Massie, Raymond 6/7/2019 For Educational Use Only E-Commerce Payment Mechanisms, Practical Law Practice Note 8-500-9416 (2019) E-Commerce Payment Mechanisms by Creighton Meland Jr. and Kevin Jonas, Baker & McKenzie LLP, with Practical Law Commercial Transactions Maintained • USA (National/Federal) A discussion of different schemes and mechanisms in the US for making payments online and the related legal issues that customers, merchants, and financial institutions engaged in online payments could encounter. Contents Internet Payment Schemes Allocation of Risk in Internet Transactions Regulation of Electronic Money Institutions Redemption Rights of Electronic Money Holders Emergence of Mobile Payment Schemes Companies and individuals commonly pay for goods and services over the internet through internet payment mechanisms designed to protect their financial data and prevent fraudulent use of their funds. This Note provides an overview of existing internet payment mechanisms and considers the related legal issues around their use. In particular, this Note looks at: • Available internet payment schemes. • Allocation of risk in internet transactions. worldwide.erau.edu All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University. • Regulation of electronic money institutions. • Emergence of mobile payment systems. Internet Payment Schemes There are currently many online payment systems operating on the internet. Many of these systems primarily aim to facilitate online consumer-to-consumer payment transactions (such as Paypal, Venmo, and Authorize.net). Other mechanisms focus on the business-to-business and consumer-to-business payment markets. These are often referred to as bill payment schemes and many have also developed corresponding electronic bill presentment capabilities to provide comprehensive unified electronic bill presentment and payment solutions. Examples of bill payment schemes include: • MasterCard’s Remote Payment Presentment Service (RPPS). • ePay by Visa. • PayTrust. • MyCheckFree. • Quicken Bill Pay. • Choice Pay. • Xpress Bill Pay. • BBVA Compass. • MSN Bill Pay. Allocation of Risk in Internet Transactions Generally, a merchant assumes the risks of accepting credit or debit cards over the internet and consumers assume only minimal risk under certain specific circumstances, as described below. The rules that apply to the allocation of risk and the parties’ respective liabilities arising from contested internet payment transactions are based on the same rules that apply in the case of face-to-face transactions, namely: • For credit card transactions, the federal Truth in Lending Act (15 U.S.C. §§ 1601-1667f) and Regulation Z (12 C.F.R. §§ 226.1-226.59). • For debit card transactions, the Electronic Fund Transfer Act of 1978 (15 U.S.C. §§ 1693-1693r) and Regulation E (12 C.F.R. §§ 205.1-205.20). These rules primarily address risk and liability between the card issuer and the consumer (that is, a cardholder). Merchant liability is generally covered in the trader’s agreement with the card associations or with its financial institution, or under more general principles of law. With respect to the relationship between a card issuer and its customers making online payments, card issuers generally may not contest a customer’s claim that a transaction was not authorized, because, as is the case with mail order telephone order (MOTO) transactions, the credit card is not presented to the merchant for inspection at the time of initiating the payment transaction. Thus, the consumer is limited in his ability to control fraud. Decades of practice with MOTO transactions have enabled merchants and card issuers to develop sophisticated security procedures and practices to minimize fraud and error losses. Fraud prevention and error loss procedures have not enjoyed the same success in internet transactions as with MOTO transactions. Cyber attacks against merchants are still prevalent. In response to recent cyber crime, legislative efforts have focused on federal and state laws to create new reporting standards for data breaches and strengthen data security and notification requirements for merchants. As such, the allocation of risk with respect to cyber crime in internet transactions is still evolving. For more information on data breach laws, see Practice Note, Breach Notification. There are different rules for credit and debit cards with respect to how much a consumer can be liable for unauthorized transactions: • A consumer is usually only liable for up to $50 in unauthorized credit card charges made before the consumer gives notice of the possible loss, theft, or unauthorized use of the card (15 U.S.C. § 1643(a)). Many card associations and financial institutions have reduced the $50 limit so that a consumer generally has no liability. • A consumer potentially has more liability for the unauthorized use of a debit card. A consumer’s liability is limited to $50 if he gives notice of the unauthorized use within two days of learning of the unauthorized use. However, after the two-day period, this amount can rise to $500. There is also the potential for unlimited liability if the consumer does not report the unauthorized use within 60 days and the unauthorized use continues after this date (the unlimited liability relates to losses incurred after the 60-day reporting period has expired) (12 C.F.R. § 205.6). Based on credit or debit card association rules, agreements between the parties, or other principles of law, under certain circumstances, a card