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The Supreme Court Weighs in on Merchant Surcharging

30 Mar

On March 29, 2017, the United States Supreme Court issued its long-awaited decision on the litigation surrounding the New York law that prohibits surcharges.  In Expressions Hair Design, et al. v. Schneiderman, Attorney General of New York, et al., the Supreme Court was asked to decide whether a New York law prohibiting merchants from charging credit card users a surcharge above the sticker price was constitutional.  The practical outcome of the Supreme Court decision is that it does not definitively  answer whether the 10 state laws that prohibit surcharges are unconstitutional.  The technical outcome is that the Court remanded, or sent back, the case to the lower court, requiring the lower court to determine whether the law is an unconstitutional violation of the First Amendment.

The Court first reviewed the history of efforts to pass along interchange costs to consumers.  The Court noted that merchant contracts historically barred merchants from charging credit card users higher prices than cash customers, which Congress put a stop to when it passed the Truth In Lending Act.  That law prevented surcharges and it prevented merchants from giving discounts to cash customers.  When Congress allowed the federal surcharge ban to expire, ten states, including New York, enacted their own surcharge bans.

The merchants in the Expressions Hair Design case were five New York businesses who wished to impose surcharges on customers who used credit cards.  As a result, they wanted to advertise their prices by posting a cash price and a price which included a surcharge.

The pivotal issue was whether the surcharge ban regulated conduct, i.e., was a price regulation, rather than speech.  Because the statute told merchants nothing about the amount they were allowed to charge, the Court concluded that the law regulates how sellers communicate their prices, not what they charge.  “In regulating the communication of prices rather than prices themselves, [the New York law] regulates speech.”

The Supreme Court, having determined that the law regulates speech, and not conduct, sent the case back to the lower court to analyze whether it violated the constitutional right to free speech.  The lower court had concluded that the law regulated conduct, and therefore did not analyze that issue.

As you may recall, ten states currently have laws banning surcharges.   Many of these statutes also have been challenged on First Amendment grounds.  In this case and in a parallel Texas case, the federal appellate courts upheld the state statute. In contrast, the Eleventh Circuit struck down Florida’s law governing surcharges.

The Supreme Court decision did not address whether the New York law was constitutional, but it did conclude that the statute regulated speech and had to be analyzed under First Amendment standards.  That decision is binding on other courts.  So, to the extent challenges to similar state statutes were rejected because the court did not think free speech was involved, those decisions will have to be revisited.  The ultimate effect of this decision will depend on whether the case makes its way back to the Supreme Court after the lower court rules again, and how the courts interpret the various state laws that prohibit surcharges.

For now, industry companies should act as though the ten state laws that ban surcharging are still effective.

But stay tuned.

–Eric Linden, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Money Transmitter Regulatory Developments

25 May

The controversy swirling around the application of state money transmitter laws to payments companies just won’t abate. The difficulty stems from state regulators grappling with applying old statutory language to the new world of payments. And it leaves payment companies struggling to keep up with those new interpretations.

Next week the Electronic Transactions Association (ETA) will be facilitating the conversation by hosting a Money Transmitter Policy Day in Washington, D.C. A state regulator and FinCEN representative will speak. I am looking forward to participating by presenting a talk there, on June 2nd, on where things stand in “The Changing Regulatory Landscape”. If you are concerned that the myriad of state money transmitter laws may apply to your business, I hope you will join us.

Historically, the states regulated money transmission companies to protect the “unbanked” – consumers that used non-banks for financial services such as check cashing and wire transfers. The goal was to provide oversight of companies holding consumer money. Regulated companies were required to obtain a state license. The regulated activity typically was defined as selling or issuing stored value or receiving monetary value for transmission. That wording is so broad that it arguably brings within its sweep unintended links in the payments chain, such as independent sales organizations.

Barely a week goes by without another state money transmitter development. Some state legislators are taking a fresh look at their statutes, amending the laws to apply to new technologies, such as virtual currencies. Other states are interpreting existing laws in new ways, focusing the application of the licensing requirements on payment processors. And others are recognizing that the purpose of the money transmitter laws was never to regulate the card processing business. Those regulators are publishing guidance indicating that various arguments support the interpretation that the money transmitter laws do not apply to payment processors.

