Law and regulation

Visa Europe will keep its cross-border interchange rates as is, even though MasterCard Europe, facing hefty fines from European regulators, said Thursday it would "temporarily repeal" its rates while continuing its appeal of the regulators' decision. "The announcement has no impact in Visa Europe's interchange," Visa said in a statement issued Friday. "We are in ongoing talks with the European Commission about how we (will) set our interchange in the future, and these continue." The commission is investigating Visa Europe's interchange and card practices. In December, it gave MasterCard six months to lower its rates or face paying daily fines amounting to 3.5% of global revenues. Regulators say the rates are anticompetitive. On Friday, Visa Europe repeated that it hoped to reach agreement with the commission. But one analyst questioned how much negotiating power Visa has in the wake of MasterCard's interchange decision. "The way the situation is evolving, it's clear that MasterCard and Visa have little leverage over the [commission]," Gwenn Bézard, senior analyst for the Aite Group, a United States-based consultancy, tells CardLine Global. "It's not good news for Visa." Meanwhile, European retailers welcomed MasterCard's decision to repeal its rates. "This signals a major victory in the battle against this hidden taxation of purchasing, which will bring significant benefits to consumers and retailers," retail trade association EuroCommerce said in a statement issued Friday.

United States-based auction Web site eBay Inc. says it is reviewing a directive from Australian competition authorities that delays company plans to mandate PayPal, eBay's payment service, as the only online-payment option on the company's Australian Web site, a spokesperson tells CardLine Global. EBay officials worked through Thursday night to "digest the information," the spokesperson says. "We will make further comment following the review process," the spokesperson says. On Thursday, the Australian Competition and Consumer Commission said it was determining if eBay's mandate is anticompetitive (CardLine Global, 13 June). The mandate was scheduled to start Tuesday.

MasterCard Europe has "temporarily repealed" its interchange rates that European regulators say violate antitrust rules, the card company said Thursday. The action applies to cross-border interchange merchant acquirers pay card issuers when customers use cards carrying the MasterCard or Maestro debit brands. On 19 Dec. 2007, the European Commission ordered MasterCard to lower the rates within six months or face daily fines amounting to 3.5% of global revenues. On 1 March, MasterCard filed an appeal with the European Court of First Instance. The card organization is continuing that appeal, though MasterCard does not expect a judgment until "the second half of 2010," a MasterCard spokesperson tells CardLine Global. The interchange rates average 1% of the sale for MasterCard-branded cards and 0.5% for Maestro-branded cards, the spokesperson says. "MasterCard believes its cross-border interchange system has kept the cost of payment cards low for cardholders," Javier Perez, MasterCard Europe president, says in a statement. In March, the European Commission said it was investigating the interchange rates applied to Visa card transactions in Europe and the card organization's rule that merchants must accept all Visa-branded cards regardless of the issuer or type of transaction. Visa said it expects to reach a "negotiated settlement" with regulators (CardLine Global, 3 April).

Australian authorities have told online auction company eBay Inc. to delay plans to mandate PayPal, eBay's payment service, as the only online-payment option on the company's Australian site. The Australian Competition and Consumer Commission is investigating whether the rule is anticompetitive. EBay has said that buyers and sellers are less likely to dispute transactions routed through PayPal than transactions routed through bank accounts. The commission says it will wait for a response from eBay and other interested parties before making a final decision. EBay did not return a CardLine Global request for comment. EBay has created a two-step process to enable Australian sellers to ready themselves to accept either PayPal or cash on pickup, the commission says in a statement. As of 21 May, all sellers were required to offer PayPal as one of their accepted payment methods. The second step, scheduled to start Tuesday, would require that all transactions on eBay be paid either through PayPal or cash on pickup. The regulation bans direct deposits, money orders and personal checks as payment. The new policy "will substantially reduce competition to supply online-payment services to users of online marketplaces more generally," Commission Chairman Graeme Samuel says in a statement. Last month, the commission told CardLine Global that authorities also are concerned that eBay's mandate will result in higher PayPal sellers' fees (CardLine Global, 15 May).

CompuCredit Corp., the Atlanta-based subprime credit card issuer that was sued yesterday by the Federal Trade Commission and faces charges by the Federal Deposit Insurance Corporation, issued a pointed response to the allegations by the federal agencies.

