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  • Federal Reserve Governor Calls for Collaboration Between Banks and Fintech Firms for Safe and Secure Payment System

    FinTech

    On October 18, Federal Reserve Board Governor, Jerome H. Powell, spoke at the 41st Annual Central Banking Seminar regarding the impact of technology on retail banking and payment services. Powell noted that rapidly changing technology for more timely and convenient payment methods, “should not come at the cost of a safe and secure payment system. . .” In doing so, he encouraged banks, fintech companies, and all other stakeholders in the industry to collaborate to achieve a payment system that is reliable, secure, and convenient.

    Powell went on to highlight the work of the Faster Payments Task Force (as previously covered by InfoBytes) and the Secure Payments Task Force. For secure payments, he discussed the Federal Reserve’s plan to launch a study analyzing payment security vulnerabilities in early 2018 and its plan to establish work groups focused on approaches for reducing the prevalence and cost of specific payment security vulnerabilities.

    As covered by InfoBytes, the OCC Acting Comptroller of Currency, Keith A. Noreika, also recently spoke about the continuing innovation of banks and fintech companies within the financial technology sector.

    Fintech Federal Issues Federal Reserve Payments Consumer Finance

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  • Federal Reserve Task Force Shoots for Real-Time Payments Network by 2020

    FinTech

    On July 21, the Faster Payments Task Force, created by the Federal Reserve in 2015, announced the publication of its final report detailing strategic efforts to implement faster payment solutions (part one of the report was published in January of this year). The report outlines 16 proposed faster payments solutions and is the culmination of proposals and feedback from providers across the payments industry, including more than 300 representatives from financial institutions, consumer groups, payment service providers, financial technology firms, merchants, government agencies, and numerous other interested parties. The task force’s goal is to have a real-time payments network available to U.S. consumers and businesses by 2020. The report discusses various solutions and technologies for implementing faster payments and recommends a framework for ongoing collaboration, decision-making, and rule setting. The report also addresses security threats, advocates for infrastructure to support faster payments, recommends that the Fed collaborate with relevant regulators to evaluate current laws and make necessary rule changes.

    “Our goal is to ensure that anyone, anywhere is able to pay and be paid quickly and securely,” said Sean Rodriguez, the Fed's faster payments strategy leader and chair of the Faster Payments Task Force. “In real terms, that means people will not have to wait hours or days to deliver and access their money. Businesses will have enhanced cash management and better information associated with their payments.”

    Fintech Federal Reserve Consumer Finance Payments

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  • OCC Releases Spring 2017 Semiannual Risk Report

    Agency Rule-Making & Guidance

    On July 7, the Office of the Comptroller of the Currency (OCC) announced the release of its Semiannual Risk Perspective for Spring 2017 indicating key risk areas for national banks and federal savings associations. Acting Comptroller of the Currency Keith Noreika pointed out in his remarks that, “[w]hile these are risks that the system faces as a whole, we note that the risks differ from bank to bank based on size, region, and business model. Compliance, governance, and operational risk issues remain leading risk issues for large banks while strategic, credit, and compliance risks remain the leading issues for midsize and community banks.”

    The report details the four top risk areas:

    • Elevated strategic risk—banks are expanding into new products and services as a result of fintech competition. According to the report, this competition is increasing potential risks. The OCC hopes to finish developing a special purpose banking charter for fintech companies soon.
    • Increased compliance risk—banks must comply with anti-money laundering rules and the Bank Secrecy Act in addition to addressing increased cybersecurity challenges and new consumer protection laws.
    • Upswing in credit risk—underwriting standards for commercial and retail loans have been relaxed as banks exhibit greater enthusiasm for risk and attempt to maintain loan market share as competition increases.
    • Rise in operational risk—banks face increasingly complex cyber threats while relying on third-party service providers, which may be targets for hackers.

    The report used data for the 12 months ending December 31, 2016.

