“Credit cards have become a staple in today’s marketplace. They provide enormous convenience, efficiencies and other benefits to consumers, businesses, and local and national economies. Credit cards have generated more than $2.5 trillion in transactions a year in the United States.”
Such were the words of Congressman Michael N. Castle, R-DE at the Financial Institutions Subcommittee Hearing entitled Credit Card
Practices: Current Consumer and Regulatory Issues in late April of
2007.
Castle went on to state that “Clearly, they have become an
indispensable tool of America’s consumer economy. Today, consumers
have a choice between 6,000 credit cards lenders. Although some consumers view the large number of credit options to be daunting, the strong national credit system in the United States has been a driving force that has helped sustain our economy in recent years.”
The words from the House floor resonate the same sentiment originating in the Senate and with consumer advocacy groups who are pressing hard for regulatory legislation that would insure adequate disclosure and serve a good dose of protection to consumers in terms of privacy and data.
The Senate Banking, Housing and Urban Affairs Committee has a definite focus on consumer protection. Senator Christopher Dodd, D- Conn, chairs the committee and recently threw his hat in the ring for the Democratic Presidential nomination. Dodd has long been a vocal advocate for oversight of consumer financial issues and has been listening to vendors and suppliers within the card industry regarding their fees and disclosure practices. He is quick to admonish any of these suppliers that he feels may be wrongfully charging high fees or not disclosing important information to consumers. He is quick to admonish them.
Dodd specifically addressed abusive practices by credit card companies during one of his recent sessions by saying “If you currently engage in any business practice that you would be ashamed to discuss before this committee, I would strongly encourage you to cease and desist.”
Privacy is quite a hot topic nowadays. In another Senate Committee,
the Senate Judiciary passed a set of data privacy bills. This
bipartisan legislation was introduced by Chairman Patrick Leahy (D-
Vt) and ranking member Arlen Specter (R-Pa.) to better protect the privacy of consumers’ personal information in the face of persistent data security breaches across the country.
“As always, the lawmakers are concerned with protecting the consumers,” says Mr. Terry Stepanik, President of Houston, Texas-
based US Dataworks, and Vice Chairman of their Board of Directors
“This falls within two categories….the first concerns consumer protection on “good” transactions….that is, what are their rights under Reg E and are these rights being fulfilled. The second deals with the potential for fraud. Is the data entered by the consumer being protected sufficiently?”
Stepanik emphasizes that data security is the single largest concern in the industry today. “Unfortunately, many vendors have legacy systems that do not provide the level of security necessary to protect the data from sophisticated hackers and, more importantly, from unscrupulous employees.”
As Congressman Castle reminds us in his floor speech, electronic transactions have grown to the trillion level in member transactions a year. With consumer consumption robust, this level of transactions should continue to grow. However, could this growth pose a crisis as we rely on electronic transactions as our method of exchange?
Many in the industry are concerned that security risk grows in a linear relationship to the volume of transactions. “The easiest way for someone to steal money from a bank is through the Automatic Clearinghouse (ACH) network,” says Stepanik. “Small to medium- sized banks provide an access to the Federal Reserve system that can be exploited in ways that the banks’ current security procedures may not prevent nor recognize until it’s too late - particularly if an insider is involved.
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Senator Leahy of Vermont believes this Act is a definite priority:
“This is a bill that deals with the underlying problem of lax security and lack of accountability to help prevent data breaches from occurring in the first place and also addresses the need to provide Americans with better notice of breaches that may affect their personal information. Passing this comprehensive privacy legislation is a legislative priority.”
Many believe that the Democrats are doing much more than their predecessors with regard to consumer protection in the financial services arena and it appears that the White House is stepping up to the plate. At a time when President George W. Bush’s poll ratings are in the 30th plus percentile for over 8 months (longer than President Carter, but shorter than President Truman), he has come out with a task force to combat identity theft.
In late April, the task force released their strategic plan to combat identity theft and stated: “We believe that a coordinated strategic plan can go a long way toward stemming the injuries caused by identity theft and, we hope, putting identity thieves out of business.”
Taken as a whole, the recommendations that comprise this strategic plan are designed to strengthen the efforts of federal, state and local law enforcement officers; to educate consumers and businesses on deterring, detecting and defending against identity theft; to assist law enforcement officers in apprehending and prosecuting identity thieves; and to increase the safeguards employed by federal agencies and the private sector with respect to the personal data with which they are entrusted. “ This task force is co-chaired by Attorney General Alberto Gonzales and FTC Chairwoman Deborah Platt Mejoras.
The task force has representatives from 17 federal agencies and departments as its members.
The Department of Justice is presenting itself in many ways to avoid any violations of the law with regard to transactions – in more ways than one.
“The single biggest issue is “Know your customer,” says Bhairav Trivedi, of Bala Cynwyd, Pennsylvania-based PayQuik who provides
funds transfer solutions. “Electronic transactions have been
designed with convenience for customers in mind. Unfortunately, this convenience comes at a cost in that clearly identifying the individual on the other end of the transaction is not easy to do.”
Trivedi concurs with many new efforts from the Federal front to combat identity theft. “Another big issue is the ability to identify suspicious activity with regard to financial transactions. Due to numerous options available to customers today, it is very difficult to monitor suspicious activity across a myriad of different medium for electronic transactions. Finally, there is the issue of preventing money laundering and as electronic transactions increase the speed of transaction fulfillment; this becomes a bigger issue as the need for sophisticated detection systems becomes apparent to keep up with the increased efficiency of the electronic transactions.”
Those in the transactions industry believe that identity theft is quite important and that the needs of the user should never be overlooked.
Recently, online auction giant eBay has been slapped with two antitrust lawsuits alleging that eBay’s payment methods do not enable sellers to accepting cash as payment, accept wire transfers and some of their competition’s checkout procedures and has monopolized all transaction processing with means of their own choosing and not that of the consumers.
Also part of the suit was the protection that a buyer receives when using Pay Pal. The coverage for buyers using Pay Pal is doubled; yet, the coverage for a non-Pay Pal payment method was eliminated.
As regulatory efforts rise, some vendors in the industry are also wary of how future actions might impact their bottom line.
“The changing landscape of regulatory compliance and the fact that the cost of implementing the revised norms in compliance may become prohibitive for vendors to maintain and update unless there is scale,” says Trivedi of PayQuik. “In addition, the ability of regulators to impose fines on organizations that may do everything they perceive to be in compliance but may still have some “bad”
transactions go through, needs to be addressed for those vendors with focused specific capabilities and the scale to react to regulatory change this may be a blessing in that they can position themselves to be a market leader.”
Numerous actions and issues should lead to more and more attention paid by Capitol Hill to issues of privacy, security, disclosure and fees. The underlying fear is that regulation will become a hindrance to those in the transaction supply chain who have to bear the cost of implementing new policy and safeguards with no tangible payback for their efforts.
Says Trivedi: “Regulators will need to ensure that compliance requirements [do not] become so onerous on customers and financial institutions that they start to drive this business underground to illegal channels.”
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