A View from Washington

A View from Washington

A View from Washington: Federal Regulations & State Legislation

Scott Talbott

Scott Talbott

Scott Talbott, J.D., C.P.A., is SVP of government affairs at the Electronic Transactions Association. He is an experienced policy advocate and communicator with two decades of experience in Washington.

More Info

During any given year in Washington, Congress is in session for a relatively short period of time — only about 150 days on average. Consequently, for any legislation to advance, both the administration and Congress need to move it very quickly.

As 2017 winds down, we have not seen many bills move over the goal line. Other than tax reform, the prospects for payments industry legislation are dimming. However, that doesn't mean the policy arena is quiet. There are two areas where we see much activity — federal regulators and in the state capitols.

Regulatory changes

The President has or will soon appoint new leadership for the federal regulators that supervise financial institutions and their fintech partners. These bodies also write and enforce the regulation that governs the products, management and strategy of financial institutions and their fintech partners. These include the Office of the Comptroller of the Currency (OCC, which oversees national banks), the Federal Deposit Insurance Corporation (FDIC, which oversees deposits at banks), the Consumer Financial Protection Bureau (CFPB, which oversees consumer protections), the Federal Reserve (which oversees banks and monetary policy) and more. These regulators can encourage economic development or deter it all together.

Finding the right balance of regulations is essential to a strong economy. Below are two current examples of how these regulations shape the payments industry:

  • Office of the Comptroller of the Currency (OCC) Fintech Charter
    The OCC has proposed a new charter for fintech companies. A federal charter would allow a startup company to avoid the costly and time-consuming process of getting a license in each of the 50 states. One charter would also allow a startup to have a nationwide presence, allowing the benefits of its new product or service to be available to all Americans.

  • Death of Operation Choke Point (OCP)
    One way to encourage economic development is to remove barriers. Attorney General Jeff Sessions has confirmed that OCP is no longer a policy initiative for the Department of Justice. OCP was a program that threatened payments companies to 'choke-off' the ability of politically disfavored merchants to access the payments system. With the death of OCP, payments companies can resume working with all merchants.

State-level activity

We've seen a dramatic increase in interest by individual states aimed at the payments industry. There are three major themes that shape the approach of the states:

  1. Imposing new taxes or expanding the tax base;
  2. Applying existing laws to new fintech-inspired developments;
  3. And altering the way the payments industry does business.

The activity of the states has the real possibility of affecting the bottom line and seamless operation of the payments system.

Taxes: Many states are strapped for cash, as state budgets are stretched thin. As a result, a number of states are looking to impose new taxes or expand the base, which means applying existing taxes in a new way. The tax is focused on money transition, whether it is traditional (such as sending payments home) or modern innovations (like person-to-person exchanges).

  1. One state that is expanding its tax base is Washington, where it is applying an existing tax in a novel way to payment processors. Earlier this year, the Department of Revenue issued an Excise Tax Advisory (ETA) declaring that merchants' discounts were taxable income to processors.

  2. Many states proposed imposing new taxes or increasing existing tax rates throughout 2017, including Georgia, Louisiana, Iowa and Oklahoma. Each of these states considered proposals to increase the state's existing tax on money transfers.

Modernizing fintech: Many states are eyeing the deployment of new products and services and are examining ways to regulate them. Unfortunately, many times the only tools in their toolbox are existing laws, which can create new challenges as many of the existing laws were written before the new products and services existed. A number of states' policymakers spent time during 2017 trying to apply existing laws to developments in the payments space or working to try and modernize their laws.

  1. Georgia introduced a bill that was designed to make it easier for drivers in ridesharing services to pay taxes. However, an early draft of the bill would have made payment processors liable for services provided by ridesharing drivers because they process the payments. The language was ultimately removed in a later version of the bill, but the fact remains that as states attempt to modernize regulations to address fintech and other innovations, there is a risk of unintended consequences, which can affect any number of industries.

  2. One positive area is that six banking regulators in New England states are working to create a compact to allow a fintech company chartered in each of the six states to receive a lighter regulatory approach. The creation of a sandbox or greenhouse is designed to reduce the burdens existing regulations pose to startups. This collective and collaborative approach creates a positive environment to encouraging growth and innovation.

The role of the industry: The final way that states are affecting the payments industry is by attempting to change the roles that they play. In Massachusetts, the Governor signed a bill into law that would ask payments processors to calculate, collect and remit a merchant's sales tax liability on a daily basis. Currently, merchants in Massachusetts perform these steps on a monthly basis. This change asks the payments industry to step in between merchants and the state, which raises many concerns.

A comprehensive look at the forces that shape policy extends beyond Capitol Hill and includes federal regulators as well as state policy makers. Each of these entities is a thread that comprises the tapestry of public policy — for the remainder of this year and next.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Scott

Scott Talbott

Scott Talbott, J.D., C.P.A., is SVP of government affairs at the Electronic Transactions Association. He is an experienced policy advocate and communicator with two decades of experience in Washington. Talbott has represented the largest financial services firms in the country before Congress and federal regulators, most notably during the fiscal crisis. He is also an expert on communication, appearing regularly on national and international media. He has been called the voice of the financial services industry and one of the most recognizable faces in the industry.

Share this story via email or social networks