Banking UP

Consumers would love to get a better handle on how much financial services cost. Schedules of fees can be maddeningly complicated, and are often difficult to find (or to read when printed in very small type).
I spent a couple of hours today looking for the tables of fees on a dozen of websites selling prepaid card services, and each site had its own way of listing their fees.
Not good.

Senator Charles Schumer of New York was at the initiative of a credit card disclosure law enacted in 1988, when he was a congressman, where all fees are grouped in a “Schumer box“. This has improved transparency quite a lot.
The Center for Financial Services Innovations is now preparing a similar “box” for prepaid cards. The final format of the box has not been published yet, as this is still work in progress.

Below is a sneak preview showing how we are “thinking inside the CFSI’s box” and preparing to follow their recommendations. This fee box is for our mainstream UPside card product.
Expect a few tweaks here and there as the model gets refined and finalized.

Prototype of the Fee Box for the UPside Visa Prepaid Card:

On September 6, Congress passed the “American Invents Act”, a rather complicated bill attempting to fix or reduce the issues with filing, granting and post-grant reviewing of US patents.
For a complete version of the act, see http://www.gpo.gov/fdsys/pkg/BILLS-112s23es/pdf/BILLS-112s23es.pdf

“Patents suck”, said Google chairman Eric Schmidt at the Dreamforce conference on September 1. In fact, Google purchased Motorola mobility in large part for its trove of mobile phone related patents, as a “weapon of mass defense”, because patents have become a tool to obtain financial compensation from competitors largely unrelated to the original intent of providing inventors a period of exclusivity on their inventions.

In July, the radio show This American Life, had a great piece called “When Patents Attack!” about “patent trolls” in the Eastern District of Texas who have no other purpose in life than extracting protection money from companies with real businesses and products. Instead of threatening to set the business on fire, mafia-style, they sue regardless of the merits of the patents they have purchased (of course they have not invented anything themselves), and offer to settle out of court for large amounts of money. Patents have become the equivalent of cans of fuels and boxes of matches.

The financial industry has not been spared by patent trolls. Visa, Wells Fargo, MasterCard, Bank of America, Citibank, and many others have been sued for alleged infringement of patents related to digital currency systems that were never implemented by the owner of the patents and would make any software engineer roll on the floor laughing at their triviality.

In an intriguing twist, the America Invents Act is requesting that the Director of the US Patents and Trademarks Office put a transitional post-grant process in place for reviewing  the validity of covered business-method patents. The definition of “covered business-method patents” is explicitly narrowed down to:

A patent that claims a method or corresponding apparatus for performing data processing operations utilized in the practice, administration, or management of a financial product or service, except that the term shall not include patents for technological inventions.

Being no lawyer myself, I interpret the  goal of this post-grant review process as being a way to facilitate the debunking of dubious patents, or the defense against patent trolls. It is rather interesting that lawmakers have chosen financial products and services as the target for this transitional process. I guess that they placed a high priority on limiting the use of patents as a weapon against innovators trying to oil the wheel of a stalled economy.

The Federal Reserve today issued the final rules on the Durbin Amendment, and it’s an ultimate win for retailers, although I predict some battles to come from the banking industry and consumers before the dust settles.

The Amendment, part of the sweeping Dodd-Frank financial overhaul legislation, allows the Federal Reserve to put limits on the interchange fees that merchants pay banks when you swipe your debit card at their cash registers.

Today, those fees are ranging between 1% and 2% of the amount you purchase and have added up to $16.2 billion that merchants paid in 2010. As of October 1, 2011, the planned effective date for the new rule, those fees will be a maximum of 21 cents plus 0.05%, nearly 48% percent lower than before for a typical transaction of $40.

Lower fees sound like a good thing, assuming the savings are passed on to consumers and assuming that the banks can still afford to run the networks that make debit cards work safely and reliably.

If they can’t, consumers will see new fees tacked on to their bank debit cards and will respond by moving to lower fee alternatives. That, in turn, will prompt the banks to innovate their financial products while being mindful of not letting hidden fees get out of hand, for fear of sparking the regulatory backlash cycle all over again. And in the end, I predict consumers will gain fair, simpler, more transparent banking options, and retailers won’t be left holding the bill. But it will take a few tries to get there.

For background on hidden interchange fees, read Why You Should Care About Hidden Interchange Fees in 2011

For the details of today’s ruling, read the Fed memo posted by PYMNTS.com

Disclosure: Plastyc, a company that offers prepaid card services (prepaid cards are a sub-category of debit cards)is not directly affected by the proposed interchange rules, which only apply to prepaid card issuers with assets of $10 billion or more.

On December 16, the Board of Governors of the Federal Reserve System met and proposed a way to implement the debit card interchange fee and routing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Board has requested comment before February 22, 2011, on their proposed rule that would establish debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Here is a copy of the comment I have sent to the Board:

Secretary,
Board of Governors of the Federal Reserve System,
20^th Street and Constitution Avenue NW
Washington DC 20551

RE: Comments to Docket 1404 – Debit Card Interchange Fee and Routing

I am the CEO of Plastyc Inc., a company devoted to delivering  financial services to the tens of millions of under-banked Americans.
We provide re-loadable prepaid card services in partnership with banks with less than $10B in assets.

Therefore, we are not impacted by the proposed regulations and can comment with the benefit of a position of neutrality.

We are particularly concerned by the un-intended negative consequences which are likely to impact the un-banked, under-banked and low income Americans. Below is a summary of such concerns, and suggestions on how to address them:

I remain at your disposal for any further input you may require.
Very Respectfully Yours,

Patrice Peyret

On December 16, 2010, The Federal Reserve Board proposed a new rule that would lower by as much as 84 percent the $16.2 billion in fees that merchants pay annually when you swipe your debit card at their cash registers. (The Fed asked for public comments on the proposal by February 22, 2011.)The idea is that merchants will save money and pass along savings to you.

Immediately, large U.S. banks and credit card issuers attacked the proposed rules as a threat to their industry, a handout to merchants who get out of paying their fair share of money network costs, and a booby-prize for consumers who gain no assurance of savings but almost surely would face higher banking fees.

See “Debit Card Fee Cap Could Mean Higher Prices for Consumers”

Behind the proposed new rules and the arguments against them are some key questions:

• Why should you care?
• What are the real costs?
• Who should pay?

Read the complete article in the Huffington Post