemeyer (R-MO) and David Scott (D-GA) introduced a bi-partisan measure that would eliminate the requirement for redundant physical signage on ATM terminals. Last week Reps. Leutkemeyer and Scott sent a letter to their colleagues inviting co-sponsors on the bill. Read that letter here.) For analysis of the Leutkemeyer-Scott bill see our post below of April 20, "H.R. 4367: Beauty in Simplicity."

In this short interview, Mr. Helwig lays out the issues and history of the problem and looks at the chances of success for legislative or regulatory relief.

Regulating Bad Behavior

More than 100 people attended this week's EFTA webinar on complying with the new federal law that requires states to restrict access to TANF benefits in specific locations. The Middle Class Tax Relief and Jobs Creation Act of 2012, signed by Pres. Obama in February includes a section, number 4004, that requires states to prohibit TANF beneficiaries from accessing their benefits in liquor stores, gaming locations and adult-entertainment venues.

States are required by 2014 to submit a report to the Department of Health and Human Services on how they have complied with the law. States that fail to adequate comply face the loss of up to five percent of their TANF block grant.

DHHS is the federal agency that oversees the TANF program. Since the new law provides for monetary penalties, DHHS must conduct a formal rules-making process to establish regulations for complying with the intent of Congress, according to the agency.

The webinar was hosted by the Electronic Funds Transfer Association and CO-OP Financial Services. It was divided into four sections:

1. The legislative background of the law
2. The regulatory process that is now underway
3. How states are complying with similar blocking state-level blocking laws
4. Alternatives to "systemic" blocking solutions

A veteran panel discussed these four issues at length. Dennis Ambach, the senior director of government relations for EFTA, explained the origin of the bill and similar state-level movements to restrict the use of TANF. Mark Greenberg, the deputy assistant secretary for policy in the Administration for Children and Families, explained in detail the regulatory process that will produce the rules that will guide states in their compliance with the law. ACH is the branch of DHHS that administers TANF.

The EBT director for the State of Colorado, Scott Barnette, presented his state's experience in restricting access to TANF and benefits from a host of other government programs. Finally, John Simeone, executive director for JP Morgan Public Sector Prepaid Cards talked about the issues involved with trying to block access to TANF by "throwing a switch" on ATM machines. (Hint: The switch doesn't exist.)

There have been just a few seminal milestones that have marked the path of EBT. The first was creation of the first set of operating regulations in 1992. Another was Congress' willingness in the late 1990s to appropriate money so that EBT transactions could be interoperable across the country. How the Section 4004 regulations are writen will be one of those milestones.

The regulators at DHHS face a thankless task in trying to control access to TANF. Most Americans share Congress' disgust with knowing that money that was appropriated to clothe poor children and keep a roof over their heads is going instead to pay for liquor and lap dances. But implementing the law will be tricky. Compliance costs may in the end exceed the amount of money that is currently being diverted to spirits, slots and strippers.

So DHHS will have to balance such factors as cost and benefit, access and fees, and the carrot and stick of enforcement.

Here are just three of the issues that regulators will have to consider over the next several months:

Whether systemic solutions are cost effective. Results in two states have shown that the amount of TANF benefits flowing through proscribed categories of merchant is in each case less than one-half of one percent of the total amount of benefits distributed. Human services agencies have no regulatory authority over alcohol retailers, gaming or adult entertainment. In at least one state, staff time was devoted to scanning Yellow Pages to make lists of liquor stores and strip clubs to contact directly. The manpower required to implement the law could be staggering.

Whether regulations may end up reducing access for all beneficiaries. Even when a state is able to locate and contact business owners who agree to block acceptance of EBT cards at ATMs in those locations, it's not the end of the story. ATMs are mobile assets. An ATM may be replaced by one whose terminal ID has not been blocked. Or a terminal with a blocked ID may end up in a lawful location where beneficiaries may be blocked from using it.

And in remote areas of the country, for example, western states in the lower 48 and Alaska, there are places where a prohibited location may be the only location within 50 or 100 miles of where a beneficiary lives. Prohibiting that location may place an undue hardship on the beneficiary.

And what about Indian casinos? Recognized Indian nations and tribal authorities under the Indian Gaming Regulatory Act of 1988 control gaming within their territory. So the requirements of Section 4004 of the new law might not be enforceable in Indian casinos. This could cause the regulations to be applied in a discriminatory manner. One beneficiary may face a 25-mile drive to an ATM because a casino is now off limits for benefit access, while another beneficiary may hop on the Interstate, get off at the next exit and pull into an Indian casino with her EBT card.

Regulators are concerned about access costs. But we know that cost and access are code words for supply and demand. ATM owners in some areas may find that blocking these transactions may make it economically unfeasible to keep their machines in those locations. They may redeploy their machines to more profitable locations. As the supply of ATMs diminishes, will the owners of remaining machines raise their surcharges? If so, compliance with the law will result in less access and higher cost for all beneficiaries. As the supply of access points decreases, the cost of remaining access points increases.

