The document provides an overview of regulatory developments in prepaid and emerging payments in 2013. It summarizes key issues including increased consumer protection scrutiny of payroll and student cards, data security fallout from breaches like Target, concerns about tax refund and benefits fraud, ongoing uncertainty around the Durbin interchange rules, and heightened anti-money laundering focus from FinCEN. It also discusses the fragmented development of mobile wallets and growing international regulatory differences.

1. 2013: Prepaid and Emerging
Electronic Payments Year in Review
Judith Rinearson - John ReVeal
Linda Odom
And the Bryan Cave Payments Team:
Margo Strahlberg – Jennifer Crowder
Alan Solarz - Courtney Stolz – Seyi Iwarere
Louise Nutt – Rob Lystad – Karen Neely Louis
January 15, 2014
1

2. Agenda
• Introduction “Themes for 2013” – Judie Rinearson
• Hot Topics
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
The Consumer Protection Flash Mob – Linda Odom
The Payroll and Student Card Drama Scenes – Margo Strahlberg
Target and Similar Data Breaches Fall-Out – Courtney Stolz
The Tax Refund/Government Benefit Fraud Fears – Jennifer Crowder
The Durbin Roller-Coaster – Judie Rinearson
The FinCEN AML Reinvention - Seyi Iwarere
The Mobile Wallet Tower of Babel – Dan Wheeler
The Virtual Currency Hysteria – Louise Nutt and Alan Solarz
The Short-Term Credit/Overdraft Siege - Rob Lystad
The Money Transmitter Licensing Blitz – Karen Neely Louis
Federal Banking Regulatory Angst– John ReVeal
International Regulatory Conundrum - Judie Rinearson
2

3. Consumer Protection Issues
“Flash Mob”
Linda Odom
Washington, DC
3

4. Q: Why Flash Mob?
• Federal Regulators: CFPB pending regulations; FTC
Guidance
• Federal Legislators: Sen. Menendez proposed
legislation (and now Sen. Warner)
• State Regulators: Connecticut, Illinois
• Consumer Groups: Pew Charitable Trust; Center for
American Progress, National Consumer Law Center
• Media: NY Times, USA Today
4

5. What is likely to happen?
• Pending federal legislation may impact on CFPB
• CFPB Regs now due in May
• Expected measures - –
–
–
–
–
FDIC insurance
Regulation E protections (payroll card version)
Specific Fee disclosure requirements
Some fee prohibitions (balance inquiries; decline fees)
Credit access limitations
5

6. Other top CFPB News for 2013
•
•
•
•
Cordray confirmed
Remittance rules take effect
Enforcement attorneys no longer participate in exams
CFPB is criticized for collecting personal consumer
data – and argues that it does not monitor accounts
• Ongoing Republican efforts to change CFPB’s
structure, impose financial oversight – not successful
• Guidance issued for “self-policing” and “self-reporting
of consumer protection violations
6

7. Payroll and Student Card
“Drama Scenes”
Margo Strahlberg
Chicago
7

8. Q: Why Drama Scenes?
Payroll
– Litigation led to front page NY Times Story
• Mandatory Cards
• Fees so high that employee gets less than minimum wage
–
–
–
–
–
16 Senators Send letters to Dept of Labor and CFPB
NY Attorney General Send Info Requests to 20 Employers
CFPB issues guidance confirming law - - no mandatory cards
Class Action in California
Payroll card legislation passed - CT, MI, OR
8

9. Student Cards
• Following on from 2012 Higher One and US PIRG report,
CFPB investigates University and College financial
products offered to students
• Democratic House and Senate Leaders send letters to 8
major banks seeking information on student card
programs
• CFPB calls on financial institutions to “voluntarily” disclose
to the public its financial product marketing agreements
made with colleges and universities
• CFPB holds public forum on student financial products
9

10. What is likely to happen?
• Speculation is that new CFPB GPR regulations will
include specific provisions on Payroll and Student
Cards
• Menendez legislation has new language requiring
that employees receive a choice in form of payment,
including check or direct deposit
• Expect more state activity
10

