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The New Firearms Merchant Category Code Legislation Impacts CUs

If your credit union issues credit cards, you should be aware of the new California law requiring merchant category codes for firearms retailers and how the payment card network is responding.  Similarly, if your credit union offers peer-to-peer (P2P) services to consumers and businesses, and those services expressly prohibit transactions related to firearms, it should consider the potential reputational risk associated with the disclosures for your P2P services.

The International Organization for Standardization (ISO) is an international nongovernmental group that develops global standards for a variety of industries, including payment card network processors.  For example, the ISO sets the merchant category codes (MCC) used by payment processors such as Visa®, Mastercard®, American Express® and Discover®.  An MCC is a four-digit category code that classifies the type of business a retailer operates.

On September 9, 2022, the ISO introduced a new MCC for firearms and ammunition retailers. Since then, several states have introduced legislation that would either require, prohibit, or restrict the implementation of this new MCC.  California passed legislation requiring use of this MCC, but other states such as Florida and Texas now prohibit its use.

California’s New Law
California recently passed AB 1587 which adds a new division to the California Financial Code relating to financial transactions (Division 26, Sections 110000-110002).

Effective July 1, 2024, payment card networks will be required to make available to merchants processing transactions (merchant acquirers) for firearms dealers or ammunition vendors (firearms merchants) licensed in California the MCC for firearms and ammunition businesses established by the ISO on September 9, 2022.

By May 1, 2025, the merchant acquirer will be required to assign the MCC to the firearms merchant.

The law gives the California Attorney General enforcement authority and creates a civil penalty of $10,000 the courts can impose for each violation.

How Payment Card Networks Are Responding
Since certain states now mandate different, and sometimes opposite, requirements on card payment processors relating to adoption of the MCC for firearms merchants, those companies are now holding off on implementing the MCC in their processes.

Mastercard and Visa have publicly stated that lawmakers appear to misunderstand the purpose and effect of the MCC which is solely to identify the business category of the retailer and does not provide any additional information related to any given transaction processed through the network.  These processors go on to opine that the inconsistency in the various state laws affects the ability of the MCC to be applied uniformly and defeats the purpose of the international standards.

It remains to be seen what position these card payment processors will take as AB 1587’s deadlines approach.

Remaining Neutral: Review Your P2P Terms and Conditions
The opinions expressed by the card payment processors highlight that advocates for and against this issue are motivated by partisan politics related to gun control which is a seriously contested and divisive topic.  A zealous advocate for this, or any other, contested topic, could read any disclosure for a third-party service offered by the credit union and interpret it as a credit union policy in support of, or against, their chosen platform when it may simply be a term required by a third-party service provider.  This raises the concern for the reputational risk associated with the appearance that the credit union is taking sides.

Credit unions generally have disclosures appropriately prohibiting transactions associated with illegal activity. Payment processors have similar prohibitions, as do P2P platforms such as PayPal, Venmo and Zelle.  However, these P2P platforms may also expressly prohibit the use of their service to transact “payments related to” firearms or ammunition.  This prohibition is likely disclosed in the terms and conditions the end user is required to agree to when enrolling in these P2P services.

Credit unions will often adopt the boilerplate terms and conditions disclosure prepared by the P2P services as these terms are mandatory, non-negotiable terms for use of the services. To ensure a clear demarcation between the requirements of the P2P service and the credit union’s transaction policy, it is important for your members who enroll in such services to understand that any such prohibitions are mandated by the P2P service and not the credit union.

Credit unions can be proactive in remaining neutral on any potentially controversial terms by clearly disclosing that the terms and conditions of the P2P service are required by the service and are not a policy of the credit union.

California now requires MCCs for firearms retailers licensed in this state, but it is unclear if, and how, the required parties will comply given the inconsistency in similar laws across the states.  Similarly, the partisan controversy surrounding this law leads to additional concerns associated with reputational risk if any disclosures the credit union is required to make could be interpreted as taking sides in the controversy.

Since the impact of this law remains in flux, the credit union should remain proactive and consult with legal counsel to address any questions or concerns it may have.

Article by Haydee Hooten, partner at Moore, Brewer & Wolfe.

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