It will be some time before the issue of the extent to which state money transmitter laws apply to payment processors is settled. A vigilant eye on developments is critical to the payments industry. The policy day organized by the ETA, and panel discussions at other industry conferences, is exactly what is needed to keep the conversation flowing and the industry informed.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Upcoming Events

11 Apr

 

With so much going on in the electronic payments arena, the gathering next week (April 19 – 21) at TRANSACT16 in Las Vegas at Mandalay Bay is a perfect opportunity to keep up with the latest developments. In the 20 years we have been attending the Electronic Transactions Association’s (ETA) annual meeting, we have found it to be the place where serious business gets done. And Jaffe is honored to be sponsoring three signature events taking place that week.

The first is Payment Facilitator Day on Tuesday, April 19.  The PayFac event will contain a full day of content-rich programming focused solely on the payment facilitator model.  I will be participating on the “What You Should Ask Your Payments Attorney” panel at the meeting.  For more information, click here.

Second, Jaffe is also sponsoring the W.net SuperLINC, also on Tuesday, April 19, from 1:00 to 4:00.  The topic of the meeting is Diversity in the Workplace.  The discussion, on how diversity has reached the attention of the boardrooms of America, will feature Phyllis James, Chief Diversity Officer of MGM Resorts and Sharon Brogdon, Director of Global Diversity at Intel, and will be moderated by my W.net co-Founder Linda Perry of Linda S. Perry Consulting.  This event is free to TRANSACT16 attendees.  To register, click here.

And finally, I’m proud that Jaffe is also a Bronze sponsor of TRANSACT16 itself.  The Firm has been committed to the ETA for years in multiple ways, and our sponsorship reaffirms our dedication to the goals of the organization.

We look forward to seeing you at one or all of these events next week.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

New Nebraska ATM Interchange Law

1 Apr

Beginning April 1, 2016, a new Nebraska law goes into effect that makes it easier for Nebraska financial institutions to vary ATM fees based on the interchange rates charged by their switches. This ends the moratorium that has been in place since May 2015, when amendments to Nebraska’s ATM law went into effect.

Under the Nebraska Banking Act, ATMs in the state must be available on a “nondiscriminating basis,” meaning that ATM usage fees must be the same for cardholders of all Nebraska-based accounts. In September 2014, four Nebraska banks filed a lawsuit against Metro Health Services FCU, an Omaha-based credit union, alleging discrimination in ATM usage fees in violation of state law. Metro FCU defended the lawsuit by arguing that the different rates charged to customers were not for its own fees but instead were “switch fees” set by the switches that route ATM transactions between financial institutions. In May 2015, the Nebraska legislature amended the law to clarify when financial institutions are permitted to vary ATM fees charged to other Nebraska financial institutions. An important piece of that law that allows financial institutions to implement the new changes takes effect April 1, 2016.

The new law provides that each switch must have a uniform interchange rate that it charges for all Nebraska-based financial institutions for essentially the same service, but each switch may decide its own rate. The financial institution that establishes or sponsors an ATM may contract with multiple switches for routing ATM transactions, and a new provision provides that it is not considered a discriminatory practice for the financial institution to charge different ATM usage fees based on which switch handles the transaction, if the switches’ fees differ from one another.

In addition, the law now excludes surcharge-free networks among affiliate institutions from the anti-discrimination requirements, so a financial institution may charge one rate for surcharge transactions and a different rate for surcharge-free transactions (even if routed over the same switch). If an ATM offers different transaction services from other ATMs, then differences in usages fees would also not constitute unlawful discrimination.

The law set a moratorium on changes to ATM usage fees and new agreements until April 1, 2016, with existing contracts still subject to the old law. Beginning on April 1, 2016, ATM-sponsoring financial institutions and switches can once again sign new customers and modify existing contracts. All new (or newly amended) contracts made after this date must be in compliance with the new law. While existing contracts are temporarily grandfathered in under the old law, beginning November 1, 2016, all ATM usage must comply with the new provisions, so even existing contracts will need to be modified if they do not currently comply.

This law does not affect fees charged to customers of financial institutions outside of Nebraska, or fees charged by financial institutions outside of Nebraska.