11. Target and Similar Data Breaches
“Fall-Out”
Courtney Stolz
Washington DC
11

12. Q: Why Fall-Out?
•
•
•
•
Sen. Blumenthal called for the FTC to investigate
Sen. Schumer urged CFPB to investigate.
Sen. Leahy reintroduced data security legislation.
Sen. Menendez asked the FTC to recommend further
legislative action to ensure consumers are protected.
• Media calls for EMV - - USA Today – 1/10/14:
– Data breaches like the one at Target that exposed information for
up to 110 million customers would be pointless for criminals if U.S.
banks switched to the secure [EMV] …
• Senators call for hearings about EMV adoption
– Banks are under no mandate to issue EMV cards but are likely to
issue EMV-compliant cards widely by 2015 to be ready for the
fraud liability shift in October 2015.
12

13. What is likely to happen?
• Calls for earlier adoption of EMV
– Could impact on Durbin Reg II Routing requirements
– Major payment networks and banks oppose
– Recent poll of merchants indicates that merchants would
prefer to invest in mobile phone POS and not anti-fraud
systems
• Potential federal legislation to protect consumers
• Potential new wave of state breach notification laws
• Class Actions and litigation
13

14. The Tax Refunds and
Government Benefits
“Fraud Fears ”
Jennifer Crowder
Kansas City
14

15. Q: Why Fraud Fears?
Tax Fraud
• Sen. Nelson introduces the Identity Theft and Tax
Fraud Prevention Act of 2013 – distinguishes between
“at risk” and “verified” accounts – limits number of
refunds to the same account.
• IRS Crackdown on “Refund Fraud & ID Theft”; IRS
warnings on pervasive telephone scam
• Congressional hearings on IRS Tax fraud
• FinCEN issues Tax Fraud Advisory
15

16. Other fraud-related items
• Massive global cyber fraud hits Omani Bank - $42
million withdrawn
• Congressional Hearings on Jamaican Lottery Scam
• FTC issues warning bulleting on utility bill scam
• Internet Crime Complaint Center (IC3) issues warning
on gift card tampering
• Three states pass laws restricting usage of
government benefit/EBT cards at liquor stores, race
tracks, and other inappropriate locations
16

17. What is likely to happen?
• Increased pressure to monitor transactions
• Increased pressure for more internal controls at
government agencies such as IRS
• Banks scrutinize their prepaid tax refund programs
• Concerns that regulators might limit or restrict which cards
can accept government payments
• Potential new regulations on warning notices to
consumers
• Potential push for EMV as a fraud deterrent
17

18. Durbin and Reg II
“Roller-Coaster”
Judith Rinearson
NYC
18

19. Q: Why Roller Coaster?
•
•
•
•
•
•
•
•
•
•
Dodd Frank Act – Passed in May 2010
Proposed Regulations Issued December 16, 2010
Final Regulations issued June 29, 2011
Exclusivity for Payment Networks - October 1, 2011
Routing and Exclusivity generally for issuers - April 1, 2012
Routing and Exclusivity for HSA / FSA / HRA cards (those
using transaction substantiation systems) – April 1, 2013
Effective Date for general use prepaid April 1, 2013
Revised FAQs issued March 13, 2013; May 2013
NACS Litigation decision issued July 31, 2013
NACS appeal pending – oral arguments Friday Jan 17th
19

20. What is likely to happen?
• If Judge Leon’s NACS decision is upheld….
– Business as usual until new regulations are proposed and finalized;
expedited regulatory process likely, with comment period
– Interchange rates likely to be lowered
– Multiple routing options will likely create operational nightmares
– No changes anticipated in the exemptions for small banks and for
certain GPR cards
• Potential increase in GPR usage
• If NACS is not upheld….
– Most likely back to business as usual
– Industry still grappling with PIN issuance at point of sale or prior to card
issuance or usage
Of course other option is that Judge Leon’s decision could be upheld in part and reversed in part….
20

21. FinCEN AML
“Reinvention”
Seyi Iwarere
Washington DC
21

22. Q: Why Reinvention?
• New Director Jennifer Shasky Calvery – former DOJ
prosecutor – institutes changes - meets with industry
• Cross-border regulations that would designate prepaid as
“monetary instruments” – has been a OMB for months and
is now apparently being reconsidered.
• 314(b) Guidance responsive to requests from MSBs for
clarification on ability to participate in the 314(b) information
sharing process under a safe harbor
• Issues Guidance that secondary market for closed loop
cards does not change the intrinsic status of the card
• Takes on virtual currencies with new guidance on
exchanges and administrators in March 2013
22

