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On December 23, the FTC ordered a payment card company to stop blocking merchants from using competing debit payment networks. According to an agency investigation, the company allegedly violated provisions of the Durbin Amendment, which requires “banks to enable at least two unaffiliated networks on every debit card, thereby giving merchants a choice of which network to use for a given debit transaction,” and “bars payment card networks from inhibiting merchants from using other networks.” The FTC claimed that the company’s policy requires the use of a token when a cardholder loads a company-branded debit card into an ewallet. Ewallets are used to make online and in-app transactions, the FTC explained, adding that because competing networks cannot access the company’s token vault, merchants are dependent on the company to convert the token to process ewallet transactions using company-branded debit cards. Moreover, since the company allegedly did not provide conversion services to competing networks for remote ewallet debit transactions, the FTC asserted that it is impossible for merchants to route their ewallet transactions on other payment networks.
Under the terms of the proposed order, the company will be required to (i) provide other payment networks with customer account information in order to process ecommerce debit payments, and prohibit any efforts that may prevent other networks from serving as token service providers; (ii) provide notice to affected persons; (iii) provide 60-days advance written notice to the FTC before launching any pilot programs or new debit products that would require merchants to route electronic debit transactions only to the company; (iv) file regular compliance reports with the FTC; and (v) notify the FTC of any events that may affect compliance with the order.
On October 3, the Federal Reserve Board adopted a final rule amending Regulation II, which implements Section 920 of the EFTA, to require that each debit card transaction, including “card-not-present” transactions, must be able to be processed on at least two unaffiliated payment card networks. The final rule, which is substantially similar to the Fed’s notice of proposed rulemaking issued in May 2021 (covered by InfoBytes here), also clarified that the debit card issuer is responsible for ensuring at least two unaffiliated networks have been enabled to process a debit card transaction, and standardizes and clarifies the use of certain terminology in the Fed’s Official Board Commentary on Regulation II. The Fed noted that when the rule was initially issued in 2011, the market had not yet developed solutions to broadly support multiple networks for card-not-present debit card transactions. Claiming technology has since evolved to address these challenges, the Fed said the final rule includes changes to make it easier for debit card issuers to determine whether they are in compliance and encourages competition between networks. The Fed noted, however, that the final rule does not modify interchange fee requirements. The agency said it will continue to review these requirements in light of recently collected debit card industry cost data, and may propose to modify these requirements in the future. The final rule is effective July 1, 2023.
Federal Reserve Governor Michelle W. Bowman voted against adopting the final rule. “During the public comment process, community banks raised substantial concerns with the proposal,” she said. “Although the Board has attempted to identify the likely effects of the proposed rule based on available information, I believe that significant questions remain about how the rule will affect banks, and particularly community banks, with respect to both fraud and the cost of compliance. Given this continued uncertainty, I do not support the final rule.”
On August 22, the U.S. District Court for the District of Nevada granted a defendant credit union’s motion to compel arbitration regarding a consumer’s signature on bank-owned equipment. According to the order, the plaintiff alleged that the defendant violated 42 U.S.C. § 407 by transferring Social Security benefits from his savings account to his checking account to pay a debt. In March, a magistrate judge determined “that given ‘the liberal construction courts are to afford pro se complaints, it appears Plaintiff states a claim against [the defendant] at least for purposes of surviving screening’ and ordered that the case would proceed against [the defendant]” who filed the motion to compel arbitration. The order further noted that in support of their assertion, defendant provided documentation evidencing the plaintiff’s agreement to arbitrate all claims regarding his account. The defendant submitted an affidavit, a copy of the signature card that the plaintiff executed when he opened his account with the credit union, all subsequent signature cards executed by the plaintiff, and a copy of the “Important Account Information for Our Members,” among other things. According to the affidavit, the signature card the plaintiff executed when he opened his account included the “agreement to the terms and conditions outlined in the Important Account Information for Our Members,” and further indicated that the “[w]ritten notice we give you is effective when it is deposited in the United States Mail with proper postage and addressed to your mailing address we have on file.” The order noted that the “Notice of Change to the Terms and Conditions of Your Account was provided,” and “[t]hat document included a mandatory arbitration provision and the ability to opt out of arbitration.” The defendant argued “that by not exercising his right to opt-out, the agreement necessitates the action be moved into arbitration.” The plaintiff asserted that his signature was collected on an electronic device and because the signature was collected electronically, it was incorporated by fraud. The plaintiff also contended that he did not explicitly sign a document setting forth an arbitration clause because he only electronically input his signature to obtain a debit card.
