Cybertheft Crackdown My Butt

I've read several stories of late flaunting some high profile cases where it seemed law enforcement and judges were finally cracking down on cybercrimes and cybertheft. I thought we finally made the turn and were prosecuting the perpetrators (hackers) of these crimes the way they should have been prosecuted all along. Then I read this today: http://www.bankinfosecurity.com/rbs-worldpay-sentence-too-light-a-5058/op-1

In a nutshell, the mastermind of the RBS WorldPay hack, where $9 million was pilfered from U.S. bank accounts, was sentenced to 30 months in prison and ordered to pay $89,000 in restitutions. Let's see, $89,000+30 months for $9 million, that comes out to a $297,000 per month. That's a pretty good payoff. I understand that he had accomplices' so he did not pocket the entire $9 million; but many wannabe hackers reading this will see it as $9 million for 30 months. This sends a strong message: Cybercrime pays!

Until sentences are large enough to discourage the crime, nothing will change: More money will need to be spent for cyber security -- more hacking -- more money -- more hacking -- and so on…

Durbin Debit-Rate Cuts Failed to Help Consumers: Analysts

I think by now everyone knows my stance on Dodd-Frank. File this under "color me surprised": http://www.americanbanker.com/issues/177_84/fed-durbin-debit-rate-cuts-1048944-1.html

Debit Card Fees - Simply another front in the ongoing class war

I just read this commentary in the Washington Post: In cutting debit card fees, Fed should use Congress’s standard. I could not disagree more. I have not got a clue where the author is getting his numbers? My guess is that he is calculating the $7B vs. $14B based the campaign marketing numbers used to sell the bill to congress and the public. There are flaws in this type of thinking and I'll get into that below, however, this did get me thinking of a related but bigger problem.

I'm sure by now everyone reading this has heard about the class warfare arguments in politics. Whether you believe the "rich" should pay more or not is one issue but to me, the bigger issue is the class warfare campaign. This is a slippery slope. Take for instance the Dodd-Frank Wall Street Reform and Consumer Protection Act. This is another battle of the same war being fought under the guise of "consumer protection."

I've briefly touched on the Dodd-Frank Act before. I think that this entire bill is a big can of worms that many proponents don't understand or choose to blindly ignore. Some of the provisions of the act that has generated buzz in the payments space are the restrictions it places on debit card transaction fees. Merchants have been told they will receive huge cuts in fees due to this bill. The NRF jumped on this bandwagon early in the process. I have not fully researched their involvement, but I would not be surprised if they provided parts to create this wagon.

There is one key component that the NRF and other merchant advocates blindly missed - the title of the act. Note the last two words just before Act: "Consumer Protection!" Not "Merchant Protection." Definitely not "Bank Protection." While today having the word "bank" in your name is synonymous to "rich", who's to say that tomorrow "merchant" won't be as offensive as "bank" to politicians? Currently the Dodd-Frank Act does not specify that merchants, or consumers for that matter, will receive one dime from the restrictions as there are many hands in the fee structure pie (not to mention various carved out exceptions). I can easily see a scenario where politicians realize that consumers are not reaping the rewards they were so generously promised so out pops "[insert name(s) here] Main Street Reform and Consumer Protection Act." Since politicians are so good at adding language to fix prior failures, one can expect a generous heaping of price controls for merchants to swallow, all under the same guise of "consumer protection."

As I said, this is a slippery slope. I've warned of side effect of price controls before this Dodd-Frank Act was implemented; we are seeing them now (see my previous post). One of the latest is that Visa and MasterCard have increased credit card fees: New Visa, MasterCard rates take effect. While not publicly stated, I have to imagine that this is to compensate for the loss of debit card fees. Since credit card usage rates are still higher in the US than debit card usage, this will mean a wash or an increase in fees even if the merchant does receive the debit card "rewards."

Just to clarify, I am not anti-merchant, and I am not pro-bank fees; instead I am very pro-merchant. I am against the government controlling prices for any industry. I feel allowing the government to dictate the price of any product or service is dangerous. Yes, there is precedence for government dictated price controls and some might argue this to be a good thing, and throw out some examples. But I would argue that these price controls have caused as much or more damage and problems than they fixed -- just to someone else (the politically out of favor class at the time).

Until next time...

House Democrats Ask Justice Department to Probe Debit Fees

This is an interesting and quick read in Bloomberg Businessweek: House Democrats Ask Justice Department to Probe Debit Fees

If you don't have the time and need a Reader's Digest version: Lawmakers are crying because banks are making them look like incompetent boobs. That's about it.

