Weekly Fintech Focus
- In response to pandemic challenges, card networks agree to delay merchant fee hikes that would have taken place next month.
- E-commerce activities continue to grow and are projected to reach $1 trillion in revenue by next year.
- The BIS publishes a paper urging a global rethink on how to regulate big tech companies engaged in financial services to address systemic risk.
- Fintech trade groups launch to address issues like financial inclusion and regulatory approaches to fintech engagement in the financial services industry.
- Regulators issue the first enforcement action directly referencing a bank’s role in serving marijuana-related business customers.
Visa and Mastercard Delay Hike to Interchange Fees—US and UK Developments
Visa and Mastercard announced on March 16 that they have postponed the scheduled plan to boost interchange fees, i.e., fees that U.S. merchants pay for using credit cards online, by another year. For example, the fee for online or over-the-phone transactions on Visa’s traditional card was set to increase from $1.90 to $1.99 (per $100 transaction) and for the premium cards from $2.50 to $2.60. The new rates were scheduled to take effect in April 2020 and were postponed due to the pandemic, but now they will not go into effect until April 2022. Visa and Mastercard are under scrutiny just two months into a Democrat-controlled Senate with Senator Dick Durbin and U.S. Representative Peter Welch writing to the CEOs of Visa and Mastercard earlier this year. This letter referred to the Wall Street Journal article on February 24, Covid-19 Shopping makes Card Fees a Bigger Burden for Merchants, which stated that merchants “have only stayed afloat through online purchases and the proposed fee increases would disproportionately affect online transactions.” Several state law makers—in at least three states, Tennessee, Mississippi and Oklahoma—have called for interchange fees to be assessed on sales before taxes, to reduce the burden on merchants.
The credit card interchange fee is also facing pressure on two other fronts. Bloomberg Intelligence Analysts point out: “Credit card use is down and competition is growing from other rewards programs and buy-now pay-later providers.” Credit card swipe fees paid by U.S. merchants are amongst the highest in the world as pointed out by the Merchant Payments Coalition (representing retailers, supermarkets, convenience stores, gas stations and e-commerce providers). U.S. merchants pay on average 1.76% as opposed to .96% in most European nations.
Mastercard and Visa have faced class-action claims in the United States in the past. Now, in a landmark decision in the United Kingdom, in Mastercard v. Merricks, the U.K. Supreme Court dismissed Mastercard’s appeal (against a Court of Appeal April 2019 decision) and allowed a class action lawsuit brought by 46 million consumers against Mastercard (for $18.6 billion) to proceed. Hence, former financial ombudsman Walter Merricks can now bring a suit against Mastercard alleging the interchange fees violate EU’s competition law.
BIS Recommends a Rethink in Big Tech Regulation for Financial Services Activities
A new report by the Bank of International Settlements (BIS) calls for a comprehensive public policy approach to address big tech’s role in financial services. The report discusses the role of big tech companies in finance and outlines regulatory approaches and suggested policy options for governments, urging a combined financial, competition, and data privacy approach to regulation. The report follows a growing chorus of governments and interest groups exploring the potential risks associated with the role big tech companies are playing in financial service, either through their own business models offering financial services to customers or through their role as critical service providers for financial institutions for services like cloud computing related to financial institutions’ core banking, data analytics, and risk management. The report cautions that in both roles big tech could become systemically important to the global financial system.
The report also urges global regulators to develop their financial regulatory systems to account for the role big tech plays in financial services. Cross-industry regulation already covers many activities of big tech in financial services, such as requiring licenses for certain banking, credit, and payments activity. However, the report notes that the scope of big tech’s operations and their particular access to large amounts of data, could lead to big tech companies becoming systemically important very quickly even if the companies are not directly licensed as financial institutions. Their rapid growth as service providers in areas such as cloud computing coupled with regulatory frameworks that do not directly regulate such activities, could result in “spillover effects” that are not captured by regulatory oversight.