According to the district court, the plaintiff “does not assert that he did not sign the signature card when he initially opened his account and received the debit card. He asserts that he never agreed to arbitrate his claims because he never received or signed an arbitration agreement.” The district court granted the defendant’s motion to compel arbitration determining that a valid arbitration agreement existed between the parties and that the agreement encompasses the plaintiff’s claims. Among other things, the district court explained that “a valid arbitration agreement exists,” because the “signature card signed by [the plaintiff] certifies ‘[a]greement to the terms and conditions outlined in the Important Account Information For Our Members disclosure and any other material pertaining to the account.’” The district court further wrote that such “statement plainly refers to an external document, and plainly states that the [plaintiff] agreed to be bound by the terms contained therein. Moreover, [the plaintiff’s] assertion that he did not actually receive the Important Account Information For Our Members disclosure does not defeat the signature card’s statement that [the plaintiff] bound himself to the terms contained therein.” Additionally, by signing the signature card, the plaintiff agreed to arbitrate every claim arising from or relating in any way to his account.
On October 19, the CFPB issued its first enforcement action under newly-appointed Director Rohit Chopra. The consent order, issued against a provider of financial services to prisons and jails, stated that the company engaged in unfair, deceptive, and abusive acts or practices in violation of the CFPA by charging consumers fees to access their own funds on prepaid debit cards that they were required to use. The CFPB also claimed the company violated the EFTA and implementing Regulation E by requiring consumers to sign up for its debit card as a condition of receiving gate money (i.e. “money provided under state law to help people meet their essential needs as they are released from incarceration”). According to the CFPB, the company provided approximately 1.2 million debit release cards to consumers, which replaced cash or check options previously offered by state departments of correction. In addition to forcing consumers to use the debit cards to access their funds, the company also allegedly charged consumers fees that were not authorized by the cardholder agreement and misrepresented the fees that it charged. Pursuant to the consent order, the company—which neither admitted nor denied the allegations—may only charge “a reasonable inactivity fee” if a debit card is not used for 90 days. The company is also required to pay $4 million in consumer redress and a $2 million civil money penalty.
Chopra released a separate statement, saying the “case illustrates some of the market failures and harms that occur when the disbursement of government benefits is outsourced to third-party financial services companies that fail to adhere to the law.” He warned that the CFPB “will continue to scrutinize these companies, particularly when law violations and abuses of dominance undermine the intent of such government benefits, and where the harms fall heavily on people who are struggling financially.”
On August 26, the DOJ unsealed an indictment in the District of Massachusetts against four individuals, charging them with “conspiring to deceive banks and credit card companies into processing more than $150 million in credit and debit card payments on behalf of merchants involved in prohibited and high-risk businesses, including online gambling, debt collection, debt reduction, prescription drugs, and payday lending.” According to the announcement, executives of a Los Angeles-based payment processing company secured payment processing for these high-risk businesses through fraudulent misrepresentations about merchant clients. As a payment processor, the company “enabl[ed] merchant clients to accept debit and credit card payments over global electronic payment networks run by major card brands” and “served as an intermediary between its merchant clients and financial institution members of the card brand networks.” Two of the individuals were charged with conspiring to commit wire fraud, and two others were charged with conspiring to commit wire fraud and bank fraud. Among other things, the DOJ asserts that the individuals and their co-conspirators allegedly made fraudulent misrepresentations to financial institutions, card brands, and others about the type of transactions that were being processed along with the true identities of the merchant clients, created shell companies and fake websites to make it appear that they were selling low-risk goods, and “miscategorized the true nature of the transactions” by using industry-standard codes.
Recently, the DOJ and the FTC submitted comments on the Federal Reserve Board’s notice of proposed rulemaking (NPRM) on debit card interchange fees and routing. As previously covered by InfoBytes, the Fed’s NPRM would require banks to ensure that two unaffiliated payment networks are available on their debit cards for online purchases. Among other things, the proposed amendments to the commentary to Regulation II, which implements Section 920 of the EFTA, (i) “clarify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions”; and (ii) clarify requirements imposed “on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions.”
On August, 11, the DOJ’s Antitrust Division filed a comment in support of the NPRM, “commend[ing] the Board for its efforts to promote competition in this important part of the debit card industry by ensuring that smaller debit networks will have a greater ability to compete for merchants’ business.” While offering support for the NPRM, the DOJ asked the Fed to “consider whether the proposal is drafted broadly enough to capture all card-not-present transactions,” adding that “incumbent industry participants may attempt to circumvent the proposed rule.” The DOJ encouraged the Fed to “actively assess additional ways the proposed rule may be enhanced to increase competition for debit payment processing.”
