Raging Gun Debate Threatens to Wound Banks in Verbal Crossfire

A new merchant category code for gun and ammunition retailers is further heating an already hot firearms issue for banking. With gun control a key issue for the Biden White House, the industry faces reputation risks and more. Yet the latest controversy came from the industry itself.

The continuing battle over firearms ownership in the U.S. puts financial institutions in the spotlight in nearly every facet of the business, including credit cards and other payment methods, merchant processing, business lending to firearms manufacturers and dealers, and investments in securities of gun-related companies.

Multiple challenges can arise when the intensity of the spotlight increases — as it has now.

Institutions identified as providing services of some kind to the gun industry at a time of a mass shooting incident face reputation risk. Ratings have been issued on bank involvement in firearms finance, for example, which can also make this a competitive factor. Among fintechs and neobanks there have been references that deposits would not wind up as loans to gun concerns.

Various sites — such as As Ye Sow, which screens for gun interests in mutual funds and exchange-traded funds — play a part in the socially responsible investment movement.

At the same time, while there are many advocates for gun control and related measures, there are many individuals, businesses and organizations opposing further regulation and control. They typically oppose any additional restrictions on firearms ownership and use. Notable among the groups is the National Rifle Association.

The firearms issue also exposes the banking industry to political pressure, at both the federal and state level, in multiple ways and from both sides of the aisle.

The most recent controversy, involving credit and debit card purchases, stands out because the cause behind the controversy was actually set in motion by a three-year campaign driven by Amalgamated Bank, which has the slogan, “America’s Socially Responsible Bank.”

How Four Little Digits Started Generating Lots of Heat for Banking

Amalgamated, based in New York City but with a national digital presence, has long been a leader in what it refers to as “gun safety,” among other causes.

The bank has refused to lend to firearms, weaponry and ammunition manufacturers and distributors for years. In addition, it has long offered investment products for both institutional and consumer clients that exclude weapons makers.

Amalgamated was the first financial organization to sign onto the Everytown Gun Safety Codes of Conduct in 2018. The codes, applicable to dealers and manufacturers, are intended to create a framework to prevent gun violence. Everytown for Gun Safety, which has the support of former New York City Mayor Michael Bloomberg, sees financial institutions as key players that can use their leverage as financiers and payment processors to encourage firearms businesses to comply.

Amalgamated’s latest move was its petition to the International Standards Organization to create a new merchant category code specifically to apply to purchases of guns and ammunition with credit and debit cards.

Previously these purchases fell under a more general code. In early September, after multiple rejections, Amalgamated and its allies, including Guns Down America, won approval of the new code.

“We all have to do our part to stop gun violence and it sometimes starts with illegal purchases of guns and ammunition,” said Priscilla Sims Brown, President and CEO of Amalgamated, in a statement. “The new code will allow us to fully comply with our duty to report suspicious activity and illegal gun sales.”

Federal anti-money-laundering and counter terrorist financing law has for many years required the filing of “SARs” — suspicious activity reports — with banking regulators and FinCEN (Financial Crimes Enforcement Network), which gathers and disseminates intelligence from SARs to law enforcement agencies.

In a column in the New York Times published when the code was approved, writer Andrew Ross Sorkin recounted a Times study in 2018 that indicated that “the guns used in a majority of the most deadly mass shootings in America had been bought legally with credit cards. None of the purchases were flagged by credit card companies or banks.”

“Mass shooters have repeatedly financed deadly massacres using credit cards, and bank CEOs need to step up to save lives.”

— Sen. Elizabeth Warren

Both Visa and Mastercard opposed creation of the new merchant code. The Times intimated in its column that the cause was “fear of angering politicians who support gun rights.”

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Card Companies: It’s Not What Codes Are For

In a statement after the code’s approval, Visa said that advocates of the codes don’t understand the role of merchant codes.

“Merchant category codes do not give Visa or any other payment network visibility into product-level data, also known as ‘SKU-level’ data,” Visa stated. “When we process a transaction, we have no visibility into what items a consumer is purchasing — this is true irrespective of which MCC applies to a merchant.” (SKU stands for “stock keeping unit” and refers to product codes on sales labels.)

“We do not believe private companies should serve as moral arbiters. Asking private companies to decide what legal products or services can or cannot be bought and from what store sets a dangerous precedent.”