issuer could seek to pass on to the merchant all or part of the liability for unauthorized transactions not otherwise recovered from a consumer. Regulation of Electronic Money Institutions Existing laws that apply to financial institutions at both federal and state levels generally regulate electronic money institutions. These laws are extremely comprehensive and cover all aspects of the electronic money business, especially where the activities fall under umbrella definitions such as financial services, engaging in the business of banking, or acting as a money services business. Entities seeking to engage in the provision of online payment services need to be concerned at the federal level with at least the following: • Whether the entities may be construed to be a financial institution or money services business under the Bank Secrecy Act (12 U.S.C. §§ 1951-1959) and related Treasury Department regulations. • Whether they comply with registration, reporting, and anti-money laundering program implementation requirements. The Bank Secrecy Act was extensively revised and supplemented by the USA PATRIOT Act (Pub. L. No. 107-56, 115 Stat. 272 (2001)). • Compliance with financial privacy requirements under the Gramm-Leach-Bliley Act (Pub. L. No. 106-102, 113 Stat. 1338 (1999)) and applicable federal privacy regulations, which give consumers certain rights to protection of personal information. Some states have supplemented the Gramm-Leach-Bliley Act’s financial privacy provisions, so appropriate state laws must be reviewed for recent changes. Examples of applicable federal privacy regulations include: • 12 C.F.R. Sections 30.1-30.6 (Office of the Comptroller of the Currency); • 12 C.F.R. Sections 1016.1-1016.17 (Consumer Financial Protection Bureau); • 12 C.F.R. Sections 208.1-208.111, 211.1-211.605 and 225.1-225.200 (Federal Reserve System); • 12 C.F.R. Sections 308.1-308.605, Subpart R and 364.100 and 364.101 (Federal Deposit Insurance Corporation); • 12 C.F.R. Sections 568.1-568.5 and 570.1-570.5 (Office of Thrift Supervision); and • • 16 C.F.R. Sections 313.1-313.18 (Federal Trade Commission). Compliance with federal laws applying to the particular payment mechanism used, for example: • the Electronic Fund Transfer Act (electronic fund transfers, such as debit card payments); • Truth in Lending Act (credit card payments and disclosures to consumers); • Fair Credit Reporting Act (credit reporting); and • regulations issued under each of the above. • The Consumer Financial Protection Bureau, which has regulatory and supervisory authority over most federal consumer protection laws. • Other applicable payment laws, such as: • • state versions of the Uniform Commercial Code (UCC) (especially Article 4A addressing payers, payees, and intervening banks), which governs wire transfers and payment orders; • the Uniform Money Services Act (generally covering non-depository financial services providers) and relevant state money transmitter laws; • the National Automated Clearing House Association (NACHA) Operating Rules and Guidelines, which Regulation E and the related Official Staff Commentary treat as legally enforceable; and • the operating rules, by-laws, and standards, as applicable, of credit card associations (such as Visa and MasterCard) and electronic funds transfer networks (such as Plus, Cirrus, Star, and NYCE). Federal and state laws that apply to electronic contracting, including the federal Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. §§ 7001-7006) and applicable state versions of the Uniform Electronic Transactions Act (see Practice Note, Signature Requirements for an Enforceable Contract). This is not a comprehensive list. Entities seeking to provide electronic money services should prepare a thorough caseby-case analysis of applicable federal and state laws and regulations, as well as applicable association or network rules and standards. Redemption Rights of Electronic Money Holders Electronic money refers to money that is exchanged electronically through the internet or computer networks, such as payments made via Paypal. There is no automatic right for electronic money to be redeemed for cash, and whether it may be redeemed depends on the terms on which it was issued. Emergence of Mobile Payment Schemes The presence of payment schemes for mobile devices is rapidly expanding. Mobile devices can be used as internet browsers, with the functionality of internet payment schemes. However, application-based mobile payment schemes are becoming more popular. Mobile device payment schemes use various underlying mechanisms to transact payment, including, for example: • Using the mobile device to initiate a credit payment. • Creating a direct transfer to another individual or business through an automated clearing house. • Debiting a stored value card by scanning a QR code. • Contacting the mobile carrier directly to perform clearing and settlement. Both bank and non-bank entities (for example, Google, Amazon, and Paypal) operate in the mobile payment market. The laws and regulations governing internet payment schemes, which vary based on the underlying payment method, are also applicable to mobile payment schemes. Several agencies share supervisory responsibilities for these activities, including the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Association, and the Consumer Financial Protection Bureau. The Federal Trade Commission and the Federal Communications Commission also have some regulatory jurisdiction. As mobile technology