Also on August 11, the FTC submitted a comment letter urging the Fed to clarify and strengthen the implementation of debit card fee and routing reforms, stressing that the Fed should “prohibit debit card networks from paying incentives to an issuer based on how electronic debit transactions are routed by merchants using that issuer’s debit cards.” According to the FTC, “[e]liminating routing-based incentive programs will make it less likely that issuers will search for ways to circumvent Regulation II, whether by violating the rule (necessitating an enforcement action) or by finding a loophole (necessitating future revisions to Regulation II).”
On June 1, the U.S. District Court for the Northern District of California issued a preliminary injunction enjoining a national bank from certain actions in administering prepaid debit cards to class member recipients of Employment Development Department unemployment or disability benefits. Under the terms of the preliminary injunction, the bank is prohibited from “considering the results of [its] initial automated fraud claims filter” when investigating or resolving any alleged unauthorized transaction error claims, or from closing claims or denying credit before conducting an investigation, pursuant to EFTA and Regulation E. Class members are also entitled to a written explanation of investigative findings before the bank can deny or close a claim. Additionally, the bank is, among other things, (i) prohibited from considering the results of its claim fraud filter as justification for freezing the card account of any class member; (ii) required to reopen any claims that were closed or denied “based solely” on results of its claim fraud filter if those claims have not already been paid or previously reopened and investigated; (iii) required to provide written notice to class members with blocked accounts explaining that their accounts will be unblocked if they authenticate their identity; and (iv) establish a process for handing class member claims.
On May 7, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) seeking comments regarding proposed amendments to Regulation II, which implements Section 920 of the EFTA, that would require banks to ensure that two unaffiliated payment networks are available on their debit cards for online purchases. In a memo to the Board, Fed staff noted that due to the growth in online commerce, “card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions.” However, “[d]espite this, two unaffiliated payment card networks are often not available to process card-not-present transactions, such as online purchases, because some issuers do not enable multiple networks for such transactions.” This outcome, Fed staff stated, is “inconsistent with Regulation II’s requirement that at least two unaffiliated networks be available to process each debit card transaction.”
The NPRM addresses this issue by amending Regulation II and its official commentary to (i) “clarify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions”; (ii) clarify requirements imposed “on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions”; and (iii) “standardize and clarify the use of certain terminology.” Notably, Fed staff emphasized in their memo that the NPRM would not impact Regulation II’s provisions governing interchange fees for certain debit card transactions. As previously covered by InfoBytes, last month, two North Dakota trade associations filed a complaint against the Fed claiming that the agency has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.”
The Fed published its report on debit card transactions in 2019, and noted it “will continue to review the parts of Regulation II that directly address interchange fees for certain electronic debit transactions in light of the most recent data collected by the Board pursuant to section 920 of the EFTA and may propose revisions in the future.”
On April 29, two North Dakota trade associations filed a complaint against the Federal Reserve Board, claiming the Fed has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.” The plaintiffs’ suit revolves around interchange fees—currently capped at 21 cents—paid by merchants to card issuer banks to process debit-card transactions. The interchange fees are intended to compensate issuers for their costs in a transaction, but the plaintiffs contend that the fees have become a “lush profit center for issuers.” Among other things, the plaintiffs allege that the Fed has failed to enforce provisions under Dodd-Frank’s “Durbin Amendment,” which amended the EFTA and limited the interchange fees paid to large issuers to an amount “that is ‘reasonable and proportional to the cost incurred by the issuer with respect to the transaction.’” The amendment also directed the Fed to distinguish between incremental, processing costs and other costs “not specific to a particular electronic debit transaction”—a requirement the plaintiffs argue is not reflected in the Fed’s final rule. Moreover, the plaintiffs contend that the Fed’s final rule, Regulation II, creates “a one-size-fits-all fee” that does not tie the maximum allowable fee to a specific transaction, and allows all covered issuers to charge up to 21 cents for any debit-card transaction regardless of the issuer’s actual processing costs (as well as .05 percent of each transaction “to compensate the issuers for fraud losses”). The plaintiffs claim the Fed’s actions are arbitrary and capricious and exceed the Fed’s statutory authority and ask the court to vacate the rule at issue.
On October 1, the Federal Reserve Board extended certain temporary actions that are designed to increase the availability of intraday credit to mitigate the impact of Covid-19. The temporary actions were previously announced on April 23 (previously covered here), and include: (1) suspending uncollateralized intraday credit limits and waiving overdraft fees for eligible institutions; (2) permitting a streamlined procedure to request collateralized intraday credit; and (3) suspending two collections of information that are used to calculate net debit caps. The actions are extended to March 31, 2021.