Credit card reform is emerging as a key issue on the campaign trail for presumptive Democratic presidential nominee Sen. Barack Obama, D-Ill., who is touting industry reform at public appearances this week. Kicking off his general campaign in Raleigh, N.C. on Monday, Obama promised new laws to curb what he calls abusive credit card practices. At another stop on his two-week, cross-country tour, Obama met today in Chicago with hard-pressed borrowers and consumer advocates. Obama vowed legislation that would prohibit credit card issuers from retroactively raising cardholders' interest rates on balances without their approval. He also promised to establish a federal credit card-rating system to help inform consumers of credit card choices. Obama last fall introduced the Credit Card Safety Star Act of 2007 with Sen. Ron Wyden, D-Ore. The legislation, which was referred to the Committee on Banking, Housing and Urban Affairs, would create a federal five-star rating system for credit cards (CardLine, 11/28/07). Late last year on the campaign trail, Obama began advocating a Credit Card Bill of Rights that would crack down on issuers that use what some consider deceptive practices (CardLine, 12/5/07).

Financial authorities in India reportedly will require payment card companies such as MasterCard Worldwide and Visa Inc. to provide regular financial reports of suspicious international transactions. The Indian government wants to reduce money laundering, according to press reports. Government and payments officials were unavailable for immediate comment. India's government recently amended the existing Prevention of Money Laundering Act, adding casinos, card issuers and funds-transfer companies to the law, which is designed to help prevent illegal foreign currency from circulating in the country. The original law, enacted about three years ago, previously applied only to banks.

CompuCredit Corp., an Atlanta-based credit card company, and two banks with which it has third-party card program arrangements, today are the subject of charges and a lawsuit filed, respectively, by the Federal Deposit Insurance Corporation and Federal Trade Commission. The FDIC is seeking consumer restitution it estimates will exceed $200 million. FDIC issued its enforcement actions against CompuCredit and two FDIC-supervised banks – First Bank of Delaware, which is based in Wilmington, Del., and First Bank & Trust, which is based in Brookings, S.D.– for allegedly marketing subprime credit cards in violation of the Federal Trade Commission Act. If FDIC's enforcement charges are upheld, the court would require the companies to provide credits for restitution for fees and charges arising from the deceptive marketing practices, FDIC board member Thomas J. Curry said at a news conference today. The FDIC also seeks civil penalties of $6.2 million against CompuCredit, and $431,000 against First Bank of Delaware and First Bank & Trust. Curry said supervised banks "must be highly vigilant about their third-party arrangements, especially in the subprime arena." When they are not, he said, it can lead to predatory lending practices and violations of federal consumer laws. FDIC and FTC each allege CompuCredit's card solicitations to subprime consumers failed to disclose significant upfront fees and misrepresented the initial available credit. For example, cards with an advertised $300 credit limit actually had $185 "in inadequately disclosed fees, leaving them with as little as $115 in available credit," Lydia Parnes, director of the FTC's Bureau of Consumer Protection, said at the news conference. The FTC complaint also cites violations of the Fair Debt Collection Practices Act stemming from allegations of abusive debt collection practices by CompuCredit's collection agency subsidiary, Jefferson Capital Systems LLC. FTC alleges that Jefferson misrepresented a debt collection program as a credit card offer and used such tactics as an egregious number of calls per day to debtors. The FDIC settled with a third bank, Columbus Bank and Trust, which is based in Columbus, Ga., and also was involved with CompuCredit's cards, for $7.5 million in consumer restitution and cooperation in the FDIC's action against CompuCredit, according to Curry. CompuCredit issued a statement saying the federal agencies' claims "are untrue and without merit," and the company "intends to vigorously contest these unsupported allegations."

Discover Financial Services is seeking $6 billion in damages in its antitrust lawsuit against Visa Inc. and MasterCard Worldwide, according to documents unsealed yesterday in U.S. District Court for the Southern District of New York. Discover filed the lawsuit in October 2004, shortly after the U.S. Supreme Court let stand a lower-court ruling in an antitrust case won by the U.S. Department of Justice that forced Visa and MasterCard to allow their member banks to issue credit cards on rival networks. Discover and AmEx alleged in separate lawsuits that Visa's and MasterCard's exclusionary rules hampered their ability to grow over many years. Last year, AmEx reached a $2.25 billion settlement with Visa in its lawsuit, which is similar to Discover's (CardLine, 11/7/07). MasterCard, which has not settled with either AmEx or Discover, said in a statement yesterday that Discover's damages claim is baseless. It contends that after MasterCard withdrew restrictions preventing its member banks from offering cards from rival networks, Discover has not experienced any significant increase in its overall percentage of credit card volume from third-party issuance. Visa earmarked $650 million for settling its Discover lawsuit in a $3 billion fund it established to settle future lawsuits after its record-setting initial public offering in March. "AmEx's settlement of more than $2 billion was considered pretty hefty, so I doubt we would see an amount as high as $6 billion in Discover's case," Eva Weber, an analyst with Boston-based Aite Group, tells CardLine. She expects Visa to settle its case with Discover as soon as possible. "It would seem that Visa would want to resolve this sooner rather than later, so the company can move forward," Weber says.

