Playing Recurring Transaction Roulette
Last week, I examined how new Visa and MasterCard regulations on debit card interchange rates may result in a reduction of fees for direct marketers who accept debit card payments.
Though most direct marketers are applauding the new rates, those making extensive use of recurring payments are growing increasingly wary. Their concern originates with the possibility that the Visa and MasterCard associations would begin reporting whether consumers were using credit or debit cards on a per-transaction basis.
Historically, the card associations have reported certain transaction attributes to payment processors, but they never passed along a card's debit or credit status. Though the distinction now can result in lower interchange rates for many merchants accepting debit cards, the new information puts federal regulators in a better position to arbitrarily impeach companies that use recurring credit card charges to receive consumer payments. Considering the widespread use of debit cards and the associated dollar volume, the implications are alarming.
The concern centers on a relatively old Federal Reserve Board rule known as Regulation E, which is the government's interpretation of a provision in the Electronic Funds Transfer Act of 1978. The regulation states: "A preauthorized electronic fund transfer from a consumer's account may be authorized only in writing, and a copy of such authorization shall be provided to the consumer when made."
Recurring (or installment) payments on a debit card can easily be interpreted as preauthorizations to charge a consumer's demand deposit (checking) account. Will they be? Regulation E was passed with a safe harbor for bona fide mistakes. This provision took into account that a merchant in a card-not-present transaction might not know whether the card was a debit card. Even the consumer might not realize this at the time of the sale. So for years direct merchants have processed debit cards in the same manner as credit cards.
Many questions, few answers. As of Aug. 1, the card associations began reporting some card-type data to payment processors. If processors are capable of reporting these card types back to their recurring-payment merchants, then according to Regulation E these merchants are obligated to obtain "written" authorization for further installments.
Will these merchants be compelled to retrieve written permission from the consumer for ensuing installments? What constitutes written permission? How will this affect customer service costs and cancellation rates?
Complicating matters further is that not all payment processors are willing or capable of effectively reporting this information back to their merchant. For instance, processors using a flat-discount pricing scheme (which masks reduced interchange fees, as described in last week's article) may be under no legal or contractual obligation to report this information to merchants.
Concerned merchants are keeping watch on the card associations. In the future it might be possible for Visa and MasterCard to provide card-type information immediately within an authorization response - or simply make debit card listings available to merchants or their processors. In these cases, all direct merchants technically would be obligated to obtain written authorization, even on the first transaction.
Merchants also are keeping an eye on the government. When it was passed in 1978, EFTA clearly did not anticipate the wide proliferation of debit cards. Moreover, there was no way for legislators to foresee the widespread use of "check cards" that use the Visa and MasterCard networks.
Will the government take into consideration the efficacy of a regulation that does not compensate for the business and technological advances of the past quarter-century, or will agencies like the Federal Trade Commission use it as a tool to keep direct marketers in line? Only time will tell.
Electronic signatures. Fortunately, some laws work to direct marketers' advantage. Though laws exist for electronic fund transfers, laws also exist covering electronic signatures. In particular, DMers are looking at how more modern laws like E-SIGN can mitigate the risks of Regulation E.
E-SIGN refers to the Electronic Signature in Global and National Commerce Act, which took effect Oct. 1, 2000, giving an electronic signature the same legal validity as a physical signature when certain conditions are met. Though the act does not define how online transactions must take place, it serves three main purposes:
· Providing a uniform, nationwide legal standard for electronic signatures.
· Giving consumers the freedom to choose the technology most appropriate for their particular needs.
· Encouraging technological innovation by not granting a legal preference to any one type of technology.
Though E-SIGN took effect three years ago, issues remain regarding its compatibility with state laws in many states. These issues could take years to play out in the courts, as will specific issues relating to electronic signatures under broad federal and state legislation.
In all likelihood, merchants won't have to fight any of these battles alone, though. Regulation E has become an issue with ramifications well beyond direct marketing. Under the card associations' new reporting options, Regulation E might also apply, for example, to utilities that offer fixed monthly "credit card" payment plans.
Resolution soon. Issues surrounding debit card transactions should begin to resolve themselves in the upcoming months. The government and the card associations will make their strategies known. In the interim, there are logical actions recurring card payment merchants can take. Be diligent in keeping up with debit card regulatory developments.
Your payment processor should provide you updates regularly. If a large part of your revenue is derived from recurring payments, you may wish to seek legal advice.
Merchants that are members of professional organizations like the Direct Marketing Association should contact that organization's governmental affairs office. These organizations can be helpful. You also will be underscoring for them just how important these issues are.