SEC Ends Debit Card Interchange Probe Into PayPal

August 7, 2023
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The US Securities and Exchange Commission (SEC) has closed an investigation into interchange fees charged on PayPal debit cards.

The SEC was investigating whether interchange fees paid to the bank that issues PayPal-branded debit cards were consistent with US debit card interchange fee regulations.

The securities agency was also investigating how PayPal reports marketing fees earned from its branded-card programme.

“We have been informed by the SEC that this matter has been formally closed without action,” PayPal wrote in its latest quarterly statement.

PayPal offers PayPal-branded debit cards issued by The Bancorp Bank using the Mastercard network.

According to the report, the SEC was scrutinising PayPal’s compliance with the interchange prong of Regulation II (Reg II) of the Federal Reserve.

Reg II caps debit card interchange fees at $0.21 plus 0.05 percent of the transaction value and a potential $0.01 fraud-prevention adjustment. It also mandates issuers to enable dual routing on debit cards.

Although the regulations do not directly apply to PayPal, they may bear relevance to the fintech’s operations.

For instance, given that PayPal charges merchants $0.49 plus 2.99 percent of the transaction, an increase in interchange fees could bite into its profit margins.

“Any increase in interchange fees, special fees, or assessments for transactions that we pay to the networks or our payment processors could make our pricing less competitive, increase our operating costs, and reduce our operating income, which could materially harm our business, financial condition and results of operations,” the quarterly report says.

At the same time, the fintech also noted that regulatory intervention and a significant drop in interchange and other fees may push down PayPal’s competitive position against traditional card payment providers and put pricing pressure on the firm.

VIXIO PaymentsCompliance reached out to PayPal for further information about the SEC investigation but did not receive a response by the time of publication.

Securities concerns around debit card interchange fees

Although neither the SEC nor PayPal revealed further details of the investigation, a parallel class action lawsuit may provide insights into some potential securities law concerns.

In a class action lawsuit filed in 2021, PayPal investors argued that for years the fintech had downplayed regulations regarding US debit card interchange rates.

In its 2016 annual report, PayPal wrote that in relation to Reg II, “we and our payment card processors have implemented specific business processes for merchants to comply with payment card network operating rules for providing services to merchants.”

In July 2021, PayPal revealed that its compliance with Reg II was subject to the SEC investigation. Following the announcement, PayPal’s share price fell 6.23 percent to $283.

Investors argued that PayPal had violated Reg II and filed false reports about its compliance to keep its stock at an artificially inflated price.

PayPal has now revealed that this matter was closed after the court rejected the plaintiff's second amended complaint in April and the deadline to file an appeal passed.

The court said the plaintiff failed to “plausibly allege that PayPal in fact violated any regulatory obligation” and “cited no support for [its] opinion that PayPal violated Regulation II.”

Additional regulatory actions

Also revealed in PayPal's latest quarterly earnings report is an ongoing investigation by the Consumer Financial Protection Bureau (CFPB).

That investigation concerns Venmo’s unauthorised funds transfers and collections processes, and treatment of consumers who request payments but accidentally designate an unintended recipient.

Additionally, PayPal received a civil investigative demand from the Federal Trade Commission (FTC) in February 2022.

The FTC probe is looking at PayPal’s practices relating to commercial customers that submit charges on behalf of other merchants or sellers, and related activities.

Finally, Germany’s antitrust watchdog is scrutinising PayPal Europe's contractual terms with merchants in Germany prohibiting surcharging and requiring parity presentation of PayPal relative to other payment methods.

PayPal received a notice of an administrative proceeding and a request for information from the German Federal Cartel Office in January 2023.

The company said it is cooperating with the agencies in each investigation.

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