1Visa Confidential

Card Regulation; Pricing and Security

Paul Russinoff

State Government Relations

2Washington, D.C. Climate Visa Confidential

Interchange Fees, Defined

Acquirers Issuers

Interchange represents a transfer price between the Issuing and Acquiring Members involved in a transaction

Acquirers pay Issuers for payment transactions Issuers pay Acquirers for ATM transactions Interchange flows “in reverse” for credits and chargebacks

3Washington, D.C. Climate Visa Confidential

CardholderCardholder MerchantMerchant

IssuerIssuer AcquirerAcquirer

Acquirer Submits Acquirer Submits Transaction to Visa - $100Transaction to Visa - $100

Visa Pays Visa Pays Acquirer $98.25Acquirer $98.25

Issuer Pays Visa Issuer Pays Visa $98.25 ($100 - $98.25 ($100 - $1.75 IRF)$1.75 IRF)

Visa Submits Transaction Visa Submits Transaction to Issuer - $100to Issuer - $100

The Flow of Interchange

VisaVisa

Merchant Submits $100 Transaction

Merchant Paid $97.80 ($100 – $2.20 Discount)

Issuer Bills Cardholder $100

11

22

3344

55 66

77

88

CardholderPays Issuer

4Washington, D.C. Climate Visa Confidential

Why are we here today?

• Member financial institutions are increasingly invested in interchange as a means of driving revenue from base of accounts

• Merchants are increasingly sensitive to interchange costs, both in rate and in total amount, as consumers increase their use of cards for payment

• Consumers may not be aware of interchange, but have been the primary beneficiaries of improved product features and functionality funded by interchange

• Media, analysts and regulators are engaged

5Washington, D.C. Climate Visa Confidential

2007 State “Interchange” Legisaltion

Type of Bill (28 Bills) States – Bill Number (14 States)

State Sales Tax Exemption/Prohibition

FL HB 14, SB 1724

IN SB 500

KS SB 348

NE LB 174

NY AB 1020

WA SB 5884, 5885

Surcharge TX HB 1236

Rate Cap MT LC 1580

TN HB 1019, SB 850

WA SB 5065

Disclosure

AL 788

KS HB 350

KY HB 250

NE LB 174

NY A 501, A 3956, A 7775, SB 5035

TX SB 1322

Miscellaneous MA, HD 2572, HD 2995

TN SJR 361

WA SJM 8020

Resolutions WA SJM 8020

TN SJR 361

NCSL (ongoing)

6Washington, D.C. Climate Visa Confidential

State Sales Tax Prohibition

• FL, IN, KS, NE, NY, NV, WA

• Prohibiting “merchant discount” or “interchange fees” on the state sales and use tax portions of a transaction.

• Allows merchants to deduct “merchant discount” fees from sales and use taxes owed the state.

7Washington, D.C. Climate Visa Confidential

Surcharge

• Currently 10 States Prohibit Surcharging. CA, CO, CONN, FL, KS, ME, MA, NY, OK, TX

• TX surcharge bill modified statute to allow a surcharge on transactions under 10 dollars.

• HI surcharge bill allowed surcharges with disclosure.

8Washington, D.C. Climate Visa Confidential

Rate Cap

• WA capped “interchange” at 1.5% of the overall transaction.

• TN capped merchant discount at .75 %

• MT probable merchant discount rate cap for small businesses.

9Washington, D.C. Climate Visa Confidential

Disclosure

• AL, KS, KY, NE, NY, TX

• Require access to complete rules of card association/issuer and actual notification of any and every rule change.

• Complete schedule of interchange credit and debit card rates and any other fees.

• Failure to provide rules, or rule change results in no liability for a “charge back” and AG and civil suit against acquiring bank.

• NY - Disclose “interchange” rates to NY bank regulator.

• KY – Disclose “interchange” rates to card recipients (among other things), pertains to issuing banks.

• TX, must allow a merchant to offer a cash discount.

10Washington, D.C. Climate Visa Confidential

Universal Default

• Consumer is charged the default rate by a card issuer when consumer is in default on a separate account. Specific to the card industry with adjustable interest rates reflecting risk based pricing.

• Federal “creditor practices” hearings.

• 2007 Federal Legislation H 1461 (Udall), H 2146 (Ellison), S 1309 (Tester)

• 2007 State Legislation: CA (SB 968); FL (HB 421, SB 748); IL (HB 292, SB 171); NV, (AB 215, SB 302); NY, (A 5325, A 7291, S 2969); TN (HB 1483), VA (SB 104)

• NV Law and NY Veto

11Washington, D.C. Climate Visa Confidential

Merchant Focused Data Security

• Payment Card Industry (PCI) standards

• Minnesota – • Prohibit retention of full magnetic stripe data and pin numbers 48 hours

after authorization

• Private right of action for financial institutions, sue for cost of breach notice, card replacement and associated fraud loss.

• California –• Amends current California data breach notice law, contains Gramm-

Leach-Bliley Act exemption.

• Prohibit retention of magnetic stripe data, CVV numbers or pin numbers, or communicating these without encryption or redaction.

• New security breach reporting requirements to include the name of the breached entity.

• Financial institution can sue for cost of breach notice and card replacement.

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Merchant Focused Data Security

• Oregon –• Data breach notification and security freeze law also includes detailed

“security program” requirements which track Federal GLB requirements.

• Technical requirements of program to address key controls, systems, networks and software designs.

• Policies for employees access

• Data destruction

• System tests

• Flexible for small business requires policy “appropriate to size and nature of the business and sensitivity of the data collected” (like GLB).