By Patti Murphy
ProScribes Inc.
With government scrutiny of financial services intensifying and prospects of new regulatory oversight looming, talk of industry self-policing has assumed an added sense of urgency. But what is self-policing? How does it work? And can it work in merchant acquiring?
"Self-policing is something anybody can do," said Mark Dunn of Field Guide Enterprises LLC. People can craft best practices, for example, and hope that everyone plays by those voluntary rules. Enforcement is different. "When you start talking about policing others, that's where it really gets dicey," he added.
During a recent interview, attorney Adam Atlas said, "Generally speaking, it's a good idea to have some self-regulation, but there are pitfalls. For example, you would want to be careful about barriers to entry." Licensing, for instance, could create barriers, he noted.
Today, anyone with the wherewithal and gumption to sell merchant services can find an ISO to work with and have a go at it, including individuals of questionable character. Anyone who has spent time on GS Online's MLS Forum has read about some of these.
"What would you do?" asked CCGUY in a recent post. "Salesperson from XYZ ... walks into a merchant location ... tells merchant that they have been redlined by XYZ ... that their account has been taken over by XYZ company and if [they] do not sign these [contract] papers [they] will not be processing in 24 hours. ... I am so sick of sales reps doing this to merchants."
A series of posts regarding "erroneous" charges assessed merchants using terminals that have not been confirmed as compliant with the Payment Card Industry Data Security Standard, as well as new tax reporting requirements, and the associated fee schedules some ISOs have instituted in response, seem to have fueled the debate about the need for policing.
Industry consultant Paul Martaus offered this potential scenario: a retailer provides the ISO its federal tax ID number, as required, but someone misplaces the form, and the retailer gets hit with a monthly noncompliance fee. "Where's the burden of proof?" he asked. "Stuff like this happens."
Only a handful of professions have established self-policing mechanisms. The most obvious include doctors, lawyers, accountants and securities dealers.
The Financial Industry Regulatory Authority (FINRA) serves as a watchdog over investment firms and brokers. It has come down hard on those deemed acting in bad faith. In May 2011, for example, FINRA filed formal proceedings against a brokerage house (David Lerner Associates Inc.) accused of selling shares in illiquid real estate investment trusts to unsophisticated and elderly clients. And in June, the watchdog agency levied a $600,000 fine against Northern Trust Securities Inc. for failing to properly oversee retail sales of collateralized securities; the problem was rooted in a faulty reporting system at Northern Trust, the agency said.
FINRA also supports an arbitration process for disgruntled investors. All told, FINRA oversees more than 4,500 brokerage firms and more than 630,000 brokers. It accomplishes this with a staff of about 3,000 working from headquarters in Washington, D.C., and 20 regional offices. Brokers pay annual registration fees and fees to be fingerprinted by FINRA, and brokerage firms pay annual membership fees, which together generate about $75 million in annual revenue.
FINRA also offers extensive educational resources for investors online and offline. Since 2003, FINRA has reported spending at least $50 million on investor educational initiatives.
Professional certification is a process undertaken in many lines of business. A professional certification or designation recognizes an individual has met certain requirements (including passing grades on standardized exams) that vouch for his or her professional credibility.
The Association for Financial Professionals, a Bethesda, Md.-based association of corporate treasury professionals, has been administering a certification program since 1986. About 2,500 treasury and cash managers are registered annually, based on results of a "rigorous" exam, according to the AFP.
To qualify for the Certified Treasury Professional (CTP) exam, an applicant needs two years' full-time experience in a corporate treasurer's office or finance shop; one year's experience is sufficient for applicants with graduate degrees in business or finance. CTPs must also agree to abide by a professional code of ethics published by the AFP.
NACHA - The Electronic Payments Association administers what it calls the Accredited ACH Professional (AAP) program. More than 4,000 professionals (primarily bankers) have earned the AAP designation since the first exam was given in 1993, according to NACHA.
Here's how NACHA describes the designation: "An AAP is an individual who has a comprehensive knowledge of all areas of ACH, a deep understanding of and experience in one or more specific ACH subjects, and a broad knowledge of concepts that relate to the payments system as a whole." An AAP is someone "who has taken the extra step to become an expert in the field."
Certified Fraud Examiner (CFE) is a globally recognized designation that "sets the standard for excellence in the fight against fraud," according to the Association of Certified Fraud Examiners, which administers the 22-year-old program.
A professional development association with international reach, the ACFE offers extensive study tools and other educational resources in addition to administering exams and issuing the CFE credential. The CFE exam tests knowledge and expertise in four areas: fraudulent financial transactions, legal elements of fraud, investigation methods and fraud deterrence.
Merchant acquiring is regulated by virtue of the industry's involvement of banks; ISOs and MLSs, after all, are agents of banks. Additionally, the Federal Trade Commission has direct jurisdiction over ISOs, merchant level salespeople (MLSs), processors and others in cases of unfair and deceptive business practices involving consumer loans, debt collection and telemarketing sales.
Historically, however, there's never been much focus from Washington on merchant acquiring. But that changed a few years ago when revenue-hungry lawmakers and the Internal Revenue Service decided to go after merchants for under-reporting sales, and the IRS tasked merchant acquirers, processors and ISOs with helping to keep the agency abreast of sales tallies by reporting merchants' card transaction totals.
