Popular and Evolving Payments Business Models - Venable LLP

Popular and Evolving Payments Business Models
Payments Law Virtual Bootcamp – June 10, 2021

   Evan Minsberg - Moderator   Andy Arculin
   Partner, Venable LLP        Partner, Venable LLP

                               Dan Chandre
                               Senior VP, Strategic Development, MindBody

                               Nicole Ibbotson
                               Senior VP, General Counsel & Chief Privacy Officer, InComm Financial Services

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Disclaimer: This presentation is intended as a summary of the issues presented and is not intended to provide legal
advice. It is provided for the general information of the attendees. Legal counsel and advice should be sought for
any specific questions and before taking any action in reliance on the information presented.

                                                                                                    © 2021 / Slide 2

Agenda

• B2C Distribution
• Marketplaces
• Buy Now, Pay Later
• Surcharging

                       © 2021 / Slide 3

B2C Distribution

B2C Distribution

• Includes any commercial, nonprofit, or government need to
  distribute funds to individuals

• Examples: Lottery winnings, security deposits, tax refunds,
  tuition refunds, grants and other award money, relief funds, etc.

• Challenge: For companies, nonprofits, and government agencies,
  how to quickly and easily distribute relatively small amounts to
  numerous individuals?

                                                         © 2021 / Slide 5

B2C Distribution – Payments Model
Third-party payments company that coordinates the distribution of funds through various
payment methods on behalf of the payor entity.

Variations:
• Payments company may receive funds and distribute directly to recipients
• Payments company may direct payor to send funds to a bank or other third party and
  coordinate their distribution

Payment methods:
• ACH / Direct Deposit
• Check
• Prepaid Card
• Others

                                                                         © 2021 / Slide 6

B2C Distribution – Challenges

Money Transmission
• Federal Bank Secrecy Act / Anti-Money Laundering
  Requirements
• State Money Transmission Laws (49 States and the District of
  Columbia)

Bank Partner Arrangements
• Agreements on sponsorship, issuing, and account structures for
  funds distribution
• Division of regulatory and other responsibilities

                                                       © 2021 / Slide 7

B2C Distribution – Challenges (Continued)

Privacy and Data Security
•   GLBA
•   CCPA and other state laws
•   PCI DSS

Additional Regulatory Concerns
•   EFTA / Regulation E
•   UDAAP / UDAP
•   Escheatment

                                            © 2021 / Slide 8

Marketplaces

Marketplaces
What is a marketplace (generally)?

• An ecommerce platform where consumer or commercial customers can
  purchase goods and services from multiple unaffiliated sellers

• Marketplace platforms exist in different verticals, including clothing, sneakers,
  electronics, cars, vacation rentals, health and fitness, among many others

                                                                     © 2021 / Slide 10

Marketplaces – Merchant vs. Marketplace
                        Merchant                                               Marketplace

 •   Sells the goods or services to the customer           •   Provides an ecommerce platform that connects
                                                               customers and third-party sellers

 •   Third parties involved in performing or providing     •   Third parties provide goods or services under
     goods or services do so as service providers to the       agreements with customers entered into on the
     Merchant                                                  Marketplace’s platform

 •   Sets the applicable sale, return, refund, and other   •   May set uniform terms and conditions for sales on
     terms and conditions                                      the platform or may permit third-party sellers to
                                                               set terms and conditions

 •   Processes payments under its own processing           •   May be involved in payment processing or may
     relationship as the merchant                              engage third-party payments company

                                                                                                  © 2021 / Slide 11

Marketplaces – Payment Processing
        Referral / ISO Model                Marketplace Model (Visa Only)                  Payment Facilitator

