It’s June 2008, Do You Know Where Your BINs Are?

by Bryan Derman on June 10, 2008

in Bryan Derman, Financial Regulators

Bryan Derman

We were intrigued by this week’s announcement that the FDIC had issued enforcement actions against two banks (and reached a settlement with a third bank) related to their sponsorship of credit card programs promoted by CompuCredit.

These actions follow a lawsuit by the Federal Trade Commission against a subsidiary of CompuCredit alleging deceptive practices in the subprime lending market, and seek restitution for the consumers involved totaling $200 million.

The restitution claims are very high in relation to the capital of the two banks involved.  While the banks have vowed to fight the charges — and probably have contractual recourse to CompuCredit should they lose — the actions are clearly designed to send a message that regulators will be holding banks closely accountable for the actions of certain customers.

CompuCredit has subsequently released letters indicating that FDIC officials previously approved disclosure materials for the programs involved, but the subprime market and the political climate have changed markedly since then.  The banks must fight these charges aggressively, if only because the proposed penalties are so severe, but I can’t remember any situation where banks have ultimately come out the winner in these kinds of arguments with regulators.   Banks will clearly need to take a far greater interest in what marketing partners are doing with their charters and licenses.

In fact, we wonder how this new focus on the activities of third parties might affect some other bank businesses:

  • Open-loop prepaid cards – This dynamic market is being driven by the marketing prowess of a set of entrepreneurial non-banks that depend on the support of FDIC-supervised institutions.  The fee structures on prepaid cards have been a favorite target of consumer advocates for years, and the addition of small credit lines to these prepaid cards is this year’s hot trend and may invite further scrutiny.  A senior executive of a leading sponsoring bank gave us the “right” answer when he said, “The Terms and Conditions and disclosures are ours, and we take them very seriously”.  Hopefully all banks have been taking this issue as seriously.
  • Merchant acquiring ISOs – For decades now, banks have depended on a variety of Independent Sales Organizations to market their payment card acceptance services to smaller merchants and vendors.  While the legal and regulatory protections afforded small businesses are far less stringent than consumer protection laws, we can’t help but wonder what undiscovered issues may exist in agreements between merchants and some ISOs.  Acquirers underwrite their merchants in order to control the financial risk they may bring the bank, but how often and carefully do they review the contracts that these merchants sign, particularly with ISOs that operate under so-called “Rent-a-BIN” arrangements?  Perhaps we’ll find out.

I would not be surprised to see MasterCard and Visa begin to take a more active interest in this topic and perhaps tighten the rules under which banks are allowed to bring non-bank players into those networks.  At minimum, sponsoring banks will need to determine whether they are being adequately compensated for the new level of risk they are assuming, not to mention the compliance costs that heightened FDIC oversight brings.

2 Responses to “It’s June 2008, Do You Know Where Your BINs Are?”

  1. Bryan, great post. This is the first time I think I’ve seen “BIN rental” kinds of concerns affecting issuers. We’ve had similar issues from time to time for years on the merchant acquiring side of the business!

  2. Bryan, my experience is that issuers have all the necessary tools in their contracts to monitor their marketing partners’ activities, and do so to some extent. What may be changing is the increasing use by regulators of the unfair and deceptive practices provisions of the FTC Act to bring something akin to the “investment suitability” requirements in the SEC Act into marketing of certain bank-sponsored products. Barney Frank claims he does not want a formal suitability requirement in bank consumer protection regulation, but the FTC Act can be used to the same effect.

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