For two years now, a furiously digitizing financial sector has read regulatory signals across several pressing fronts from buy now, pay later (BNPL) to cryptocurrency, awaiting decisions from Washington that hold the potential to transform the landscape for newcomers and established players alike.
Seasoned pros acknowledge that 2022 may present a nearly unprecedented slate of showdowns.
With the U.S. Consumer Financial Protection Bureau (CFPB) opening an inquiry into BNPL risk in December, i2c Inc. President Jim McCarthy told Karen Webster “[Some think] the government is there to protect people from themselves. And even though the consumers are disclosed [and] they like the product, there’s a school of thought that they don’t understand what they’re getting into, so we’re going to protect them from themselves.”
The CFPB wants Affirm, Afterpay, Klarna, PayPal and Zip to assuage fears around debt accumulation, regulatory arbitrage (dealing with disclosures) and data harvesting. To address some of these concerns, McCarthy said he foresees new requirements akin to the Schumer Box more mainstream credit offerings used to disclose terms to consumers.
McCarthy speaks from experience. During his nearly two-decade tenure at Visa, he saw the financial sector, lawmakers and regulators face-off over dozens of issues from the mundane to the macro, learning the hard way that old adage‚ “The more things change, the more they stay the same,” doesn’t seem so hackneyed when you’re talking about power plays inside the Beltway.
“It’s funny to see how these things get recycled and nothing really has changed,” he said. “I always wonder, ‘Why is this going be a better mouse trap than it was the first time?’”
See also: CFPB Probes Big Five Buy Now, Pay Later Providers Over Data Use, Debt Accumulation
Interchange Debate Resurrected
Storm clouds over interchange rates caused a thunderclap in 2021 as trade associations challenged the 2011 Durbin amendment (also known as Regulation II) that requires the Federal Reserve to limit the fees banks can charge acquirers for debit card transactions, labeling the measure “arbitrary and capricious agency action.”
It’s difficult to predict how lawmakers and regulators will respond to merchants’ and card issuers’ concerns — and whether they’ll address them this year, McCarthy said. He suggested that the European regulatory situation could well be a bellwether for how banks’ and card issuers’ lobbying efforts might fare.
He said that may lead to overly simple calculus like, “You’re getting 30 basis points or 50 basis points in Europe. Why can’t they survive on that here?”
As it pertains to community banks, credit unions (CUs) and small financial institutions (FIs) and their powerful lobbying machines, he added that “their share of debit is, say, between 10% and 20%, and it’s a big number to the retailers, but no one’s going to go after them.”
Neobanks and FinTechs survive almost completely on those fees, however, and McCarthy is concerned this could create an uneven playing field as some of those upstarts begin to fill big footprints — even by legacy bank standards.
“I think at some point, someone’s going to say, ‘Well, wait a second. How does that work? I’m a big bank. I can’t do that,’ and the numbers, as they get bigger, become more interesting to regulators, to merchants that are impacted, and others. I just don’t think it’s done yet.”
Read also: North Dakota Trade Groups File Debit Card Fee Suit Against Federal Reserve
Crypto and Big Tech in the Spotlight
The unintended consequences of regulatory action are a key concern as the payment industry faces new scrutiny into new digital products that are generating fortunes. With the Fed’s promised white paper on a central bank digital currency (CBDC) due any time now, regulators may be paying particular attention to crypto and stablecoins.
Saying “the thing that’s still most interesting in my mind is just the amount of spend that people are putting on [crypto] cards,” McCarthy said he believes that decentralized finance (DeFi) is primed to go under the regulatory microscope this year.
“Think about the number of times the [Department of Justice] or the government has come into the card payment space,” McCarthy said, recalling encounters with regulators during his Visa tenure, “be it through litigation like Walmart versus the networks, the DOJ blowing up Visa-Mastercard, precluding Amex from being issued. At the point in time, you were living through it; these were massive disruptions, and yet it was less than a bump on the road on the growth of the card networks.”
With Web3 also on the agenda, McCarthy said, “The surface area is very wide, so I do expect another year of debate certainly and maybe regulation.”
See also: CFTC Must Pay Closer Attention to Crypto
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