— Visa statement

Added Visa: “It would be an invasion of consumers’ privacy for banks and payment networks to know each of our most personal purchasing habits. Visa is firmly against this.”

For its part, Mastercard stated that its rules do not allow blocking of transactions based on a merchant code alone.

“If we identify unauthorized blocking or intentional restrictions of legal commerce by any of our network participants, we will take action to address such activity,” the company said in a statement.

Added Mastercard: “What you buy is your business. We do not track individual or personal data.”

Support and Opposition to the New Merchant Category Code

Interestingly, many fintech-based payments services don’t permit usage for firearms, ammunition or other weapons. Among these are PayPal, Stripe, Square, Apple Pay and Intuit. (Zelle, the industry’s own P2P service, likewise bars such transactions.) Among the buy now, pay later fraternity, Affirm bars such commerce and Klarna indicates it is a case-by-case decision.

A company called Credova Financial offers buy now, pay later for gun dealers as well as sporting goods sellers. The controversial company received a long letter, including 15 detailed questions about its activities, from numerous members of the House of Representatives.

Notably, the letter criticized the company’s sponsorships and other deals with the National Rifle Association, which the letter described as “a firearms advocacy organization that rigidly opposes any gun control legislation…”

For its part, the NRA has weighed in on the issue multiple times, including on the website of its lobbying arm, the Institute for Legislative Action.

“If fully implemented by the various payment processors, the hope of gun control groups for this new MCC is that it would create a registry of gun owners that they have long sought and provide them with another tool to attack lawful industry when firearms are used in crime,” the NRA stated.

The organization noted that the Firearm Owners Protection Act of 1986 bars the federal government from centralizing most gun records into an owner registry. The group characterized the new code as its backers’ way of doing an end run around the existing law, in effect putting financial players into the position of private police. This was a frequent banking industry criticism of much anti-money-laundering recordkeeping rulemaking, before the terrorist attacks of 9/11.

“If banks and payment processors share their records with the government, that would be a major step towards the registration of all gun owners in America.”

— National Rifle Association

NRA maintains that the merchant code is not mandatory for payment processors to adopt, although Visa, Mastercard and American Express all gave signs of moving ahead with the change. It’s also been noted that gun buyers have to fill out a federal form when purchasing guns from dealer stores.

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Bank CEOs Grilled on Merchant Gun Codes

Approval and objection to the move on the merchant code has taken predictable turns. Democrats generally love the idea, Republicans are vehemently opposed. A House Financial Services Committee hearing in September saw the heads of the seven largest U.S. banks questioned about a range of subjects. A few relatively short exchanges about the code made headlines of their own. The leaders said little definitive other than that they supported consumers’ privacy and that the code was not of the banks’ creation. Citigroup CEO Jane Fraser, in response to a question, did not think information based on the new merchant code would generate SARs by itself.

Most of the institutions represented have navigated rough waters dealing with gun purchases and financing of gun manufacturing before. In 2019, Guns Down America issued a report card on the top banks at the time for their firearms industry support that gave no As at all and only one B, to Citi. Fs were given to JPMorgan Chase, PNC, TD Bank, U.S. Bank and Wells Fargo. SunTrust and BB&T, which merged to become Truist, received a C and an F, respectively.

In recent years several of the major banks have made moves to restrict firearms industry support. Bank of America, for example, announced in 2018 that it would cease lending to companies that make military-style firearms.

During the closing days of the Trump administration, the Comptroller’s Office tried to put through a rule that would have barred large banks from withholding credit from politically proscribed industries, including fossil fuels and firearms. The proposal was pulled early on by the Biden administration. Brian Brooks, then the Acting Comptroller for President Trump, remarked at the time that, “There is a creeping politization of the banking industry that has the propensity to be very, very dangerous.”

Pat Toomey (R.-Penn.), the ranking member of the House committee, picked up on this theme in opening remarks at the hearing: “If banks don’t cease and desist from weighing in on social and cultural issues, don’t be shocked if Republicans, once back in power nationally, seek to pressure banks to advance their goals.”

Republican members of Congress have urged regulators to avoid creating “Operation Choke Point 2.0.” This is a reference to an Obama-era program that was seen as an attempt to cut off financial services to some legal businesses, including firearms. Such companies were classified as “high risk” and today there are still payment processors specializing in providing merchant services to such companies.

They’ve also sent a letter to FinCEN, asking how it plans to use data from the new merchant code.

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