23. What is likely to happen?
• Likely there WILL BE some cross-border regulations
requiring certain prepaid cards to be declared.
– Perhaps only anonymous cards. Hard to say.
• Increased focus on ID verification – when needed;
looking for 21st century solutions.
• Expect some high-profile law enforcement proceedings
• Increased interest in off-shore products, banks, and
issuers.
• Increased interest in mobile payments and virtual
currencies
23

24. Mobile Wallet
“Tower of Babel”
Dan Wheeler
San Francisco
24

25. Q: Why Tower of Babel?
• NFC and Contactless payments
– ISIS - A mobile payments venture owned by AT&T, Verizon Wireless
and T-Mobile USA – partners with American Express – studies
suggest 50% of smart phones to be NFC enabled. NFC is being
used by Android, Samsung, BlackBerry and Windows Phone
operating systems
• Apple has rejected NFC:
– Apple uses iBeacon; Touch ID; Rumors say iPhone6 may have NFC
• Paypal also uses iBeacon – Bluetooth wifi communicates
with a “beacon” installed at retailers locations
• MCX – Retailers’ Network: cloud-based-relies on bar codes
• Square Wallet – Combines GPS and Photo ID
25

26. What is likely to happen?
Hard to Predict - - Not a legal issue….
• Possible that new laws or regulations or more major data
security breaches will lead to EMV (chip and pin)
technology in order to reduce fraud
• Nevertheless, consumers and merchants seem to both
want the convenience and innovations brought through the
use of mobile wallets/apps
• What Apple decides will impact industry
• One suggestion: EMV can be compatible within NFC
mobile devices – through the use of “EMV contactless” - If
the payments industry will be upgrading for EMV, why not
do both?
26

27. Virtual Currency
“Hysteria”
Louise Nutt
Santa Monica
Alan Solarz
NYC
27

28. Q: Why Hysteria?
• March 18, 2013 – FinCEN Guidance
– Exchangers and Administrators must register as “money transmitters”
• Senate Hearings on “Potential Risks, Threats and Promises”
of Virtual Currencies -November 2013
• Bitcoin value exceeds $1200 in November; New York Times
publishes 17 articles on Bitcoin and other virtual currencies
between in less than 3 weeks.
• California DFI issues a cease and desist order against the
Bitcoin Foundation. Questions of state licensing arise.
• Law enforcement: : TX Ponzi scheme; Liberty Reserve; Silk
Road; Mt.Gox.
28

29. Current Status
• FinCEN Rules
– “User” - A user is a person that obtains virtual currency to
purchase goods or services.
– “Exchanger” - An exchanger is a person engaged as a
business in the exchange of virtual currency for real currency,
funds, or other virtual currency.
– “Administrator” - An administrator is a person engaged as a
business in issuing (putting into circulation) a virtual currency,
and who has the authority to redeem (to withdraw from
circulation) such virtual currency.
• NY DFS issues subpoenas; hearings on “BitLicenses”
scheduled for January 28-29th.
• At least one state issues license; most are waiting…
29

30. What is likely to happen?
• Tax issues – IRS is studying. Is it a “currency”? A “capital
asset”? A commodity?
• Global acceptance – Thailand prohibits; China bans; UK’s
FSA considering regulatory position
• Overstock.com - - as merchant acceptance grows, usage
will grow, call for regulation will grow
• Possible outcomes:
– Optimists: “Internet” for money; changes the entire payments
infrastructure; becomes ubiquitous
– The middle road: Acceptance and growth through a network of
“compliant” licensed exchanges around the globe.
– Pessimists: The bubble bursts; globally outlawed.
30

31. The Short-Term
Credit/Overdraft
“Siege”
Rob Lystad
Atlanta
31

32. Q: Why Siege?
• March 2013 Federal legislation introduced in March 2013 to regulate
banks' overdraft protection plans
• Spring 2013: Fed and OCC “crackdown” on payday lending; CFPB
white paper highly critical of payday and deposit advance loans
• August 2013: NYDFI Targets Online Payday Lenders; Pressures from
Federal Regulators Increase regarding Banks that Process their
Transactions
• October 2013: Consumer groups urge federal agencies to take “further
strong action to protect consumers and the integrity of the payment
system by stopping [banks] and payment processors” from facilitating
electronic payments on behalf of Internet and tribal payday lenders
• November 2013: OCC and FDIC jointly issued final guidance on deposit
advance products
• November 2013: CFPB begins accepting payday lending complaints
32

