As consumer payments have continued to migrate toward electronic applications, the Payment Cards Center has studied the payment choices consumers make and how these choices can determine the protections available to them. This subject has arisen either directly or tangentially in a variety of PCC-sponsored conferences and in discussions with industry leaders and policymakers.
For example, the recent study of the prepaid card market made clear the contrast between the regulatory uncertainties in the prepaid market and the regulatory environment for credit cards, where consumer protections are addressed under Regulation Z, and for debit cards, where similar protections are addressed under Regulation E. As consumer protection issues continued to arise during Center-sponsored activities, several questions were raised, including: How do consumer protections differ across payment card applications? Do consumers understand these differences? Can current consumer protection regulation be extended to newer payment innovations? Is the traditional focus on disclosure and transparency in most federal consumer protection regulation sufficient for today’s increasingly complex web of payment alternatives and pricing structures?
Earlier this year, the Center invited Professor Mark Budnitz, Georgia State University School of Law, to lead a workshop discussing his views on current consumer payment protections. Professor Budnitz, the author of several books and a number of articles on consumer payments, described the ways in which the breadth of payment products available to consumers and the disparate laws governing these products may lead to consumer confusion.
To make his case, Budnitz highlighted several developments in payments and described the potential of each to confound consumers. One example focused on the increased use of new electronic check technology and the passage of the Check Clearing for the 21st Century Act (Check 21). Budnitz noted that checks can now be cleared and settled either in their original paper form or in one of several electronic forms. Different laws with varying consumer-protection provisions will be triggered by this payment decision. For example, a transaction initiated with a paper check can be processed as a paper check, converted to an electronic funds transfer, or truncated in the form of a substitute check. Depending on which of those avenues the holder of the check chooses, the transaction is governed, respectively, by the Uniform Commercial Code (UCC) and Regulation CC (Reg CC), Regulation E and the rules of the National Automated Clearing House Association (NACHA), or by three different laws: the UCC, Reg CC, and Check 21. In his summation, Budnitz asserted that “this patchwork creates an information asymmetry between banks and consumers, leading consumers to make ill-informed decisions about which payment product to use for a given transaction.”
At the end of the day, Budnitz advocated uniform consumer-protection standards across payment products to address disclosure, error, and fraud protections. He argued that these protections should be based in federal law, but at the same time, he asserted that nonconflicting consumer protections legislated by states should also be supported. For more detail regarding the discussion from this workshop, see the Center’s discussion paper titled "Payment System Regulation and How It Causes Consumer Confusion."
Concurrently, PCC Industry Specialist Mark Furletti and Stephen Smith, of the Bank’s Legal Department, began a detailed study of the protections available to consumers in dealing with three payments problems: error resolution, third-party fraud, and merchant disputes. The analysis focused on four types of electronic payments: credit cards, debit cards, ACH e-checks, and prepaid cards. The authors examined protections afforded by federal and state laws, the applicable rules of networks and associations, and finally individual bank practices. While the review of regulatory protections is in itself instructive, an especially important contribution of this research lies in the knowledge gained from dozens of interviews with private-sector networks and many individual bankers. In these conversations, the authors were able to document the role that market-based forces play in complementing and, often, working to harmonize the disparate body of federal or state regulation. In their work, the authors describe a consumer protection environment for payments that is complex, layered, and generally fragmented.
This research is presented in a series of three papers. The first paper focuses on protection related to the use of relatively mature credit and debit card instruments, and the second deals with newer applications associated with ACH e-checks and prepaid cards. The third paper, which is forthcoming, considers the policy implications associated with the analysis of consumer protections and suggests areas for future inquiry.
Most recently, the Center held a one-day symposium, entitled “Federal Consumer Protection Regulation: Disclosures and Beyond,” to consider these and other related issues. This event was structured as a two-part roundtable discussion intended to explore the role of disclosure regulation in providing effective consumer protections in the credit card industry. The second part of the discussion examined supplementary or alternative protection options, such as advisory letters, enforcement actions, and the role of market discipline. The symposium greatly benefited from the variety of expert perspectives provided by industry practitioners, legal scholars, economists, regulators, and consumer advocates. As might be expected in such a complex arena, consensus on many issues was an elusive goal. Nevertheless, a number of important insights and critical issues were effectively identified and debated. Highlights from the day’s discussion will be documented in a forthcoming Payment Cards Center publication.