To address these risks, the report urges global financial regulators to work to (i) better understand big tech business models; (ii) assess big tech risk profiles and transmission channels related to direct services as well as those posed by big tech interconnectedness with financial institutions; (iii) recalibrate regulatory approaches related to the mix of entity-based and activity-based rules to account for risks that may be missed by activity-based rules; (iv) introduce specific regulatory approaches for big tech companies to monitor and mitigate the potential systemic role big tech plays in financial services; and (v) enhance local and international supervisory cooperation, including financial, competition, and data protection authorities.
eCommerce Sales to Hit $1 Trillion by 2022 and BNPL Is Witnessing 215% Growth in 2021
eCommerce is expected to generate over $1 trillion in revenue by 2022. According to the Adobe Digital Economy Index report for February 2021, over $844 billion was spent online from March 2020 through February 2021. Over $183 billion was the result of the pandemic, and people using the internet to access necessities like groceries and banking. For context, this number is nearly as much as what was spent during the entire holiday shopping season in November and December, which totaled $188.2 billion in 2020. The Adobe study estimated eCommerce will hit around $850 billion to $930 billion this year and could hit $1 trillion next year.
This Adobe report pointed out, “buy now, pay later reigns supreme.” The first two months of 2021 have seen a 215% YoY growth in buy now pay later (BNPL) services. Consumers using this payment method place orders that are 18 percent larger orders than with other payment methods.
The highest eCommerce peak happened in the northeastern and western states of the United States, with 60 percent more on various home improvement products. Online grocery shopping models have increased by 230 percent and were identified as one of the biggest shifts by the report.
As Industry Matures, New Fintech Trade Groups Launch
This month two new fintech trade groups announced their launches: the Financial Technology Association and the American Fintech Counsel. The Financial Technology Association (FTA) was launched by leading fintech companies, including BNPL companies like Afterpay and Quadpay, card issuing platforms like Marqeta, financial data companies like Plaid and Zest.ai, and investment companies like Betterment. The trade organization intends to work to develop modern financial regulation and drive financial inclusion, equity, and opportunity. Among the FTA’s priorities are promoting competition, clarifying data security and privacy regulations, driving ethical business standards, and promoting fit-for-purpose, digitally native regulation. Upon its launch, the FTA also published a white paper on the future of fintech, outlining its priorities and describing how fintech is changing the financial services landscape. The American Fintech Council has a similar mission to FTA’s lobbying efforts and is the result of a merger between two groups: the Marketplace Lending Association and the Online Lending Policy Institute. The American Fintech Council includes in its membership lenders like Affirm (which also offers buy now, pay later), LendingClub, and Upstart, the three credit bureaus, and numerous challenger banks, such as Varo and Green Dot. The American Fintech Council plans on expanding beyond lending for its membership in the future, with a focus on open banking.
Not to be outdone, the four major card networks (Visa, Mastercard, American Express, and Discover), as well as the largest payments companies (FIS, Fiserv, and Global Payments) also formed a trade group this month, called the Payments Leadership Council. In particular, this trade group will work on issues related to interest rates, credit card interchange, and general payments regulatory policies.
Cannabis Banking Sees Its First Public Enforcement Action Addressing Compliance Failures
While there have been enforcement actions in the past that reportedly related to the banking of cannabis clients, this week, the first penalties in an enforcement action that directly referenced marijuana were meted out as a result of a credit union’s compliance failures related to its cannabis clients. Under the enforcement action, the small credit union is required to cease opening new accounts for marijuana-related businesses (MRB), file missing suspicious activity reports (SARs), and implement an automated transaction monitoring system. As reported by the American Banker, the credit union had 150 MRB customers and had relied on a manual compliance process. The manual compliance process resulted in late or missed filings for SARs.
A challenge for banks in serving MRB customers is that the compliance obligations can overwhelm small banks’ compliance departments, and the ongoing SAR filing obligations may not fit well with standard practices at some institutions. As this enforcement action shows, the issue for banks is not the act of serving MRB customers, but not having a compliance program that is able to scale and adapt to the challenges. For example, a bank must have customer due diligence policies and procedures in place to enable the bank to detect and report suspicious activity, which includes understanding its customers’ business such that the bank is aware of the source of funds for its customers. Additionally, for MRB customers, banks have obligations to file three types of SARs depending on the activity engaged in by the MRB clients.
We discuss guidance for banks serving MRB clients in our blog here. And we have written more extensively about these issues in our recently published primer on Federal and State law regarding marijuana, hemp, and CBD.