The Banking Law Connection

The Banking Law Connection

Trends and topics related to banking law and litigation

Wall Street Journal Publishes Commentary on Johnson-Crapo

In case you were looking for a short primer on the merits of the Senate Banking Committee’s contemplated overhaul of America’s mortgage-lending industry, the Johnson-Crapo bill, you can find it in a recent headline.  The April 17 Wall Street Journal carries an Op-Ed piece authored by former Banking Committee Chair Phil Graham and AEI Fellow, Peter Wallison. The Journal’s headline for Graham and Wallison’s article is Worse Than Fannie and Freddie

Former Sen. Graham and Mr. Wallison claim that under Johnson-Crapo, “housing financial reform is held hostage to the political allocation of housing credit.” They point out that the revenue from the fees Johnson-Crapo imposes on mortgage originations “will not be earmarked for subsidized mortgages for low-income Americans. A significant amount will go to advocacy groups that pressure lenders to make subprime loans, creating what will almost certainly be the largest community-action slush fund in American history.”

Johnson-Crapo, according to Mr. Graham and Mr. Wallison, is also an exercise in wealth redistribution. They write that “low-risk, prime borrowers will be forced to pay far more than the true cost of their mortgage insurance so that subprime borrowers, who defaulted five times more often than prime borrowers during the financial crisis, can pay far less than the actual cost of their insurance . . . . A standard political argument for the federal guarantee of mortgage-backed securities is to help people who play by the rules and behave responsibly to obtain affordable 30-year, fixed-rate mortgages. But a close reading of Johnson-Crapo’s 442 pages makes it clear that much of the gain to the responsible, low-risk borrower coming from federal guarantees is taken away by a parasitic system in which the prime borrower overpays to fund subprime mortgages and community action groups.”

Graham and Wallison’s commentary suggests that Johnson-Crapo increases the federal government’s involvement in the housing credit market, imposes higher costs on prime borrowers to subsidized their subprime counterparts, funnels billions of dollars to special interest advocacy groups, and makes a replay of the mortgage default meltdown that fueled the financial crises more likely.

Let us know what you think.

Facebook Entering the Electronic Money Arena

Like my status, and send me money. Facebook is about to get even more involved in people’s lives and wallets. Facebook is planning to jump into the financial services sector. Specifically, Facebook is planning on becoming a player in the world of electronic money and payments.

The Financial Times is reporting that Facebook “is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process.”

If Facebook is successful, it could launch a payment platform fully integrated with its users’ Facebook profiles and create a convenient and user-friendly method of transferring money between Facebook friends or contacts.

According to the Financial Times, “the authorisation from Ireland’s central bank to become an ‘e-money’ institution would allow Facebook to issue units of stored monetary value that represent a claim against the company. This e-money would be valid throughout Europe via a process known as ‘passporting’.” So, while this product may be available in Europe very soon, it seems that non-European users will have to wait a bit longer to send money directly to their Facebook friends. Facebook has definitely shown in its interest in handling money for its U.S. users though. Last year, Facebook facilitated $2.1 billion worth of transactions relating to payments for developers (mostly games) who charge users for in-app purchases.

Computer World points out that this is not Facebook’s first attempt to break into electronic payments. Facebook canceled its Facebook Credits virtual currency program after the program failed to get traction with users. Facebook has also been trying to promote its Facebook Gifts program, a service where Facebook friends can sent gifts to each other for birthdays or for particularly awesome cat photo posts.

Given how much Facebook knows about its users already, will Facebook users trust Facebook with their payment information, too? A recent Yankee Group survey found that only “10% of U.S. consumers would choose a mobile wallet from Facebook.” The primary reason for the low interest seems to be security and privacy concerns.

What do you think about Facebook jumping into the electronic payments arena?


The Smartest Things Overheard at TRANSACT14

TRANSACT14, the Electronic Transaction Association’s annual conference, kicks off tomorrow.  Based on the line-up and the attendee list, TRANSACT14 promises to be an excellent event.  I’m always excited to catch up with old acquaintances and meet new ones.   In between meetings and panels, I will be live-blogging the event, and sharing the smartest things I learn here, in a series dubbed “The Smartest Things Overheard at TRANSACT14″.

Before the event starts tomorrow, however, here is my list of industry hot topics.

1. Bleeding Edge Technology (My credit card only works if I’m standing next to it?) 

The technology landscape for the payments industry is changing rapidly.  Some of this change is driven by security concerns, but much of it is simply utilizing the newest tools to open up newer and faster payments channels.  The keynotes promise to be very informative on the topic, including those from Paul Galant, CEO of Verifone, and Ariel Bardin, VP of Product Management at Google Payments.  Additionally, walking the exhibit hall floor is a great way to see the newest technology.  One ‘cool’ example (of dozens):  ”Proximity Location”, which utilizes your phone’s location data to determine if you are in the store your credit card was just swiped in, in order to determine whether to approve or deny the transaction.

2. Data Security & Breaches (“Don’t collect data you can’t protect.”)

Data security is an issue at the forefront of the industry, especially given the prominence of the Target breaches over the holiday season.  TRANSACT 14 is providing a Data Breach Summit featuring six panels on the topic.  The quote above is from 3Delta Systems from a recent top 10 list in Transaction Trends.  Sure, the quote was #8 on the list, but it has what “sticky” advice tends to have: relevance, rhyme and cadence (other examples that come to mind include “you can’t manage what you can’t measure” or “if the glove don’t fit, you must acquit”).