Legislation recently enacted in Tennessee goes further than other state laws in restricting credit card solicitations of students on college campuses, and it could create a precedent for stricter regulation of such marketing elsewhere, bankers and observers said.

The Fed's rate-cutting strategy to counteract the credit crisis has had consequences in Net banking. The alluring five-percent-plus rates that ING Direct, Citi, Capital One and others once offered for high-yield, online savings accounts (HYSAs) have dwindled to three percent territory.

Senate Majority Whip Richard Durbin introduced companion legislation Thursday to a bill by House Judiciary Committee Chairman John Conyers that would regulate interchange fees.

The American Bankers Association said today it "strongly opposes" the bill Sen. Richard Durbin, D-Ill., introduced yesterday to regulate interchange rates. "Just like the bill introduced in the House in March, this legislation inappropriately inserts the government in the role of setting prices in the private marketplace, undercutting a pricing system that currently benefits consumers, businesses and the broader economy," Edward L. Yingling, association president and CEO, said in a statement. According to the association, interchange revenue helps to support the infrastructure costs required to support the card-payments system and the risk nonpayment issuers routinely assume. "The result will be more federal bureaucracy, less industry competition and fewer choices—and ultimately higher prices—for consumers, as is always the case when government tries to fix prices," the statement continued.

By Brandy Colbert

Last week, the Financial Crimes Enforcement Network released a ruling that says merchants and nonbank owners of ATMs that reload prepaid cards are not in a regulatory category called money services businesses. The ruling means a bank that sponsors ATM and point-of-sale locations must comply with the Bank Secrecy Act for the transactions conducted at locations it sponsors.

The People's Bank of China is expanding the country's credit database by adding details about consumers' utility-bill payments, the central bank has announced. The database already includes information about consumers' loans and credit cards, the bank says. "The credit-record system in China is still lacking in many aspects," Fei Cao, payment analyst with Beijing-based research company Analysys International, tells CardLine Global. "Setting up a more complete credit database is something [that could] provide better card and financial services."

Over the coming months, banking institutions will continue to face deteriorating loan quality, Federal Reserve Vice Chairman Donald L. Kohn warned the Senate Committee on Banking, Housing and Urban Affairs today during a talk on the condition of the U.S. banking system. "House prices are still declining sharply in many localities, and losses related to residential real estate, including loans to builders and developers, are bound to increase further," Kohn said. "In addition, weak economic conditions could well extend problems to other segments of lending portfolios, including consumer installment or credit card loans." Kohn emphasized that financial institutions must be prepared "for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly." Because of these circumstances, the Fed anticipates the number of banks with "less-than-satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years."

The China Banking Regulatory Commission has asked the country's banks to increase monitoring that could prevent illegal cash advances made with credit cards, according to a notice from the commission. Regulators want banks to set limits on cash advances credit cardholders make and keep better watch against illegal cash advances, the notice says. Regulators hope to prevent consumers from swiping their cards at payment terminals without buying goods, receiving instead cash from merchants who take a small cut. "The notice aims to reduce the risk of illegal cash advances and ensuring normal credit card transactions in the market," Fei Cao, a payment analyst with Beijing-based research company Analysys International, tells CardLine Global. "This notice will, however, not affect normal purchase transactions."

President Bush yesterday signed into law a bill prohibiting class-action lawsuits against merchants that once put payment card expiration dates on customer receipts. The U.S. House and Senate approved the legislation last month (CardLine, 5/15 and 5/21). The Credit and Debit Card Receipt Clarification Act of 2007 does not exempt merchants that fail to truncate credit or debit card numbers on receipts. Moreover, merchants that print expiration dates on receipts after June 3 also are not exempt, according to Bart Murphy, a partner at Ice Miller LLP, an Indianapolis-based law firm that represents several merchants facing lawsuits for including expiration dates on receipts. Penalties in those cases range from $100 to $1,000 per violation. The Fair and Accurate Credit Transactions Act, itself an amendment to the Fair Credit Reporting Act, prohibits businesses from printing expiration dates and requires them to truncate credit and debit card numbers so electronic receipts show no more than five digits. The act represents a "get-out-of-jail-free card" for merchants facing lawsuits filed before June 3, Murphy says. Merchants still are prohibited from printing expiration dates on receipts following June 3. The act does not remove the threat of a lawsuit if they do, Murphy explains. The new law also does not remove the legal liability for merchants that failed to truncate card numbers on receipts. The act means pending lawsuits related only to printing expiration dates on receipts before June 3 likely will be dismissed, Murphy says. This law is a "fix" to prevent plaintiff class-action attorneys from cashing in on technical violations of the act, known as FACTA, Murphy previously told CardLine. About a year ago, some law firms filed a series of lawsuits in which they alleged violations of the act and sought class-action status in Illinois and Chicago.