Fairness of sanctions. States that fail to comply with the law could be sanctioned with the loss of up to five percent of their TANF block grant. But whom does this affect? Not the liquor store owner who sold a pint of bar whiskey to someone who paid with TANF funds. Not the casino owner who knowingly allowed access to TANF funds so that in three hands of blackjack the beneficiary's family support money was in his till. Not the stripper who steps off the bar with TANF cash in the waistband of her G-string.

Section 4004 sactions could end up harming the vast majority of program beneficiaries who play by the rules. A sanctioned state will be forced to make up the five percent reduction in its TANF grant by cutting other programs to use that money to meet its TANF obligation. Which programs? Maybe reduce the hours for school nurses. Maybe buy fewer assisted living devices for the disabled. Or maybe layoff the interpreters at the blind commission. Who knows?

Sanctions should not end up indirectly harming beneficiaries who play by the rules. States should comply with the new federal law by passing their own legislation that will allow them to better enforce how and where these benefits are accessed and spent. Gaming commissions should be responsible for making sure that the casinos, bingo-halls and poker clubs they oversee don't allow TANF funds to be accessed in those locations. If these businesses circumvent the gaming commission's regulations the businesses could face loss of their licenses. The same for liquor stores.

Congress did the right thing by trying to turn the focus on TANF benefits back to children and families. But regulators will have to have the leadership of Moses, the wisdom of Solomon and the patience of Job to get this one right.

DHHS will have to absorb a great deal of information in a very short period of time in order to craft regulations that don't negative impact anyone but the bad actors. And states, in their compliance plans, will have to show that they can apply the proper pressure to those bad actors in order to regulate access to and use of TANF in the manner Congress intended when it created the program.

H.R. 4367: Beauty in Simplicity

All too often the public only hears about 2,500 plus page laws (monstrosities if you will) coming from our Congress. Let’s round up the usual suspects: Obamacare, Dodd-Frank and year-ending omnibus spending bills. Bigger is not better when it comes to law making.

Blaine Luetkemeyer (R-MO)
Google Images

I am more pleased then to offer thoughts on a bill recently introduced by Rep. Blaine Luetkemeyer of Missouri. Responding to a real need in the ATM industry, Rep. Luetkemeyer sponsored H.R. 4367 along with Rep. David Scott of Georgia. Weighing in at a sleek and sturdy one and half pages, H.R. 4367 proposes to streamline and update the Electronic Funds Transfer Act’s requirement that an ATM operator provide a consumer two fee notices (one on the screen and one on the physical ATM) before a balance inquiry or cash withdrawal.



David Scott (D-GA)
Google Images



Years ago, the dual fee notification requirement was an important consumer protection measure because some screens on older ATMs could not deliver a robust notice. Current ATM screens now offer the consumer a very robust fee notice (thank you Triple Des, ADA audio requirements and good, old investments by the ATM industry). Unfortunately for the industry, some unscrupulous characters have started a national trend of defacing the ATM’s physical fee notice placard, hiring trial lawyers to accuse ATM operators of non-compliance with the EFTA and demanding cash settlements.

The Electronic Funds Transfer Association and the ATM Industry Association last year began to reach out to Capitol Hill on the problems with these lawsuits and the need to update the EFTA’s dual fee notification requirement. The Consumer Financial Protection Bureau is also involved. The Bureau asked for public comment on whether the dual fee notification requirement ought to be changed. Of the more than 100 comments letters filed, a strong majority supported the dual fee notification elimination. The American Bankers Association, American Gaming Association, Credit Union National Association, Independent Community Bankers Association, National Association of Federal Credit Unions and the National Association of Convenience Stores are also working hard to eliminate the dual fee notification requirement.

Reps. Luetkemeyer and Scott deserve much credit for offering a simple solution to an important problem. H.R. 4367 fully protects consumers and it’s in the spirit of updating and streamlining an old regulation. It deserves broad support.

 

Giving Credit Where Credit Is Due

Kevin Warsh, former member of the
Federal Reserve System Board of
Governors. Future Treasury
Secretary?

Former Fed Governor Kevin Warsh published an op-ed in last week’s Wall Street Journal titled “Who Deserves Credit for the Improving Economy?”  In it, he challenges the notion that has seemingly taking hold in some inside the beltway circles that politicians and government largess are responsible for the modest economic recovery currently underway.  He opines that the strength of our economy lies in the citizenry not the government.  The citizen that cleaned up their personal balance sheets during the worst of the financial crisis and continues to do so.  The citizen who continues to delay consumption and make tough spending choices. 

The government has done just the opposite.  The Senate, in a clear abdication of responsibility has not passed a budget since April 29, 2009.  President Obama’s unserious 2013 $3.6 trillion budget was rejected by the House 414 to 0.  The recommendations of the President’s own bipartisan Bowles/Simpson Commission were rejected by both the House and the White House. 

The government continues to spend money it doesn’t have, while American’s tighten their belts and make prioritize their spending.  Mr. Warsh’s best point is as follows:  “We should not allow the failings of the US banking system to serve as a generalized indictment of the market economy.  The failures in the banking system owe at least as much to public policy failures (Fannie Mae, Freddie Mac) as to deficient private practices (poor risk management). The marketplace is still the best allocator of capital and labor.”

