New Threats From States and Old Ones From the CFPB: PF Regulatory Responsibilities Aren’t Getting Any Lighter

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Bailey Reutzel

As third parties, payment facilitators have a complicated regulatory framework to wade through.

And it’s unlikely to get untangled any time soon, especially as state regulators look to clamp down on a payments industry they don’t fully understand, according to panelists at Payment Facilitator Day during the ETA’s TRANSACT 17 conference.

“Everyone thinks about the federal law…but there are so many threats at the state level,” said Kim Ford, vice president of public affairs at First Data. “We,” she continued, speaking about payment providers of all kinds, “don’t get to enjoy preemption from state law like banks do.”

Prepaid, money transmission, data and cyber security, these are perennial worries, Ford said, but one particular trend in state regulation has her very nervous, and that’s the requirements for real-time sales tax collection.

The farthest along in this legislative process is Massachusetts, where Governor Charlie Baker has outlined what he describes as a “Sales Tax Modernization Timing Change” in his FY18 budget. If the change passes, third-party payment processors would be required to collect and remit sales tax from retailers on all third-party debit and credit card purchases in real time.

This differs from the way sales tax collection is handled today in that currently, retailers are responsible for collecting and remitting sales tax to the state.

According to Retailers Association of Massachusetts, the administration believes this change could bring in $125 million the year after it’s passed. The change has passed the House of Representatives in the state and is now heading to the Senate for a vote.

“States are broke,” said Jonathan Genovese, who handles regulatory compliance and government affairs at Vantiv. “They’re looking for streams of revenue above and beyond taxes,” and this is one idea that not only Massachusetts has had, but Washington, Connecticut and Puerto Rico have considered as well.

But this legislation misses something very important about the payments industry, Genovese said. “Interchange doesn’t go to processors or acquiring banks. It goes to the issuing bank. Yet, we’re getting a tax bill for our interchange rates.”

Plus, said Ford, the legislation also doesn’t take into account just how complex the inner workings of the payment chain are. At the time of the transaction, payment processors would have to identify what the sales tax should be and then either settle with the merchant first and then remit the money to the state, or remit the money to the state and settle with the merchant later.

“States love it because they usually don’t know how the industry works and the infrastructure that would have to be changed to do this,” Ford said. “States that are having budget issues say, ‘Wow, this sounds really great,’ and it’s seen as a way to catch under-reporters.”

Ford and others are currently battling the legislature in Massachusetts over this proposed change, and asked others in the state for help.

She continued: “This just underscores the fact that the states can be a hotbed of challenging ideas.”

And, said Genovese, “The payment industry needs to work together to educate legislators about the complexity of the business. They have no idea how ridiculously complicated it is.”

So what’s spurred all this unwanted attention on the payments industry?

Apple Pay and other tech companies moving into the payments space, said Genovese. The attention tech companies and new models like those used by PFs have brought to the industry has made regulators take a closer look, not just for the possibility of revenue but also to protect consumers, he said.

On the topic of consumer protections, many in the industry wonder whether the leadership and the role of the CFPB might change under the eye of President Donald Trump’s administration. But First Data’s Ford said she doesn’t think the bureau or the bureau’s director, Richard Cordray, is going anywhere any time soon.

While President Trump had said one of his first actions would be to fire Cordray, “the rhetoric coming out of the administration has died down a bit,” said Ford.

And the CFPB is specifically looking deeper into the working of third party payment providers, like PFs that onboard and provide for submerchants, according to the panelists.

“One thing PFs don’t appreciate is the extent to which they have to be monitoring their submerchants,” said Holli Targan, a partner at Jaffe Raitt Heuer and Weiss and chairperson of the law firm’s Electronic Payments Group. “Not only do PFs have to comply with all card brand rules, but sometimes PFs are surprised that they have to monitor their submerchants for card brand compliance as well.”

Plus, PFs have to monitor submerchants for federal and state regulatory compliance with an obligation to file suspicious activity reports (SARs) to FinCEN if they spot something fishy.

“The primary thing to remember is that the PF totally takes on all the risk of submerchants, all the liability of submerchants for the transactions that are processed through them,” Targan concluded.

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