Payments News Update – December 22, 2023
Legal and Regulatory Developments
SPOTLIGHT: The Justice Department Takes Aim at Microtransactions Fraud
Digital Transactions News – December 19, 2023
The U.S. Department of Justice announced late Friday it is filing cases against several fraud rings that use so-called microtransactions to mask their fraudulent activity from victims and card issuers. The lawsuits are being brought as part of efforts by the Justice Department’s Consumer Protection Branch to stop criminals that use misrepresentations or unauthorized charges to steal money from consumers’ financial accounts.
Microtransaction scams involve the use of low-dollar transactions made with stolen credit or debit cards. By mixing in fraudulent microtransactions—which often go unnoticed by the cardholder or are automatically reimbursed by card issuers if disputed—with fraudulent transactions that have higher dollar values, criminals can lower the percentage of fraudulent transactions that get flagged as a chargeback. To determine fraudulent chargeback rates, the card networks take the number of transactions with a chargeback and divide that figure by the total number of transactions for the merchant. . . .
Senators Prod CFPB on BNPL Oversight
Payments Dive – December 19, 2023
Democratic senators urged the Consumer Financial Protection Bureau this week to be vigilant in monitoring buy now, pay later offerings, especially during the holidays, so it can curb tools that “prey upon consumers.” Sen. Sherrod Brown, who is the chairman of the Senate Committee on Banking, Housing and Urban Affairs, along with Sens. Raphael Warnock of Georgia and John Fetterman of Pennsylvania made the plea in a letter Monday to CFPB Director Rohit Chopra. “We urge you to continue focusing on this increasingly popular form of consumer credit and use the full range of your authority to ensure that it is not used to prey upon consumers,” the Monday letter said.
The letter followed a Banking committee CFPB oversight hearing last month in which Chopra said he would closely watch the increasingly popular payments tool. When consumers tap one of the many BNPL offerings available, they’re able to take possession of a good or use a service with only a down payment and a promise to pay the rest of the price over a period of time, sometimes interest-free and usually over four to six weeks. . . .
SEC Won’t Budge on Crypto Regulation
Payments Dive – December 18, 2023
Update: Coinbase on Dec. 15 filed a petition with the U.S. Court of Appeals for the Third Circuit to order the Securities and Exchange Commission to write rules governing the treatment of crypto assets as securities. The petition comes in response to the SEC’s decision not to write separate rules on the grounds existing rules, and case law, are adequate for crypto assets.
From last week: Rules focusing just on the governance of crypto assets subject to federal securities laws aren’t forthcoming any time soon.
The SEC on Dec. 15 denied a petition submitted last year by Coinbase Global, the publicly traded crypto asset exchange, seeking rules to end confusion over which crypto assets are securities and how they should be regulated. “The Commission disagrees with the Petition’s assertion that application of existing securities statutes and regulations to crypto asset securities … is unworkable,” the agency said in the 3-2 decision. . . .
Apple’s Visa, Mastercard ‘Tap Pay’ Deals Bar Rivals, Suit Says
Law360 – December 14, 2023 (subscription required)
Apple has anti-competitive agreements with Visa and Mastercard that give the tech company a cut of transaction fees while blocking other mobile-based payment systems from competing with the credit card companies’ point-of-sale transaction payment networks, according to a proposed antitrust class action filed Thursday in Illinois federal court.
When Apple Inc. was preparing to introduce its Apple Pay feature on the iPhone in 2014, Visa Inc. and Mastercard Inc. worried it would drive down the “lucrative” fees they charge merchants who use their point-of-sale transaction payment networks, but instead of competing, Apple and the credit card companies reached a mutually beneficial anti-competitive agreement, according to the complaint filed by Mirage Wine & Spirits Inc. . . .
CFPB’s Digital Payments Plan Sparks ‘Confusion,’ Fintechs Say
Bloomberg Law – December 14, 2023
Fintech trade groups said the Consumer Financial Protection Bureau needs to provide more clarity about who would be covered by the agency’s proposal to subject digital payments companies to direct supervision. The CFPB’s proposal for agency examiners to review operations at the 17 largest online payments and digital wallet operators contains contradictions that would result in some companies being subject to agency exams, while excluding other businesses with nearly identical services, industry trade groups said in a Thursday letter. The groups asked for an additional 30 days to comment on the proposal.
