An Industry in Flux: Navigating Payment Regulations & Compliance

Exploring Payments Regulations & Compliance: A Conversation With NMI CSO Kate Hampton

Greg Myers: Welcome back to NMI Payment Playbook. This is the third episode in our series on trends affecting payment providers. Today, we’ll be discussing regulations and surcharging.

Our special guest is NMI Chief Strategy Officer Kate Hampton. Kate, would you mind telling us about yourself and your role at NMI?

Kate Hampton: As NMI’s CSO, I oversee strategy, corporate development and M&A. I’ve been in payments for 18 years now, specifically focusing on payments acceptance. Because of that, I’ve seen my fair share of regulations being formed and reformed.

I’ve worked at companies like Accelerated Payment Technologies, which were pioneers in integrated payments, Global Payments, and Entrata, a SaaS platform for property managers. At Entrata, we built out a PayFac-powered, industry-leading payment solution. Now, I lead strategy at NMI. 

Myers: If you step back from payments in fintech and really think about what we do in this industry, it’s all about commerce and moving money. It’s a huge responsibility, and our goal as an industry and industry participants is to keep everything safe and secure. In order to do that, we obviously have regulations that span across banking, payments and fintech. How do you view this ecosystem?

Hampton: The way I think of it, there are two main categories or buckets to consider. The first one includes regulations that protect system participants, such as consumers and merchants. These regulations may include data protection laws, fees for consumer products and services, credit card fees and surcharging. There are regulations around fair lending practices and even an AI bill of rights, which has four protections that are currently being proposed.

The second bucket includes regulations that protect the system. In payments and transmitting money, specifically, you always have to know where the money is coming from, who it’s going to and what it’s for. To that end, we have regulations around anti-money laundering, Know Your Customer (KYC) and PCI compliance, among others.

Regulatory Differences Between the EU & United States

Myers: Let’s chat about some of the recent regulatory changes and how they affect payments, like the PSD2 (payment services directive) in Europe. It seems like EU regulations are stricter than in other areas. Could you talk about that a bit? Do you see any of those stricter regulations coming to the United States?

Hampton: The European market has typically set the tone on a number of initiatives when it comes to payments and the financial sector in general. These tend to outline the rules of engagement of their participants and are often viewed as being stricter than the U.S. market, as you mentioned.

What tends to happen is the U.S. eventually adopts many of these initiatives, but tailors them to the U.S. market and environment, which is somewhat different from the European one. That said, I think it’s helpful to break down some of these initiatives, like PSD2, into their core objectives.

PSD2 is about increasing competition in the payments industry by simplifying the rules of engagement. The European Union realized that many of the rules and laws were too complex for anyone to navigate, which meant they had become a barrier to entry. Their complexity stifled competition and innovation, so the EU decided to try and improve competition by lowering that barrier of entry. In my opinion, objectively, it’s a good thing. But, the question for the U.S. market specifically is how do we go about doing the same thing? That remains to be seen.

Myers: It seems like open banking is somewhat similar, in that it has stricter regulations in the EU compared to the U.S. What are your thoughts on open banking?

Hampton: So, I think there’s a similar principle here. If you break open banking down to its core objective, it’s all about putting the consumer in control of their data. From there, consumers can allow (or not allow) their data to be used in certain ways and decide what they want to get out of it. I think it’s a worthy objective.

I do think open banking will make its way to the U.S. in some form; it just depends on what ends up being appropriate for the U.S. market and environment. We know it will be slightly different, but I do think it will eventually make its way here in some form or another.

The Credit Card Competition Act Explained

Myers: Let’s shift focus to the Credit Card Competition Act (CCCA). It hasn’t passed in the U.S. yet, but many believe that it will. What do you think the potential implications of this are?

Hampton: So, to level set, the CCCA intends to lower the cost of card acceptance by increasing competition outside of the Visa/Mastercard duopoly. The conversation stems from the U.S. interchange rates being some of the highest in the world. The intended outcome is to lower the cost of acceptance for merchants.

However, what makes this a very complex topic is that regulations have historically been somewhat mixed, depending on which side of the fence you sit on. The CCCA has a number of potential implications. For instance, one is the degradation of rewards and benefits for card holders. That one is quoted very often because interchange is known to fund the rewards that we get on our rewards cards.

Another implication could be new consumer fees. The argument I hear often is that if you want to keep rewards but lower interchange rates, then consumers might have to start paying an annual fee. Otherwise, the issuers will have to supplement that income somehow.

Then the other implication I keep hearing is that the CCCA could give a leg up to Discover or American Express credit cards. Those two are notably not present in the CCCA proposal today; the only card brands that are included in its scope are Visa and Mastercard.

Myers: What is NMI’s responsibility when it comes to complying with these regulations?

Hampton: So, NMI is a payment acceptance enablement platform, which means that our responsibility is to comply with the applicable regulations. One of our value propositions is that we own the technical side of compliance. 

There are regulations that are non-technical in nature, and they sit in our customers’ court to comply with. We have no visibility into or control over those aspects of compliance. But, to the extent that there is a technical side to the regulation, we do want to hear from our partners how we can best support them.

AI Rules & Regulations

Myers: In an earlier episode, we spoke about AI and how it’s being used across the industry. What are your thoughts about AI from a regulatory perspective?

Hampton: AI is in its very early stages. Because of that, not much regulation exists today, specifically in the financial sector. Understandably, there’s a desire to outline some of those rules of engagement and define how and where AI can be used. But that is something that is currently in discussion at various levels.

Now, the financial sector has made tremendous progress in introducing and enforcing regulations pertaining to consumer protections and fair lending practices. The worry now is that with AI, the spirit of these regulations can be circumvented or even undone, such as in cases of potentially perpetuating or creating biases that would be essentially undetectable to a human observer.

Myers: Why is transparency so important?

Hampton: Our ecosystem is incredibly complex, with so many perspectives from so many different participants. When we’re talking about regulations, especially in the payments world, transparency is pretty much the only thing that is going to ensure that we are seeing all of those perspectives. As I mentioned before, there is a very real possibility of conversations becoming one-sided or siloed.

The Pros & Cons of Surcharging

Myers: Can you explain what surcharging means and how it affects how consumers pay?

Hampton: Surcharging is a fee that the merchant can charge their customers (the card holders) to recoup some of the cost of credit card processing. It’s technically a convenience fee that operates under slightly different rules. As an industry, we’ve been talking about surcharging for quite some time because it raises fundamental questions with no easy answers.

For instance, how do we ensure this practice is fair to the consumer? How do we make sure we’re not introducing anti-competitive practices? How do we ensure the practice achieves its intended objectives without any unintended consequences? 

To complicate matters further, surcharging, specifically, is regulated on several different levels by the card brands. If you pull up card brand guides, they will have certain rules of behavior that merchants must adhere to. That said, you also have surcharging on the state level with some states not allowing it at all.

Key Takeaways

Myers: To close, can you give a brief summary of the key takeaways from our discussion?

Hampton: The regulatory environment is constantly evolving. As new technologies and innovations come along, such as AI, it’s our responsibility to keep appraised of these developments and revisit regulations from different angles as they arise.

More importantly, I would say that a key takeaway here is that it is our responsibility to engage in conversation and provide perspectives as subject matter experts. New regulations are constantly being introduced, and their effectiveness is driven by the form they take.

Tune in to the full episode.