The new law makes it easier for Nebraska financial institutions to vary ATM fees based on the interchange rates charged by their switches. Now that financial institutions and switches can resume contracting for ATM services, it is important to ensure that new contracts comply with the law’s new provisions.

—Daniel Ungar, Attorney, Jaffe Raitt Heuer & Weiss, P.C.

Daniel Ungar

Daniel Ungar

Daniel M. Ungar is a member of the Firm's Electronic Payments and Corporate Practice Groups. His practice is in corporate, commercial, and intellectual property matters, including business contracts, technology licensing, M&A, and startup/emerging companies matters such as entity formation and venture financing. Daniel is a former patent examiner and holds an advance computer science degree from Johns Hopkins University and a J.D. from Harvard Law School.

dungar@jaffelaw.com

State Law Mandates New Merchant Contract Requirements

3 Feb

The payments world is in a constant state of change, and the requirements surrounding clauses that must be included in card processing agreements with merchants are no exception.  Typically, language that must appear in merchant contracts is handed down from the card brands.  To remain compliant with those constantly-evolving requirements a close eye on card brand rule revisions has been essential.  But now states are getting into the act as well.     

Tennessee provides the latest example.  Effective March 1, 2016, Tennessee requires that all merchant agreements disclose certain terms, such as the effective date and term of the contract,  the circumstances surrounding early termination or cancellation, and a complete schedule of all fees applicable to card processing services.  These requirements are benign enough, as the vast majority of commercial contracts already contain those provisions. 

But here comes the sticky part.  In addition to the above, the Tennessee statute requires the payment acquirer to provide monthly statements.  So far so good – everyone provides monthly statements.  However, the law mandates that certain data points be included in each monthly statement, including an itemized list of all fees assessed since the previous statement, the total value of the transactions processed, and, if the acquirer is not a bank, an indication of the “aggregate fee percentage”.  The aggregate fee percentage is calculated by dividing the fees by the total value of processed transactions during the statement period.

The troubling requirement is the last one:  that any non-bank payment acquirer include in monthly statements the fees imposed, calculated as a percentage of the total value of the transactions processed during the statement period.  Currently such a calculation is not determined, so systems will need to be revamped to include that information in statements. 

And a determination will need to be made as to who, exactly, this requirement applies to.  The law says it is imposed on non-bank payment acquirers.  Certainly that includes payment facilitators.  But if both an ISO and a bank are a party to a merchant agreement and provide the statement, does the aggregate fee percentage need to be included in the monthly statement?  It’s not clear.  A conservative interpretation would suggest that if any non-bank is a party to a merchant agreement, the aggregate fee percentage should be disclosed each month.

Interestingly, the remedy for non-compliance with the Tennessee law is limited to an option by the merchant to terminate the contract.  Before the merchant may cancel the agreement, it must give the acquirer 30 days’ notice.  If the non-compliance is cured, then the merchant is not permitted to terminate the agreement.

ISOs, banks, and processors should review the new Tennessee statute to ensure compliance with its provisions.  And now that the payments industry is on the radar of state legislators, card processors will need to monitor state law developments to keep up with shifting obligations. 

–Holli Targan, Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

New Card Brand Fee Disclosure Requirements

4 Aug

There is a subtle shift afoot surrounding merchant fee disclosures.  Both MasterCard and Visa have revised their Rules to require more transparency in card processing charges.  Merchant acquirers and payment facilitators would be wise to revise their merchant agreement forms to incorporate the new guidance.

The MasterCard Rules now specify that acquirers and payment facilitators must deliver to merchants and sub-merchants a separate fee disclosure in the merchant contract.  The disclosure must detail, in truthful, clear and simple terms, the methodology by which each merchant fee is calculated. 

To give the industry insight on what will satisfy the new requirement, MasterCard has published a sample fee disclosure that will comply with the Rules.  We are talking nitty-gritty detail here.  MasterCard recommends that the following be included: 

  • Any monthly minimum fee
  • Qualified rate (credit cards): X.X%
  • Mid qualified rate: Qualified rate + X.X%
  • Non-qualified rate: Qualified rate + X.X%
  • MasterCard assessment fee: X.X%
  • Penalty to cancel prior to expiry date
  • Description of discount rate calculation

Further, MasterCard suggests including the following information on a distinct disclosure page, if not disclosed elsewhere in the agreement:  the date of the contract, cancellation terms, the name and address of the acquirer, the name and address of service providers, the name and address of the terminal provider, and when the merchant will receive payment for transactions.