3. M&A Opportunities (Tell me more about ‘Shifting Paradigms’)

M&A is the field I focus on the most.  Both from my clients perspective and the market at large, the ePayments space is heating up with M&A (e.g. Global/PayPros) and IPO activity (e.g. Mercury & Comdata).  The Panels, which include a wide range of great speakers, will focus on trends and changes in the industry.  One question I hope is addressed: to what extent is the M&A activity we are seeing a result of companies seeing solid strategic opportunities (my opinion, also more sustainable) versus simply growth-for-growth’s sake.

4. Department of Justice Involvement (“Operation Choke Point”)

I have written previously about Operation Choke Point and am excited to attend the Operation Choke Point Boot Camp.  I think that this crackdown by the Department of Justice on banks and credit card processors will be an important and potentially disruptive trend for the industry.   Deana Rich of Deana Rich Consulting will be presenting on the ETA’s Guidelines on Merchant and ISO Underwriting and Risk Monitoring.  I’m only slightly miffed that I had to change my flight home in order to catch this important panel.

Josh Rosenblatt (@JoshSRosenblatt) is an attorney in the Electronic Payments & Financial Technology group at Waller Lansden Dortch & Davis, LLP and is a member of the ETA’s Membership Committee.  

Banking Identified as a Digitally Contestable Market

In a recent report by Accenture, the banking industry was identified as a “digitally contestable market.” Over 35% of banks’ market share in North America could be up for grabs by 2020. Accenture points to a market shift from traditional branch banking to mobile banking and other forms of digital banking. Significantly, the Accenture report finds that consumers identified mobile banking and online banking as the most important areas that banks should be developing, over ATM access and branches. A recent Bankrate survey supports this finding, noting that more than 30% of Americans haven’t visited a bank branch in the past six months.

What entities are vying for the market share of traditional bank branches? Some unusual potential competitors are emerging. One potential competitor to community banks, as discussed previously on this blog, is the U.S. Postal Service. Another possible competitor, identified in an article for Wired Business, is Starbucks.

Many are familiar with the ability to register a Starbucks giftcard and use it like a debit card at any Starbucks, “re-loading” when all money has been debited from the card, or even setting up “auto-loading” so that the balance of the card never falls below a set amount. Wired Business points out that Starbucks Cards are acting, in effect, as savings accounts. In fact, Starbucks giftcard transactions accounted for about $2.5 billion in U.S. sales for Starbucks in 2013. Starbucks giftcards and other services for storing money are working their way into the game. If Starbucks expanded its financial services, it could potentially edge into the traditional banking industry.

In an effort to maintain market share, banks have responded to the new digital market by strengthening their mobile banking services and thinking beyond the traditional branch banking model.  BBVA, based in Madrid, recently acquired “Simple,” a mobile banking start-up with a base of 100,000 customers, for $117 million. The Accenture report suggests that banks develop “light branches,” with a small staff and real estate footprint, or even kiosks that feature video interaction with remote staff. At a recent investors’ conference, JPMorgan Chase noted that it planned to follow such a model, decreasing branch headcount and square footage, and increasing banking kiosks.

While mobile banking services and kiosks seem to be breaking new ground, any bank contemplating adapting to the market by offering these services should remember that these services are subject to regulation. The FDIC provided insight into the potential rewards and risks of providing these services in 2011, noting the need to secure authentication of mobile customers, detect mobile malware and viruses, transmit data securely, and control for compliance risks.

What should banks avoid in this new digital landscape? Social media. Social media does not address the issue of access identified in the Accenture report, regulations prevent banks from addressing customer service issues on such a public interface, and a recent survey by the Carlisle & Gallagher Consulting Group found that 87% of consumers think banks use of social media is “annoying, boring, and unhelpful.”

Tera Rica Murdock authored this post.  Tera Rica is an associate at Waller that represents clients in the financial services, manufacturing, and healthcare industries.

Supreme Court Extends SOX Whistleblower Protections to Employees of Private Companies

The reach of the Sarbanes-Oxley Act of 2002 is not limited to publicly traded companies.  The United States Supreme Court has greatly expanded the number of companies that may be subject to whistleblower retaliation claims under SOX, holding recently that privately owned companies that perform services for publicly traded companies (i.e., financial services companies, accounting firms, law firms, etc.) can be sued for taking an adverse employment action against an employee that reports illegal activity by a publicly traded client.

In Lawson v. FMR LLC, the plaintiffs were employees of a company that provided advisory and management services to a publicly traded mutual fund company.  The employees had each raised concerns about fraud in the mutual fund’s financial reports.  One was soon after terminated, and the other claimed she was forced to resign.  Both claimed they were retaliated against in violation of SOX.  Their employer’s initial defense to the claims was that SOX did not apply because it was not a publicly traded company.  The Supreme Court rejected this defense, holding that the plaintiffs were protected by SOX because they were employed by a contractor for the publicly traded company.

The Supreme Court failed to define the potentially broad scope of this ruling, which the dissenting Justices remarked could apply to a babysitter who was hired by one of the publicly traded company’s employees.  Although there remains a strong argument that the complaint of fraud must relate to the interests of the shareholders of the publicly held company, the scope of the Supreme Court’s ruling remains unclear.

Financial services companies should assess their business relationships with publicly traded clients to determine their exposure to SOX whistleblower actions.  They should review and update their compliance policies and code of conduct and their anti-retaliation policies to protect against a potential SOX whistleblower action.