evolves, lawmakers and self-regulatory groups will likely consider enacting laws and rules for mobile devices in order to close any gaps in the current regime, protect consumers, and preserve the security of banking and payments systems (see, for example, Legal Update, FTC Issues Mobile Privacy and Security Publications). Massie, Raymond 6/7/2019 For Educational Use Only General Contract Clauses: Payment Terms, Practical Law Standard Clauses... General Contract Clauses: Payment Terms by Practical Law Commercial Transactions Maintained • USA (National/Federal) Standard Clauses providing for the payment of goods or services in a commercial transaction. This resource also includes standard language addressing late payments (including interest charges), invoice disputes, and setoff rights. These Standard Clauses have integrated notes with important explanations and drafting and negotiating tips. General Contract Clauses: Payment Terms 1. Payment Terms. 1.1 Payment. [The Buyer shall pay all [amounts/fees] due and owing under this Agreement [on or before the Effective Date/within [NUMBER] [days/Business Days] from the date of the Effective Date]. All payments hereunder shall be in [US dollars] and made by [check or electronic transfer].] OR [The Buyer shall pay the [amounts/fees] due and owing under this Agreement in equal [monthly/quarterly] installments during the Term commencing [NUMBER] [days/Business Days] from the Effective Date. Each installment shall be invoiced [monthly/quarterly] [in advance/in arrears] and shall be due and payable in full within [NUMBER] [days/Business Days] from the [date/Buyer’s receipt] of such invoice[, except for any amounts disputed by Buyer in good faith]. All payments hereunder shall be in [US dollars] and made by [check or electronic transfer].] OR [The Buyer shall pay [[NUMBER]% of the [amounts/fees] due and owing under this Agreement/$[NUMBER]] [on or before the Effective Date/within [NUMBER] [days/Business Days] from the Effective Date]. The remaining [amounts/fees] due shall be invoiced in equal installments [monthly/quarterly] [in advance/in arrears] and shall be due and payable in full within [NUMBER] [days/Business Days] from the [date/Buyer’s receipt] of such invoice[, except for any amounts disputed by Buyer in good faith]. All payments hereunder shall be in [US dollars] and made by [check or electronic transfer].] OR © 2019 Thomson Reuters. No claim to original U.S. Government Works. 1 Massie, Raymond 6/7/2019 For Educational Use Only General Contract Clauses: Payment Terms, Practical Law Standard Clauses... [The Seller shall issue an invoice to the Buyer for all [amounts/fees] due and owing under this Agreement [on or any time/within [NUMBER] [days/Business Days]] after the completion of delivery of the [Products/Services]. The Buyer shall pay all invoiced [amounts/fees] due to the Seller [on receipt/within [NUMBER] [days/Business Days] from the [date/Buyer’s receipt]] of such invoice[, except for any amounts disputed by the Buyer in good faith]. All payments hereunder shall be in [US dollars] and made by [check or electronic transfer].] 1.2 Invoice Disputes. The Buyer shall notify the Seller in writing of any dispute with any invoice (along with [substantiating documentation/a reasonably detailed description of the dispute]) within [NUMBER] [days/Business Days] from the [date/Buyer’s receipt] of such invoice. Invoices for which no such timely notification is received shall be deemed accepted by the Buyer as true and correct, and the Buyer shall pay all amounts due under such invoices within the period set forth in Section [X]. The parties shall seek to resolve all such disputes expeditiously and in good faith [in accordance with the dispute resolution provisions set forth in Section [Y]]. Notwithstanding anything to the contrary, each Party shall continue performing its obligations under this Agreement during any such dispute, including, without limitation, payment by the Buyer of all undisputed [amounts/fees] due and payable under Section [X]. 1.3 Late Payments. Except for invoiced payments that the Buyer has successfully disputed, all late payments shall bear interest at the lesser of the rate of [NUMBER]% per month or the highest rate permissible under applicable law, calculated daily and compounded monthly. [The Buyer shall also reimburse Seller for all [reasonable] costs incurred in collecting any late payments, including, without limitation, attorneys’ fees.] [In addition to all other remedies available under this Agreement or at law (which the Seller does not waive by the exercise of any rights hereunder), the Seller shall be entitled to suspend the [provision of any Services/delivery of any Products] if the Buyer fails to pay any [undisputed] [amounts/fees] when due hereunder and such failure continues for [NUMBER] days following written notice thereof.] 1.4 [No] Setoff. [Notwithstanding anything to the contrary in this Agreement, and without prejudice to any other right it may have, the Buyer reserves the right at any time to setoff any [amounts/fees] it owes to the Seller under this Agreement against any amount payable by the Seller to the Buyer.] OR [The Buyer shall not withhold payment of any [amounts/fees] due and payable under this Agreement by reason of any setoff of any claim or dispute with the Seller, whether relating to the Seller’s breach, bankruptcy or otherwise.] © 2019 Thomson Reuters. No claim to original U.S. Government Works. 2
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