A View from Washington: State Policymakers Take Aim at Payments

A View from Washington: State Policymakers Take Aim at Payments

A View from Washington: State Policymakers Take Aim at Payments

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.

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While most of the political attention is focused on policymaking in the nation's capital, payments companies should not ignore policymakers at the state level. In fact, as federal lawmakers in D.C. spend an increasing amount of time on the 2020 elections and less on moving meaningful legislation, state policymakers have stepped up their activities.

Policymaking is a double-edged sword, sometimes encouraging innovation, and at other times, stifling it. Below is an update on the state policymaking for the payments industry — for better or for worse.

Sandboxes for startups

The lifeblood of change for the payments industry is new entrants: startup companies who come to life in a garage (or other humble space) with an idea that will make the world a better place — and then bring it to market. State policymakers should create a positive policy environment to encourage this type of innovation and creative thinking. Many states, such as Arizona, have already done so by creating regulatory sandboxes to accomplish this business climate. A sandbox, or incubator, creates a simpler path for startups to ease into the regulatory requirements as they mature. It avoids stifling a startup with regulatory requirements before it has a chance to help shape the modern market.

Privacy

A major topic in both state capitols and around kitchen tables across the country is privacy. With data-rich companies finding their way through novel and complex privacy issues and consumers demanding increasing degrees of transparency and accountability, state policymakers are weighing in to restrict data use and protect consumers.

Data is a powerful tool for good — powering more seamless payments, stronger security, sophisticated fraud prevention tools, advanced underwriting and better products — but it also can be a valuable target for cyber thieves and is subject to missteps by corporate players.

In just a few months of 2019, we've seen a dramatic increase in state legislative proposals to impose new privacy protections and regulations for consumers and businesses. California and New York, the largest states in the country, have been the most active and far-reaching. California passed a landmark privacy bill last year, and new proposals continue to be introduced. New York has begun to pursue its own consumer privacy framework. Other state legislatures, such as New Jersey, Hawaii and Illinois, have introduced privacy bills as well.

Privacy policy intersects with an important tenant of the payments industry — fighting fraud. The twin public policy goals of privacy protection and fraud prevention must coexist. And the payments industry is on the front lines of identifying, reducing and preventing fraud, with data playing an important role in that battle.

According to one analysis, payments processors will spend $10 billion on advanced fraud detection and prevention by 2023, more than any other industry. These tools are powered by technological advancements like machine learning, biometrics, geolocation tools and artificial intelligence. They are critically important in the fight against increasingly sophisticated criminals. To add to the threat, cyber thieves never rest. As they build a 10-foot ladder, the payments industry must build an 11-foot wall.

With this in mind, the payments industry works with state policymakers to allow for payments technology companies to continue to do what they do to fight fraud while still protecting consumers' privacy. The two public policy goals — protecting consumers from fraud and protecting consumers' privacy — can and must work together to strengthen our modern payments system.

According to one analysis, payments processors will spend $10 billion on advanced fraud detection and prevention by 2023, more than any other industry. (source: Juniper Research)

Taxes

State policymakers are now looking at the payments industry for two tax purposes. These initiatives are exploring the modernization of sales tax collection and seeking to close revenue gaps.

The U.S. Supreme Court recognized the internet-based economy and modernized sales tax collection through its Wayfair decision, which struck down the decades-old requirement that retailers only collect sales tax in states where they had a physical presence. This decision created a vacuum as states, modern payments companies and retailers work to create an internet-based system of state sales tax collection. Many of the proposals by policymakers in this area will help modernize the system. Some ideas, however, pose a threat to it.

One such idea is 'real-time' sales tax collection. This proposed legislation asks payments processors to adopt the new roles of calculating, collecting and remitting the sales tax portion of a purchase on a daily basis — in real time — to state tax authorities on behalf of their merchants. Additionally, if implemented, it would leave us with a two-tiered sales tax system, as merchants would still use the existing reporting system for sales tax collection on purchases made with cash or check.

Opponents argue that this proposal would cost billions in compliance for payments companies and merchants, resulting in higher prices for consumers — all with no tangible gain to the state. We must work to modernize the sales tax collections system in a way that benefits all parties.

Money transmitters

Another trend in 2019 involves proposals by state policymakers to increase taxes and fees on money transmitters. Money transmitter licenses are essential to digital commerce and financial technology. Services like peer-to-peer payment apps that allow for wire transfers are favored among consumers because they have expanded the accessibility and functionality of digital payments to millions of people, many of them underserved. Most of the services are provided at little or no cost to consumers, enabling them to send each other money and even make purchases at local businesses with comfort and security.

The introduction of new taxes and fees on these licenses threaten to make these services inaccessible and unaffordable, stifle innovation and potentially create economic roadblocks to the development of new fintech and payments innovation.

Whether it is fighting fraud, protecting privacy or proposing new tax regimes, the payments industry must remain active with state lawmakers. This will make for more supportive policy environments that encourage innovation by all sizes of participants in the industry — as well as accessibility to consumers and merchants.

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

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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.

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