33. What is likely to happen?
• Banks will be very hesitant to offer short-term, small
dollar loans
• Banks will be strongly discouraged from issuing prepaid
cards with lending lines or overdraft features
• It is possible that CFPB regs will prohibit prepaid cards
from offering credit features, even on a opt-in basis with
full disclosures.
• Credit will be harder to get, and more consumers with
poor credit history may be forced to go to unregulated
sources
33

34. Money Transmitter Licensing
“Blitz”
Karen Neely Louis
Atlanta
34

35. Q: Why Blitz?
• Florida: Square Fined $507,000 for operating without a
money transmitter license from February 2010 until Nov. 13,
2012, when it applied for a license
• Illinois: Issued cease and desist orders from January 2013
against six entities for alleged unlicensed activities,
including NetSpend, Square, TouchPay and Skrill
• Wave of new laws: 23 new state money transmitter
licensing laws passed in 2013, from 19 different states.
• Non-Uniform and Inconsistent: State laws are not
uniform, and are interpreted disparately. But under 18 USC
1960 it is a federal crime to conduct an unlicensed money
transmitter business.
35

36. What is likely to happen?
• More state licensing laws applicable to both traditional
and emerging payments.
• More enforcement actions and cease & desist orders.
• More licensed money transmitters partnering with
payments businesses to sponsor licensed payment
services
• There have been calls for a national federal licensing
law to supplant the patchwork quilt of state laws.
36

37. Federal Banking Regulatory
“Angst”
John ReVeal
Washington DC
37

38. Q: Why Angst?
• OCC/Fed Guidance on Managing Outsource Risks: Seen
as a warning to the banking that third-party relationship
management to be a significant focus in coming examinations.
• FFIEC Guidance on Social Media Risks: Banks must adopt
a risk management program to help identify, measure, monitor
and control the risks related to social media.
• FDIC Guidance on Customers that Engage in Higher-Risk
Activities: Banks providing payment processing services
directly or indirectly to merchants engaged in “higher-risk”
activities must perform appropriate due diligence to ensure
that the merchants operate in accordance with applicable law.
38

39. What is likely to happen?
• Heightened focus on a bank’s relationships with program
managers and other third-party service providers
• Third party service providers can expect their bank
partners to increase demands and expectations
• Banks (especially small banks) may feel pressured by their
regulators to terminate prepaid and emerging payment
programs.
39

40. International Regulatory
“Conundrum”
Judith Rinearson
NYC
40

41. Q: Why Conundrum?
•
•
•
•
•
•
•
Canada : New regulations covering “prepaid payment products”
China: The central bank of the China for the first time issued third party
payment licenses to foreign payment companies.
Hong Kong: Proposed a new regulatory framework for device and non-device
stored value products.
EU: Revised Payment Services Directive intended to enhance transparency,
innovation and security in the field of retail payments. The EC also
recommended capping debit and prepaid card interchange fees to 0.2 percent,
and capping credit card interchange at 0.3%.
France Adopts Second E-Money Directive. The French Parliament recently
adopted the Second European Directive on Electronic Money
U.K banks: . Reported to no longer willing to offer banking services to a
electronic money and payment companies, including money services
businesses, merchant acquirers, and prepaid card issuers.
FATF: Issues Guidance for a Risk-Based Approach to Prepaid Cards, Mobile
Payments and Internet-Based Payment Services
41

42. What is likely to happen?
•
Similar forces impact international laws:
– Major data security breaches and fraud losses
– Consumer and consumer group complaints about high fees, unfair
terms, misleading advertising
• Competitive pressures as well are evident in global payment
developments
– Central banks and well entrenched financial services companies
protecting their turf
– Dominant mobile carriers and phone manufacturers can set the rules
for others.
• Laws will seek for more transparency, lower fees, and
(hopefully) risk-based AML controls
42

43. 43