Where is this kind of thinking in Washington?  Mr. Warsh is currently a lecturer at Stanford’s business school and a distinguished visiting fellow at the Hoover Institution.  Should the upcoming elections result in a change of administrations, Mr. Warsh should be on a short list for Treasury Secretary.

A Warning Against Durbin “Fatigue”

We hear it all the time at financial services meetings and conferences these days. “This is a Durbin-free meeting.” Or, “…We are all suffering from Durbin fatigue.” I have invoked these words from time to time.

It is true the financial services sector has been quite topsy-turvy since the debit card interchange amendment (aka The Durbin Amendment) was adopted during the Senate’s consideration of financial reform in 2010. The following is a brief timeline of events:

·       July 2010 – President Obama signed into law Dodd-Frank which included the Durbin interchange amendment

·       December 2010 – The Federal Reserve issued a proposed rule to implement the Durbin Amendment and sets the cap on interchange at 12 cents for issuers at $10 billion in assets or above

·       June 2011 – The Senate defeated an amendment by Sen. Jon Tester (D-MT) which sought to delay implementation of the Durbin Amendment

·       July 2011 – The Fed issued the final rule essentially doubling the interchange cap to 24 cents with an October 1 effective date

·       November 2011 – Merchants sued the Fed to overturn the final rule alleging a disregard of Congressional intent

On April 1, part two the Durbin Amendment took effect. Debit card issuers are required to offer routing across two unaffiliated networks, regardless of the authentication method. Financial institutions will also start shortly reporting first quarter financial results, so we’ll get a better snap shot of lost revenues associated with the Durbin Amendment. Banks have already reported fourth quarter results from 2011 and some estimates are a combined loss of interchange revenue of about $2.2 billion for those with more than $10 billion in assets.

Meantime, reports and press releases are flying around asking merchants where the savings are for consumers. I probably shouldn’t even start a discussion of Bank of America’s plan to charge its customers a $5 monthly fee for debit card usage.

Adding more fuel to the fire, the National Association of Convenience Stores (NACS) issued a report this week detailing how credit card interchange fees are hurting consumers at the gas pump. So, let’s get this straight. The retailers rallied Senate support to pass the Durbin Amendment. The retailers turn around and sue the Fed to overturn the Durbin Amendment. Now, the retailers are using high gas prices to rally support for limiting credit card interchange rates. What does it all mean?

I’m here to say that no one in the financial services industry can afford to suffer Durbin fatigue. The NACS study demonstrates the retail community’s unrelenting desire to end interchange as the industry knows it. And, if you sit around believing Congress will never touch credit card interchange, you do so at your peril.

Do We Have a Data Security Crisis in America?

On Monday, I tweeted (@dennisEFTA) my thankfulness for Congress being on recess as news broke on the Global Payments data breach. The saying goes Congress does two things: nothing or overreact. Nothing spells public policy disaster more than Congress overreacting to a perceived crisis (see Sarbanes-Oxley).

Do we have a data security “crisis” in America? I certainly do not possess the proper expertise in this area to give a good answer. FBI Director Robert Mueller recently told attendees at a RSA security conference in San Francisco that two companies exist in America: those that have been hacked and those who will be. We know when these breaches occur because most states have laws requiring companies to notify authorities and consumers when sensitive, personal information is unduly accessed or lost. At this writing, Congress has not acted on a national data breach notification bill.

This may change, however. We certainly do not have a shortage of cyber-security, data security and breach notice bills before the Congress. In fact, Congress has not passed any bill over the years due to overlapping jurisdiction and committees. Is data protection a commerce issue, a technology issue, a homeland security issue or a judicial issue? April 23 begins cyber-security awareness week in Washington. The House of Representatives leadership has difficult choices ahead on what bill to bring to the Floor for a vote. On the Senate side, the competition is between the Lieberman-Collins’ approach of possible government control over “critical infrastructures” and the McCain proposal to allow greater information sharing between the public and private sectors. And, has data security and breach notification taken a back seat to these larger cyber-security proposals?

While Congress struggles to untangle the jurisdictional mess, where is the American consumer in this debate? I speculate the real reason Congress has not enacted data security legislation is the lack of demand from the American public. We hear news reports of data breaches all the time. Some even receive letters from companies that their personal data has been lost or unduly accessed. Survey data suggest Americans are still very concerned about identity theft and conducting financial transactions over the Internet. I do not sense, however, Americans are expressing outrage to Members of Congress. Is one reason why most data breaches do not actually result in harm to the consumer? And, if financial harm does occur like unauthorized transactions on a stolen credit card, do Regulation E protections blunt consumer outrage?

I wish I had a good answer as to whether President Obama will sign any meaningful data security legislation into law by year’s end. Meantime, I can confidently write EFTA members spend great time, effort and resources protecting the billions of sensitive, financial records in their possessions. It’s the law (Gramm-Leach-Bliley’s Safeguards Rule), but it’s also good business and the right thing to do for the America consumer.

-Dennis