•   Marketplace does not process       •     Marketplace processes payments       •   Marketplace processes payments
    payments – instead, each seller on       as a “Marketplace”                       through its own merchant account
    the platform enters into a         •     This designation exists only for         on behalf of sub-merchants
    relationship with a third-party          Visa purposes
    processor
•   Captures transaction information •       Must display its own name and        •   Must receive settlement funds for
    at checkout and provides to third-       brand more prominently than              distribution to sellers or arrange
    party processor                          sellers                                  for distribution to sellers
                                       •     Must manage payments for sales       •   Is responsible for seller activities,
                                             and refunds and must receive             including chargebacks and
                                             settlement funds for distribution        violations of Network rules
                                             to sellers

•   Third-party processor manages       •    Must be financially liable for and   •   Must ensure a sub-merchant
    authorization, clearance, and            resolve disputes between                 enters into a direct relationship
    settlement – distributes funds to        customers and sellers by                 with the acquiring bank upon
    sellers based on Marketplace’s           providing either (i) a decision          passing $1MM in Visa or
    instructions                             binding both parties; or (ii) a          Mastercard sales volume
                                             money-back guarantee funded by
                                             the Marketplace
                                                                                                    © 2021 / Slide 12

Marketplaces – AML and Underwriting
• AML requirements may be statutory under the Bank Secrecy Act or contractual
  under agreements with bank partners and card networks

• AML requirements include:
  • Verifying the identity of the customer and, if a legal entity, their beneficial
    owners
  • Performing ongoing due diligence on customers
  • Monitoring transactions for suspicious activity

• Payments companies also need to underwrite their merchant customers for
  non-AML risks, including credit, compliance, reputational, and other risks

                                                                       © 2021 / Slide 13

Buy Now, Pay Later

BNPL
•   Retail-based form of consumer credit, typically extended in the amount of a specific purchase

•   Generally offered in ecommerce transactions, often as a payment option at a particular merchant’s
    checkout screen

•   The BNPL company pays the merchant with the proceeds of the credit and then has a direct credit
    relationship with the buyer

•   Maximum purchase, interest rates, repayment, and other terms and conditions vary

•   Retailers may effectively subsidize the cost of credit imposed on their customers by paying fees to
    the BNPL company for each financed purchase

                                                                                       © 2021 / Slide 15

BNPL – Models
Retail Installment Sales Agreement (RISA)
  • Credit sale contract between the seller and the buyer under which the seller
    permits the purchase price to be paid off in installments, typically subject to
    a finance charge
  • RISAs are often sold (immediately) to a third-party financing company

Installment Loan
  • A loan from a finance company directly to the buyer with the proceeds paid
     to the seller

                                                                     © 2021 / Slide 16

BNPL – Compliance Requirements

• State Licenses and Registrations

• Consumer Financial Protection Laws
  • TILA
  • ECOA
  • UDAP/UDAAP

• Bank Partner Arrangements

                                       © 2021 / Slide 17

Surcharging

Surcharging
As recently as 2015, credit card surcharging was prohibited in 10 states covering roughly 40% of the
U.S. population.

•   In California, Florida, Kansas, and Texas, surcharge prohibitions have been held
    unconstitutional and unenforceable
•   In Maine and New York, surcharge prohibitions have effectively been recharacterized as
    disclosure requirements
•   In Oklahoma, the state AG stated in a public opinion letter that the state’s surcharge prohibition
    is likely unconstitutional and unenforceable
•   On June 9, 2021, the Colorado legislature submitted a bill to the governor that would legalize
    surcharging

If the Colorado bill is passed, only Connecticut and Massachusetts would still prohibit
surcharging.

                                                                                     © 2021 / Slide 19

Questions?

Andy Arculin            Dan Chandre                         Nicole Ibbotson                Evan Minsberg
Partner, Venable        Senior VP, Strategic Development,   Senior VP, General Counsel &   Partner, Venable
202.344.4588            MindBody                            Chief Privacy Officer,         212.370.6202
raarculin@Venable.com                                       InComm Financial Service       erminsberg@Venable.com

                                                                                                © 2021 / Slide 20

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