Swipe Fees Revisited

I hate to say I told you so but:

• With a $1.67 Average Ticket, Vending Processor USAT Predicts Pain from Durbin Rate - A vending-machine payments processor highly dependent on debit cards is bracing for a 247% increase in its average cost for accepting big-bank debit cards as a result of new Visa Inc. and MasterCard Inc. interchange schedules set to take effect Saturday...
• Durbin Casts a Wary Eye on Rising Small-Ticket Debit Interchange - U.S. Sen. Richard Durbin on Tuesday said he is aware that new Visa and MasterCard interchange schedules will cause some merchants to pay much more in interchange when a consumer uses a debit card from a big bank to pay for small purchases...
• New BofA Fee May Hasten Debit's Demise - Bank of America Corp., the largest bank by assets, plans to start charging its checking customers $5 per month, or $60 annually, if they use their debit cards to make purchases...
• Durbin Attacks BofA's Decision - Sen. Richard Durbin, D-Ill., author of the debit-interchange regulation, attacked BofA's decision, charging the money-center bank is "trying to find new ways to pad their profits by sticking it to its customers."...
• National Retail Federation also denounced BofA’s Decision - The National Retail Federation also denounced BofA’s debit card fee.
• Bill Would Repeal Debit Fee Cap - ...Although the bill is expected to face resistance, Chaffetz and Owens believe it will gain momentum as consumers begin to see the consequences of the new price cap...

Oh, by the way, while I agree with most National Retail Federation stances, I believe they were dead wrong on this one. I have to imagine that someone over there is smarter than I and could have predicted side effects like these -- I guess not!  Asking the government to step in and regulate costs and fees for an industry cannot ever end well. If someone arrives on your door and says "I'm with the government and I'm here to help", RUN! But in this case, the NRF invited them in with open arms.

My take on Swipe Fees

There is an ongoing debate in the restaurant and retail industries about swipe fees for debit cards. There are bills being written and debated in congress that address swipe fees and I see trade associations from both industries cheering on these new regulations. My advice:

Quit crying for government regulations and

start fixing the problem yourself!

There is no regulation that I'm aware of that says a business must accept plastic -- credit or debit. If merchants think the card brands are charging too much, organize something that would get your point across. Have a "no plastic day" or "no plastic week". If enough merchants participated, this would send a strong message to the card brands and with little risk of unforeseen consequences. To me, this debit swipe fee trivial, a much bigger issue are the different rates for reward cards vs. non-reward cards and not knowing the fee up front, during the authorization event. It seems strange to me that the reward card rates are rarely, if at all mentioned by these same trade groups and the reward rates are much more significant than the debit rates.

It’s a cliché of mediation, uttered by every mediator trying to push two unhappy parties to reach agreement on a resolution, that "a good settlement is one where both sides are unhappy." The problem is when politicians create regulations, having both sides unhappy does not buy votes so one side or the other is going to be ecstatic, while the other side is going to get screwed. In this environment things will change because both sides need to be profitable and this is where unforeseen consequences enter the picture. Many times (I would say most times when it comes to government regulations), these unforeseen consequences can be worse than the original problem that was being addressed. I strongly believe that it much better to keep politicians out than to suffer the unforeseen consequences that will ensue.

Stand Up and Be Heard

While not directly "payments related," this is something that affects all industries. Don't let the bad guys win. Stand up and let your voice be heard. In November, vote out the corruption -- from both parties.

If your politicians believe they are smarted than the people they supposedly represent - then stand up and let them know how naive¹ they really are. If your politicians believe processes defined in the Constitution are only there as barriers for the unimaginative - then voice your concern. If your politicians believe ramming things through by any means, including bribes, kick backs, favors, arm twisting, threats of prosecution - then vote them out in November. If your politicians believe that the national debit is someone else's problem so spend while the spending is good - then definitely let them know now and vote them out in November.

Lastly, if you think that government is the solution for all problems and the free stuff politicians are promising to provide is truly free, then stay at home on election day - because nothing is truly free. As the famous quote goes: "Government is not the solution to our problem; government is the problem."

¹ Ongoing theme from a previous thread; but this time I am mean the www.dictionary.com definition.

What went wrong with First Data?

There is an interesting article in TheDeal.com, "What went wrong with First Data?"

Under the challenges that First Data faces, one BIG challenge that was not addressed in the article is that First Data definitely falls under the current administrations definition of "Too big to fail." While absolute numbers aren't published, an estimated 50-65% of all US credit and debit card transactions go through a First Data host somewhere along the line. To me, power hungry politicians stepping in and taking over First Data in their "challenging time" makes all the other challenges moot.

Anyone else have thoughts on this topic -- even just to tell me I'm a paranoid schizophrenic?