    Agency Rule-Making & Guidance OCC Risk Management Consumer Finance Payments Consumer Lending Privacy/Cyber Risk & Data Security Anti-Money Laundering Military Lending Act Compliance Bank Regulatory Vendor Management

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  • Noncash Payment Growth Highlighted in Sixth Federal Reserve Payments Study

    FinTech

    On June 30, the Board of Governors of the Federal Reserve issued its sixth payments study entitled The Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices. The study includes data on business and consumer noncash payments made in the United States in 2015. Among other things, the study details the differences between business and consumer payments in 2015 compared to those from 2000, general-purpose payment card use in 2015, and increases in use of alternative payment methods.

    According to the report, the most popular noncash payment types among consumers were, in descending order: non-prepaid debit cards, general-purpose credit cards, checks, and finally, ACH debit transfers. For businesses, however, ACH credit transfers were the most popular, then checks, general-purpose credit cards, and non-prepaid debit cards. Consumers wrote fewer than half the number of checks in 2015 than they did in 2000 but almost doubled the number of noncash payments that they made. Businesses also cut check-writing by more than half but differed from consumers by more than doubling the number of ACH transfers that they initiated during the same period.

    General-purpose or “network-branded” cards accounted for more than 65 percent of noncash payments in 2015. The data showed that 60 percent of these card accounts carried revolving debt, while 40 percent of accounts were paid in full each month.

    Information on fraudulent payments also was collected and should be available in the third quarter of this year.

    Fintech Digital Commerce Federal Issues Federal Reserve Electronic Fund Transfer ACH Payments Credit Cards

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  • BAFT Announces 2017 Global Payments Symposium; Will Highlight Advances in Payments Innovation, Blockchain, and Artificial Intelligence

    FinTech

    On July 19 and 20, the Bankers Association for Finance and Trade (BAFT) will host its 2017 Global Payments Symposium in New York City. The symposium will help bankers and payments professionals understand the latest innovation trends affecting compliance, payments, blockchain, fintech, cybercrime, and artificial intelligence, among others. BAFT will also discuss methods to integrate innovations into the business lines and how global challenges and best practices impact the U.S.

    Fintech BAFT Blockchain Privacy/Cyber Risk & Data Security Payments

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  • Federal Reserve Announces Updates to Regulation CC Regarding Electronic Checks

    Agency Rule-Making & Guidance

    On May 31, the Board of Governors of the Federal Reserve System (Board) announced final amendments to the check collection and return provisions in Regulation CC, Availability of Funds and Collection of Checks, which implements the Expedited Funds Availability Act of 1987, the Check Clearing for the 21st Century Act of 2003 and the official staff commentary of the regulation. The amendments update Regulation CC “to reflect the evolution of the nation's check collection system from one that is largely paper-based to one that is virtually all electronic.” The Board (i) retained the current same-day settlement rule for paper checks; (ii) applied Regulation CC’s existing check warranties to check that are collected electronically; and (iii) adopted new warranties and indemnities related to checks collected and returned electronically and to electronically-created items.

    In addition to the final rule, the Board also requested comments on proposed language amending Regulation CC's existing liability provisions to include a presumption that a substitute or electronic check was altered instead of forged in the event of a dispute under federal or state law in the absence of evidence such as the original check.  Comments on the proposed amendments are requested within 60 days of publication in the Federal Register.

    Agency Rule-Making & Guidance Payments Federal Reserve Regulation CC

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  • West Virginia Enacts Law Defining "Cryptocurrency" in Context of Money Laundering

    FinTech

    On April 26, West Virginia Governor Jim Justice approved new legislation (H.B 2585) that defines cryptocurrency in the context of money laundering. Specifically, “cryptocurrency” is defined as “digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, and which operate independently of a central bank.” Furthermore, the term “monetary instruments”—traditionally defined, for example, as coin, currency, checks, gift and prepaid credit cards—would now include cryptocurrency. With respect to the anti-money laundering clause, the legislation makes it unlawful to “conduct or attempt to conduct a financial transaction,” which would include cryptocurrency transactions, “involving the proceeds of criminal activity knowing that the property involved in the financial transaction represents the proceeds of, or is derived directly or indirectly from the proceeds of, criminal activity.” H.B. 2585 also outlines penalty structures for violations of the legislation—misdemeanor or felony charges depending on the severity of the crime—and allows for forfeiture or disgorgement of cryptocurrency.

