Archive | Merchant Cash Advance RSS feed for this section

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

Top 4 Legal Concerns for Merchant Cash Advance Businesses

19 May

The number of companies that have entered into the merchant cash advance (“MCA”) business has grown rapidly over the past year. An industry that seemed all but dead in 2008 has re-emerged and may be stronger than ever. With traditional lending institutions still cautious about lending, especially to startups and emerging businesses, MCA businesses have helped to fill the void in providing much needed capital to businesses shut out from the traditional lending institutions. Further, with independent sales organizations’ (“ISOs”) close relationship with merchants, ISOs are able to provide a value-added service while securing an additional source of revenue.

But ISOs should proceed with caution. There are many legal issues and uncertainties involved in offering cash advances. Set forth below are 4 legal concerns that an MCA business must be aware of when entering into an MCA arrangement with a merchant.

1.      Structuring Transaction as a Sale Rather Than a Loan

The most important legal concern for MCA businesses is structuring the transaction as a sale rather than a loan.

By structuring the transaction as a sale, rather than as a loan, the MCA business can avoid having to apply for the commercial lending licenses. In addition, the state usury laws may be inapplicable. Therefore, it is imperative that businesses thinking of offering cash advances to seek advice from a knowledgeable attorney.

2.      Tread Lightly in California

A majority of the litigation concerning cash advances has come out of California. The most prominent is Richard B. Clark, et al. v. AdvanceMe, Inc. under which AdvanceMe agreed to a settlement payment of $23.4 million and forfeited the right to pursue further payments from the plaintiff merchants. The litigation in California should make MCA businesses especially cautious when conducting business in California. .

3.      Drawing the Line on the Length of the Merchant Contract

With the increased interest in the MCA industry and the entry of new participants, businesses offering MCA services have to find ways to differentiate themselves from the competition. Obviously, pricing is a major form of differentiation. Another not so obvious form of differentiation is the sheer length and complexity of the merchant contract. A merchant may well choose a deal with a 4 page contract over one with 16 pages. Be mindful about finding the right balance between being legally protected and not scaring off business with a lengthy document.   

4.      Avoid Enforcement Action

States can impose harsh penalties on businesses that offer commercial loans without lender licenses or that charge usurious interest rates. However, there are few cases that address the issue of what constitutes a sale as opposed to a loan in the MCA context. Therefore, it is important that your MCA business adheres to the best practices discussed above so that if a court decides a case that is harmful to the MCA industry as a whole, you will avoid the attention of state attorney generals.

— Andrew Hayner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com