(Part 2/Case Studies) FinTech, Retail, AgTech: You Don't Own Your Data…

Continuing on my prior article "Part 1) FinTech, Retail, AgTech: You Don't Own Your Data…"https://www.dhirubhai.net/post/edit/6640860535900508160/

Three Case Studies

How Data Right Issues have faired in the context of 1) AgTech/Industrial Machinery, 2) Retail and 3) Financial Technology

Industrial Machinery: Data Privacy in Agriculture Machinery

The takeaway point here is data privacy concerns are driven by economic incentives/impact

So more and more data is being generated by machines, sensors, and other devices, both on the job site and farms. Machinery and construction are more B2B than B2C, but the B’s tend to be fairly small in construction and the C’s in Agriculture is more protective than many demographic bases. A combination of a fragmented (but well-lobbied end market base) brings these arguments to the forefront of the political world.

Most farmers believe that any data collected on a farm, or about their operations is private and “owned” by a grower.

There is broad consensus amongst growers that agriculture machinery companies should not profit off of their/customer data, and fee-based programs have been largely underwhelming in what they’ve been able to collect so far.

Data privacy for machines isn’t limited to solely the cloud but also the actual machine

Similar to that in the context of consumer electronics, the right to repair could complicate the data loop that drives the aftermarket. The debate around the right to repair is not new to OEM’s; it’s dating back to at least 2012.

With aftermarket at 2.5x that of the new equipment, and parts as much as 2 to 3 times more profitable than services, aftermarket is a large profit pool that’s worth protecting (from the OEMs’s point of view), which could be at risk as relevant privacy laws gain more traction.

OEM’s contend they have a right to protect their intellectual property and their customers. Consumers counter that purchased machine repairs are the owner’s discretion.

Push for right to repair legislation though, has largely stalled over the years; Agriculture companies are “improving” data transparency

There are currently several U.S. States with a pending bill advocating the right to repair. Legislation in the favor of consumers has OEMs face more aftermarket competition (or a market opportunity for someone else).

But in a world increasingly worried about privacy of data, many OEM’s have taken steps to adhere to transparent data use standards — with the American Farm Bureau designating ~30 co’s as Ag Data Transparent, including John Deere, CNH Industrials, & AGCO.

The USDA could dive deeper into the arena of digital data collection in Agriculture

But the ‘private’ side will still set the tone. In the 2018 Senate bill, the USDA created a Data Warehouse for land-grant universities. The bill then adds that within 3 years (i.e., by 2021) farmers should have access to private confidential conservation data specific to each farm and profitability metrics. The bill, however, prohibits sales of individual producer data and should be released in aggregate only, but the bill does not prohibit the mandatory anonymous collection of field data.

Again, the takeaway point here is data privacy concerns would have an economic impact; in this case, unintended consequences to the aftermarket!

Retail Troubles: Sale By A Non-Owner

The point here is to maybe consider data rights in the context of whether someone (or some business) can sell something (data) that they might not own, to begin with?!!

One growing trend in the ongoing retail bankruptcies is the transfer of personally identifiable information. Some legislations may have led to bankruptcy cases of retail debtors to be more likely than not to end in liquidation sale (sale to another retailer) as opposed to restructuring and turnaround of the same retail entity, or sale to financial sponsors (the Private Equity guys).

Some background: Besides the widely discussed secular shift (yeah and that Jazz), retailers are also facing legislation driven existential risks… How?

1) A result of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) changes, troubled retail debtors now have to address their lease issues “very early” in the case, which means they would be making speculative, premature decisions as to which leases to assume or reject*.

2) A result of the 2017 ‘Tax Cuts and Jobs Act’, companies including retailers which previously benefitted from unrestricted interest deductions, now face a cap of 30% of their 12-month earnings before interest, taxes, depreciation, and amortization (EBITDA)**. After 2021, the 30% cap will be limited to earnings before interest and tax. The deductibility cap will cause distress to highly leveraged retailers (and likely discourage leveraged buyouts), pushing troubled retailers to pursue liquidation sale to strategics (i.e., other retailers).