In addition, MasterCard now requires that card processors and payment facilitators provide a minimum of 30 days advance notice to the merchant of any fee increase or introduction of a new fee.  This is treading new ground:  rarely have the card brands mandated business terms in a contract with a merchant.  As a best practice, MasterCard advises acquirers and payment facilitators to include terms within the merchant contract that permit the merchant to terminate its agreement without penalty within 90 days of receiving notice of a fee increase or introduction of a new fee.

 Visa, too, has published new merchant fee guidelines.  In May, 2015 Visa noted that the Visa Rules prohibit representing any fee created by an acquirer as a fee levied by Visa.  The guidance explained that Visa charges are imposed on the acquirer, not on the merchant, and therefore that all fees should be described as a “Processing Fee for Visa Transaction” and not Visa fee.  Acquirers and payment facilitators must review their solicitations, marketing material, agreements, notifications, and statements and develop corrective action plans by In September 1, 2015, with full compliance required by January 1, 2016. 

We suggest that card processors analyze their existing merchant agreement forms, and revise the templates to incorporate the MasterCard and Visa mandates.

 –Holli Targan, Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Aggregator Rules Evolve

11 Dec

 It’s been awhile now since Visa and MasterCard revised their rules to permit merchant aggregation of payment transactions.  Recently MasterCard refined the concept yet again, this time to increase the annual dollar volume limit a sub-merchant may process to $1,000,000, and to institute a few other tweaks to the merchant aggregator program.

 A refresher:  Back in 2011 Visa and MasterCard revised their rules to permit small internet and face-to-face merchants to be aggregated under a master merchant.  Both card brands treated the aggregating entity as a merchant.  So in addition to special rules relating to aggregators, all requirements imposed on merchants also applied to the aggregators themselves.  These “master merchants” are permitted to provide payment processing services to smaller “sub-merchants”.  MasterCard calls this a Payment Facilitator or “PayFac”.  Visa uses the Payment Service Provider or “PSP” nomenclature.  Once a sub-merchant’s annual volume hit $100,000 per card brand, that sub-merchant was ineligible for aggregation, requiring a contract directly with the acquirer. 

 The aggregator model has enabled small merchants to accept payment cards.  It also has enabled a broader array of companies to offer payment processing services.  All sorts of entities are electing to become aggregators.  Previously any non-bank company that desired to generate revenue by providing payment processing services to merchants was required under the card brand rules to become an independent sales organization, or ISO.  The aggregation rules now allow those entities to become aggregators instead.   In some instances traditional ISO companies are qualifying as aggregators.  And companies that have created software that caters to a certain merchant vertical are bundling their software offerings with payments under the aggregator construct.

 This past October, MasterCard revamped its PayFac standards.  PayFacs are now classified as a type of service provider, rather than a merchant.   The permissible submerchant transaction volume was raised from $100,000 to $1,000,000 in annual MasterCard volume.  Entities with higher annual volumes must enter into direct merchant agreements with an acquirer. 

 In addition, the revised rules state that performing a credit check when screening a prospective merchant or submerchant is not required if the entity has annual MasterCard transaction volume of $100,000 or less.  Further, the new standards specify clauses that must appear in contracts between PayFacs and submerchants, and mandate that submerchant contracts must include all provisions required to be included in a standard merchant agreement.

 We have observed an interesting evolution in the contract terms entered into between PayFacs and acquiring sponsor banks.  As the acquirers gain experience with the PayFac model, that is reflected in a shifting of the terms under which acquirers are willing to sponsor aggregators.  History proves that nothing ever stays the same in the payments business; we expect this new aggregator model will continue to morph and have an effect on the payments landscape for some time to come.