“The proposal fails to make clear which product markets it includes and excludes, leaving substantial confusion about the identity of the 17 companies the rule says are covered, nor does it provide a sufficient cost-benefit analysis of the potential impacts of such a rule on these distinct product markets,” the letter said. The comments mark the latest public response from technology companies leery of being roped into the CFPB’s supervision, and highlight the hurdles the consumer watchdog faces as it looks to safeguard the rule from legal challenges. . . .
Industry Developments
SPOTLIGHT: Fraud Emerges as Concern for FedNow Users
Payments Dive – December 15, 2023
The Federal Reserve’s FedNow instant payments system faces participant concern about potential fraud, according to commentary during a Wednesday webcast hosted by the central bank. That Fed “town hall” was billed as a discussion of new use cases for the real-time payments system, with representatives from the fintech Plaid and the Virginia Department of Treasury joining to share their experiences. But it also touched on fraud repeatedly as some 800 attendees listened in on the webcast.
FedNow’s early volume since the July launch has been “modest,” said Bernadette Ksepka, who is FedNow’s head of product development. Still, the number of financial institution participants on the system has jumped tenfold from 35 financial institutions at the start to about 330 now, she said on the webcast. . . .
As it’s building out the new system, the Fed is planning to enhance “configurable fraud controls,” among other improvements, she noted as part of a slide presentation. Those tools will be in addition to some FedNow fraud-prevention capabilities and reporting requirements that were there from the start. . . .
How Generative AI Is Upending Tech at Big Payment Companies
American Banker – December 19, 2023 (subscription required)
Terms like “large language models” and “generative AI” were barely part of the vernacular as recently as a year ago, but have become a substantial part of strategies at big payment companies. “The biggest risk of gen AI is not using gen AI,” said Rohit Chauhan, head of AI at Mastercard.
Mastercard and Visa have made investments in gen AI that will drive large-scale global changes in everything from what consumers hear at the call center to what they see on a website to how their transactions are kept safe. The card networks face competition from fintechs that are also bullish on gen AI, making the technology one of the biggest sources of disruption to hit the payments industry in years. “Gen AI is the transformative technology of our time, and it will have an enormous impact,” said Rajet Taneja, president of technology at Visa. . . .
Companies are quickly ramping up investments in gen AI, according to Infosys, which projects that gen AI investment in 2024 will reach $6 billion in the U.S. and Canada, or an increase of 67% over 2023. . . .
COMMENTARY: Payments Fraud Is Unrelenting. So Are the Hidden Battles Against It
Digital Transactions News – December 18, 2023
The digital revolution in payments, characterized by a surge in online transactions and the emergence of novel payment technologies, has been a double-edged sword. While innovations have streamlined commerce, they have also spawned intricate fraud mechanisms, compelling businesses to recalibrate their strategies for safeguarding their operations, reputation, and financial survival.
It’s estimated that digital transactions such as paying by text, will surpass 3 trillion by 2026 according to McKinsey & Company, nearly triple 2020 levels. Defending against fraud and complying with changing regulatory requirements are imminent challenges, but adopting best practices positions payment service providers to adapt to any regulatory change. . . .
Buy Now, Pay Later Keeps People Spending—Without Credit Agencies Knowing
The Wall Street Journal – December 17, 2023 (subscription required)
Priscilla Rodriguez, an overnight stocker at a Walmart, has a strategy to protect her credit score as she and her husband look to buy a house. The Sunland Park, N.M., resident uses installment loans from Afterpay to buy groceries, her pricey skin-care products and art supplies for her 10-year-old son, which keeps the balance on her two credit cards low—and the credit agencies in the dark. “Afterpay doesn’t report to Equifax ,” Rodriguez, 31, said. “That was very appealing to me.”
Consumers are shifting more of their spending to so-called buy now, pay later lenders, a trend that is only accelerating as high interest rates dent budgets and pandemic savings dry up. That is sounding alarms at consumer-advocacy groups that say companies like Afterpay, and Klarna provide fewer protections than credit cards and encourage shoppers to take on more debt than they can afford. . . .