More recently, statements from the Federal Reserve Board and the Consumer Financial Protection Bureau have put ISOs, MLSs and acquirers on notice that they are very much in the regulatory cross hairs.
The Federal Reserve has just voted on rules for implementing the Durbin Amendment to the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The Durbin Amendment put the Fed in the unenviable position of establishing price controls on debit interchange.
The Fed's initial proposal, capping debit interchange at 12 cents per transaction, elicited over 11,000 comment letters, the Fed said.
By the Fed's own reckoning, the proposal amounted to a 70 percent reduction in the prevailing debit interchange average of 44 cents. A last-ditch effort by some members of Congress to stall implementation of the Durbin Amendment failed in June, and on June 29, the Fed raised the cap to 21 cents, plus 5 basis points per transaction for fraud losses. (For more details, see this issue's news story, "Federal Reserve sets debit interchange at 21 cents," July 11, 2011, issue 11:07:01.)
Also, July 21 is the official first day of business for the Consumer Financial Protection Bureau created by the Dodd-Frank Act to ensure that both banks and nonbank providers of financial services abide by federal consumer financial protection laws.
The CFPB has been one of the most controversial components of the Dodd-Frank Act, because of questions about the bureau's acting chief, Elizabeth Warren, and efforts by House Republicans to rein in the CFPB's authority. In June, the CFPB identified six categories of nonbank financial services providers that potentially could fall under its regulatory umbrella.
Included were firms providing money transmitting, check cashing and related activities, as well as prepaid card companies.
"Consumers deserve the peace of mind that financial companies - both banks and nonbanks - are following the rules," said Warren, whose official title is Special Advisor to the Secretary of the Treasury on the CFPB."
The CFPB will be able to examine companies that have never been subject to federal oversight to ensure that no one is gaining an unfair advantage by breaking the law. This will ultimately create fair competition, better product offerings and more transparent markets for consumers."
Although ISOs and MLSs do not deal with consumers directly, merchants, especially small town mom-and-pop shops, can be very vocal, as the ongoing debate over interchange has shown. "They carry a lot of political clout," Atlas said.
One likely reason retailers have such clout is longevity. The National Association of Convenience Stores, the Washington-based group that coined the phrase "swipe fee" and helped push the Durbin Amendment through Congress, celebrates its 50th anniversary this year.
Thousands of merchants are dues-paying members. Eight years after moving to Washington and staffing up, The Electronic Transactions Association is a newcomer by comparison. About 500 companies are ETA members.
Unlike the NACS, which spends significant time lobbying Congress, the ETA is primarily focused on education and professional stewardship. The Certified Payments Professional (CPP) designation is a voluntary program launched in 2011 by the ETA.
Passing the CPP exam attests to an individual's skills and knowledge involving the sale and distribution of electronic payment products to merchants. Candidates for the exam are required to have at least one year of industry experience.
"We tapped all available resources, from a wide range of industry experts to certification program specialists in order to ensure that those who earn the CPP credential are truly qualified to receive the designation," said ETA Chief Executive Officer Carla Balakgie.
On its website, the ETA points to several benefits that can be expected from the CPP, including that it, "Demonstrates the ability to self-regulate." ETA staffers are quick to note, however, that they not angling to police the industry.
"The Certified Payments Professional program is not an attempt by ETA at industry self-regulation," said Rori Ferensic, the ETA's Director of Education and Professional Development.
"In any industry, a professional certification program validates that a practitioner in that field has been tested and demonstrated a certain level of knowledge, skills and abilities." Ferensic added that the ETA's goal is "that the CPP designation signify competent practitioners and provide merchants with a way to identify sales representatives who are knowledgeable about the work they do and committed to their profession."
News of the CPP program has unleashed a torrent of industry chatter, including on the MLS Forum.
"My only question is, will the ETA do enough advertising and merchant informing to create a value to this program?" wrote forum member CLEARENT. "Until the merchant sees the value they have a very high hill to climb."
Many forum members also complained about the cost: $325 for ETA members; $425 for nonmembers. "I see this program gaining about zero traction at the quoted price levels," wrote MTY MSI.
"I still think this is a good start, but without some type of mandatory registration, licensing, etc., for all entities selling acquiring services, this really won't change much," posted SCAINE. "The unethical ISOs will continue unabated while the ethical folks get certified."
But mandatory registration would demand major investments of time, money and resources, Dunn pointed out. "It would require a grievance process, as well as policing authority. That could get pretty messy."
A spokesman for the ETA said, "It's not something we have the capacity to do. It would require a much larger organization."
Licensing presents similar obstacles, Atlas noted. "You'd want to be sure that any licensing regimen was administered by a variety of interested parties," he said - not just the ETA or the card companies.
In the end it seems the best defense for the industry against outside regulation may just be a good offense, and not letting a few bad apples sully the industry's reputation.
Atlas pointed out that there are always good and bad people in every line of business. And while the CPP may not rid the industry of dishonest folks, he is hoping it will provide "a valuable tool for the salesperson who wants to learn more and be better at what they do."
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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