Data Rights in this Retail Armageddon Context

Section 363(b)(1)of the U.S. Bankruptcy Code provides that if the debtor (e.g., troubled retailer) has a privacy policy in effect(at the time of the bankruptcy filing) prohibiting the transfer of personally identifiable information, the information cannot be sold in bankruptcy unless ‘additional requirements’ are satisfied.

The court can approve the sale at a hearing after finding that the sale (of the information) would not violate applicable non-bankruptcy law.

Retail debtors usually address rights of consumers through first day motions to maintain reward programs and other customer-loyalty programs.

But again, there is a legal argument to be made that retailers did not own the data, to begin with, to have the right to sell it…right?!

3) FinTech: Data Rights of Use vs. Data Ownership in Payments

Takeaway point: Because ownership of data is an amorphous concept, better to consider rights of use vs. ownership.

Also, AFTER you are done reading this article, if you are interested, please check out Visa’s acquisition of Plaid throws up data reuse concerns …

What is data in the context of a transaction?

Usually, information obtained at the point of sale includes reference data describing transaction amount, time, place, payment methods, date, pending status, and category code. Importantly data obtained in payment transactions can include information generated during authorization and settlement, but it does NOT include Cardholder Data.

That said, what constitutes Data is again a moving target, at best. Data in a payment system morphs as it passes from transaction participants through the payment ecosystem.

Though the only thing for sure is consumers have privacy rights as relates to their personal information and should be able to grant other parties the right to use it.

In the Payments Ecosystem…

1. Issuers may have the greatest claim to the right of use of TRANSACTION Data. Issuers (Banks, American Express, etc.) have a relationship with the customer and authorize the payment transaction.
2. However, Card Brands (e.g., AMEX, Visa, MasterCard) might be arguably the “most significant” influencers on data use rights, since they are the closest to policing the ecosystem and the transactions.

But again contracts are bilateral…

Many different contractual relationships touch the transaction. So upstream and downstream participants may place restrictions on the use of data that must flow through them parties involved in the transaction lifecycle.

1. Payment System Facilitators (e.g., Stripe, Square, PayPal, Adyen): Have information on multiple Cardholders, Issuers, and Merchants. A payment system would have contractual data-sharing relationships with the Merchant, and the Customer.
2. Merchants: Have information on multiple Cardholders, Issuers, and Payment System Facilitations. A Merchant would have contractual data-sharing relationships with the Payment System Facilitator and the Processor.
3. Acquirers: Have information on multiple Cardholders, Merchants, and Payment System Facilitations. An Acquirer would have contractual data-sharing relationships with the Card Brand and the Processor.
4. Card Brands: Have information on multiple Acquirers and everything they have. A Card Brand would have contractual data-sharing relationships with the Issuer and the Acquirer.
5. Issuers: Have all the information up and downstream. An Issuer would have contractual data-sharing relationships with the Customer and the Card Brand.

• * Prior to the APCPA, a debtor tenant (the retailer) could routinely seek multiple extensions of the deadline to assume or reject a non-residential real property lease. This left landlords in a state of limbo while retail debtors evaluated their options — including, for example, assuming and assigning below-market leases to the detriment of landlords. As amended, section 365(d)(4) now provides debtors with an initial 120 day period to assume or reject leases, with the ability to seek an additional 90 days by motion.
• ** A repeal of the deduction for corporate interest expense, which is intended to accomplish three goals (in my view). First, the tax code has for many years incentivized debt over equity, and some including lawmakers view this as distortionary and would like to treat the two equally. Second, the change is intended to complement the full expensing of capital investment that has also been proposed. Expensing CAPEX without repealing interest deductibility would result in a negative effective marginal tax rate on debt-financed investment and a significant revenue loss. Third, the shift to full expensing of CAPEX and non-deductibility of interest expense is related to the shift to a destination-based tax, as it disregards financing costs while taking into account the full cost of domestic cash outlays. Together with aspects of the destination-based tax, these changes are intended to move the U.S. away from a corporate income tax and toward a VAT-style tax, more formally known as a ‘cash flow tax.’