 –Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

CFPB Proposes Regulating Nonbank International Money Transmitters

29 Jan

On January 23, 2014 the Consumer Financial Protection Bureau (CFPB) published a request for comment on a proposed regulation that would establish the CFPB’s supervisory authority over certain nonbanks that transfer money internationally.  If adopted, the rule would bring large participants in international money transfers within the CFPB’s supervisory jurisdiction.  Comments on the proposed rule are due 60 days after publication in the Federal Register.

Large participants in international money transfers are defined in the proposed rule as companies that send at least one million aggregate annual international money transfers on behalf of U.S. senders to a designated recipient in a foreign country.  A company would be able to dispute whether it qualifies as a large participant.  Any company that meets the “large participant” criteria will be subject to examination by the CFPB.  Exams may involve site visits by CFPB staff, exam reports, supervisory letters, and compliance ratings.

If this topic sounds familiar, it may be because last October CFPB regulations relating to remittance transfers went into effect.  That remittance rule imposes consumer protection requirements on international money transfers, while this regulation distinguishes larger participants in the market and subjects them to supervisory authority.  This rule would authorize the CFPB to examine for compliance with the earlier remittance transfer rule and for compliance with other consumer financial laws.  In addition, the CFPB would coordinate with State regulatory authorities in examining larger participants of the international money transfer market. 

International money transfers may be cash-to-cash transfers, or may be initiated using credit cards, debit cards, or bank account debits.  The transfers may use websites, agent locations, stand-alone kiosks, or phone lines.  Funds sent abroad may be deposited directly onto prepaid cards, credited to mobile phone accounts, or transferred to consumers’ nonbank accounts identified by email addresses or mobile phone numbers.  All such transfers would come within the ambit of the proposed rule.

The CFPB requests comment on all aspects of the proposed rule, including on any appropriate modifications or exceptions to it.  In particular the CFPB asks whether measures other than the number of transfers should be adopted to determine who qualifies as a “larger participant”, and whether a threshold other than one million transactions is more appropriate.  Submitting comments provides a great opportunity to influence the ultimate regulation.

Industry participants and regulators alike have grappled with the burgeoning money transmitter market and regulatory environment.  This proposal adds one more brick to the wall of regulation sure to surround the industry.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Aggregation Considerations

17 Apr

The world of payments is changing, and the card brands are keeping up.  Recognizing that face-to-face micro-merchants have an interest in accepting payment cards, Visa and MasterCard now permit small merchants of all commerce types to be aggregated under a master merchant.  Previously only internet merchants could be sponsored this way.  But aggregation has been extended to new merchant types, including face-to-face merchants.  This is big news, with potentially big revenue opportunities. Many ISOs are wondering whether they should either become, or sponsor, a merchant aggregator.   Below are a few of the many factors a company should consider.  

Both card brands treat the aggregating entity as a merchant.  So in addition to special rules relating to aggregators, all requirements imposed on merchants also apply to the aggregators themselves.  The nuance is that now these “merchants” are permitted to provide payment processing services to smaller “sub-merchants”.   This means that master merchants assume all loss liability of their sub-merchants, resulting in greater due diligence of master merchants by acquiring sponsors.  It should also result in sponsor merchants instituting robust underwriting processes to investigate sub-merchants before accepting them.  Likewise, risk mitigation by master merchants, such as volume limitations or reserve requirements imposed on sub-merchants, will be critical. 

Certain merchant types, such as up-selling, infomercial, and multi-level marketing businesses can never be aggregated.  And once a sub-merchant’s annual volume hits $100,000 per card brand, that sub-merchant is ineligible for aggregation, and must have a contract directly with the acquirer.  In addition, special contractual provisions are required to be included in the master merchant/acquirer agreement and in the sub-merchant/master merchant contract.  

Aside from the card brand rules, there are other regulatory considerations.  If the funds generated from card acceptance will be sent to someone other than the sub-merchant, then state and federal laws surrounding money transmitters may be implicated.  This is a whole different world.  The Federal Bank Secrecy Act and each of the states regulate the transmission of money by any entity that is not a chartered financial institution.  Closely analyze whether your program needs to comply, and budget for undertaking this analysis to be conducted by an aggregation expert. 

The revenue potential opened up by the new aggregator rules could be huge.  As with any opportunity, there is also risk.  Structuring the business with relevant regulatory considerations in mind will facilitate minimizing the hazards while reaping the greatest rewards.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com