    Fintech Anti-Money Laundering Payments State Issues

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  • CFPB Fines Prepaid Debit Card Company and Payment Processor $13 Million for Preventable Service Breakdown, Claims Consumers Denied Access to Their Own Money

    Courts

    On February 1, the CFPB announced that it had entered a consent order against two companies—a prepaid card company and its payment processor—for failing to conduct adequate testing and preparation before and during a switch to a new payment processing platform in 2015. In addition, the Bureau cited both companies for improper administration of accounts after the switch. The allegations arise out of an approximate three week breakdown in services in October 2015 which, among other things, denied cardholders access to their accounts, delayed the processing of deposits and payments, and also, in some instances, erroneously double posted deposits which falsely inflated account holders’ balances. The consent order also notes that the prepaid card company failed to provide adequate customer service to consumers impacted by the breakdown. The CFPB stated that it received roughly 830 consumer complaints in the weeks following the switch. Based on these and other allegations, the Bureau ordered the two companies to prepare a plan to prevent future service disruptions and pay an estimated $10 million in restitution to harmed consumers as well as a $3 million civil penalty.

    Courts Consumer Finance CFPB Prepaid Cards Payments Payment Processors

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  • Texas Appeals Court Holds Email From: Line to be a Valid Electronic Signature Under State's Uniform Electronic Transactions Act (UETA)

    Courts

    On December 22, in an unpublished decision, a Texas Court of Appeals held that an email exchange constituted an executed contract between two individuals under the state’s enactment of the Uniform Electronic Transactions Act (UETA). Khoury v. Tomlinson, No. 01-16-00006-CV (Tex. App. Dec. 22, 2016). The dispute involved an email sent from Appellant to Appellee, which outlined terms of an agreement to repay investment funds. Appellee responded to the email, stating "We are in agreement," but did not type his name or include a signature block at the end of his message. A jury found that an electronic contract was formed by this exchange, but the trial court granted the Appellee’s motion for judgment notwithstanding the verdict on the basis that the electronic contract violated the state statute of frauds. On appeal, the Appellant invoked the UETA, arguing that the email satisfied the writing requirement of the statute of frauds because it was an electronic record and that the header, which included a “From:” field bearing the Appellee’s name, constituted Appellee’s signature because that field serves the same “authenticating function” as a signature block. The appellate court agreed that the email was an electronic record sufficient to satisfy the writing requirement in the statute of frauds.

    Courts Digital Commerce Electronic Signatures UETA Payments

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  • DOL Releases Second Set of FAQs Addressing Comments Concerning Fiduciary Rule

    Federal Issues

    On January 13, the Department of Labor (DOL) released a second set of frequently asked questions (FAQs) in response to comments from financial services firms and other stakeholders on its recently-released Fiduciary Rule, which redefines a fiduciary investment advisor under the Employee Retirement Income Security Act of 1974. The DOL issued an initial set of 34 answers to FAQs about the Fiduciary Rule back in October, focusing on the rule’s exemptions, such as the “best-interest contract” exemption and the “prohibited-transaction” exemption. The second set of FAQs provides further clarification on the scope of various exemptions regarding investment recommendations, but also includes guidance on topics such as: (i) investment education; (ii) general communications versus fiduciary investment advice; (iii) fees and other compensation; and (iv) platform providers.

    The FAQs further reflect, among other things, that an adviser charging clients a level asset-based fee for providing advice on 401(k) fund offerings may use revenue-sharing payments to offset part or all of that level fee, without running afoul of the fiduciary regulation. The guidance also clarifies that providing educational information to IRA and retirement customers about investment alternatives—such as product features, returns and fees—will not be considered “investment advice” so long as a bank does not make any specific investment recommendations. And, in question 34, the DOL explains that fiduciary status is not triggered by offering to customers an automatic sweep of any uninvested cash from the customer’s account into a short-term investment vehicle on a daily basis.

    Federal Issues Payments Fiduciary Rule Department of Labor

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