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Consumer Banking and Payments Law: 1.4.3.1 Introduction

Merchants often rely on payment processors to handle their payments and give them access to particular payment systems. Payment processors take the relevant information that merchants obtain from consumers (that is, bank account and routing number or credit or debit card number) and submit it in the appropriate form through a financial institution in order to process credit or debit card payments, ACH payments, remotely created checks, or payment orders.

Consumer Banking and Payments Law: 1.4.3.2 The Role of Financial Institutions in Monitoring Payment Processors

While many legitimate merchants use payment processors to manage their payments, putting a third party in between the merchant and the bank that processes the payment can obscure the identity of the merchant or hide any red flags. For that reason, bank regulators have issued guidances about special obligations particular to financial institutions that have payment processor customers.36

Consumer Banking and Payments Law: 1.4.4.2 The ACH Payment System

The ACH (“automated clearinghouse system”) is the system through which direct deposits, many bill payments, and other electronic payments are made. The system is run under rules established by NACHA, a private entity, and payments are cleared through one of two clearinghouses, one run by The Clearing House and the other by the Federal Reserve’s Retail Payments Office.82

Consumer Banking and Payments Law: 1.5.1 Overview

Federal banking law or regulations may preempt the application of state law to products or services offered by banks and credit unions. The law of preemption is summarized only briefly here as it relates to deposit taking and payments activities. It is addressed in detail in two other treatises in this series:

Consumer Banking and Payments Law: 1.5.9 NBA and OCC Preemption of Visitorial Activities

Some states and cities have considered using their own contracting powers to impose conditions on the financial institutions with which they do business. While in general state and local governments can set the terms of their own contracts and choose what institutions receive those contracts, preemption issues could arise if the contracting process is viewed as a broader attempt to regulate national banks or federal savings associations.

Consumer Banking and Payments Law: 1.5.10.2.1 Introduction

Courts have generally held that the National Bank Act and the OCC regulations do not preempt a challenge to a bank’s deception regarding overdraft fees. They have generally reached the same conclusion regarding a bank’s manipulation of the order of posting charges and deposits in order to maximize overdraft fees, especially if deception is involved.201 Courts often contrast these claims with claims that challenge the amount of the fee or the bank’s right to impose it.

Consumer Banking and Payments Law: 1.5.11.1 Gift Card Inactivity Fees and Expiration Dates

Courts have split over challenges to gift card expiration dates and inactivity fees, some finding the claims preempted,237 others rejecting preemption challenges.238 Some of these decisions deal with the question of whether state law is preempted as to a non-bank entity that sells a gift card that has some connection with a bank—an issue mooted by the Dodd-Frank Act amendments that limit preemption to banks themselves, not to agents of banks.239 Mo

Consumer Banking and Payments Law: 1.5.13 Federal Credit Union Act Preemption of State Law

The National Credit Union Administration (NCUA) has been less aggressive than the OCC and the OTS in preempting state laws. Nonetheless, the Federal Credit Union Act (FCUA) and NCUA regulations under it preempt some state laws governing deposit accounts. The Dodd-Frank Act did not revise the preemption standard governing the FCUA, but the same Barnett Bank preemption standard should apply to state laws that apply to federal credit unions.259