September 26, 2011
I can’t use my prepaid card for that now?
The focus of the Portals and Rails blog is usually related to fraud or operational risks to the payments system. Today's blog will take a look into a different type of risk, the risk of reduced functionality for general purpose reloadable (GPR) prepaid cards. An interesting development with GPR prepaid cards has risen out of the recent Regulation II (Reg II) ruling. Considering that 1.3 billion general purpose prepaid card transactions were conducted in 2009, according to the 2010 Federal Reserve Payments Study, changes affecting GPR prepaid cards could affect many people.
Reg II, which was instituted in response to the statute commonly referred to as the Durbin Amendment, has an unintended consequence. Consumers risk losing some payment functionality with prepaid cards, including the ability to have funds auto-drafted via ACH from GPR prepaid cards. The risks of unintended consequences such as this one has not gone unnoticed by the Federal Reserve Board. In fact, during the June 29 Open Board Meeting, Governor Duke expressed her concern on this topic and would eventually like the Board to "undertake a study to quantify the overall effect of this rule on consumers."
With the Reg II interchange cap set to go into effect on October 1, many institutions are implementing new checking account fees and debit card fees that will undoubtedly make checking accounts and debit cards costlier for consumers. However, outside of eliminating or reducing rewards, institutions will offer consumers the same benefits and functionality for debit cards as they did before Reg II. It does not appear that the same can be said for the functionality and convenience of GPR prepaid cards.
To be exempt from the interchange cap, a GPR prepaid card must be the only means for a consumer to access the funds on that card or the card issuer must qualify for the small-issuer exemption (assets of less than $10 billion). If the consumer can access funds on a GPR prepaid card issued by a large issuer (assets of $10B or more) with a check, ACH, wire, or other account transfer method, then the card is viewed as a "deposit account" and therefore not exempt from the Reg II interchange cap. It was critical that the regulation include this language concerning GPR prepaid cards to prevent the widespread evasion of the interchange cap by issuers labeling traditional debit cards and their underlying deposit accounts as prepaid cards.
Conceivably, a GPR prepaid card issuer could be exempt from the Reg II interchange cap by eliminating payment functionality beyond the purchasing function of the prepaid card. Under this scenario, consumers would no longer be able to use their GPR prepaid cards to auto-draft funds via ACH from the card to pay recurring bills, such as utility bills.
According to recent comments by the CEO of Green Dot, the largest GPR prepaid card program manager, "all Green Dot managed programs, including our Walmart MoneyCard program, will be exempt from interchange restrictions under the Durbin interchange amendment and therefore, our programs will not be subject to lower interchange." A recent article in the American Banker noted that Green Dot would need to either remove features of its cards or switch bank issuers (neither of Green Dot's current issuers can qualify as small) for its cards to be exempt from the interchange cap.
Implications for GPR prepaid card users
With Green Dot cards set to be exempt from the Reg II interchange cap, many GPR prepaid card users should prepare for the loss of the direct debit functionality of their cards. And with the loss of this payment option, prepaid card users that currently use their cards' direct debit functionality to pay bills will now be more at risk of making late payments and having to pay the accompanying late fees. Furthermore, because many recurring billers, including utility companies, often charge a fee for card-based payments, GPR prepaid card users can expect to pay a service fee for paying some of these bills. To avoid these service fees for card-based payments, GPR prepaid card users may be forced to make cash payments in person, which can be both inconvenient for the consumer and costly for the biller.
A final thought
Perhaps the most surprising information from the Green Dot announcement is the fact that the WalMart Money Card will also be exempt from the interchange cap. With merchants being some of the biggest proponents of the Reg II interchange cap, it's interesting to learn that a merchant cobranded prepaid card will be stripped of a feature that provides consumers with a free, safe, and convenient way to pay bills all in the name of earning the higher interchange and presumably maintaining low costs for consumers. Given the utility of GPR prepaid cards for the un- and underbanked population, will removing electronic payment functionality from the cards further disenfranchise these consumers from banks? Or would increasing consumers' cost for the product to maintain its current functionality lead this segment away from electronic payments and back to cash?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
September 26, 2011 in payments, prepaid, regulators | Permalink
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Posted by:
dave fortney |
October 03, 2011 at 10:25 AM
How absurd that a piece of legislation intended to curb debit interchange earnings for banks is singling out transactions that do not generate any interchange (ACH, checks).
Under-banked people encouraged by the government to receive their tax refunds into prepaid cards will be delighted to learn that they can no longer pay their bills conveniently with the money received...
There are plenty of non-evil large banks that will think twice before offering prepaid cards as an entry product, if the cards loose a large part of their usefulness.
Posted by:
Patrice Peyret |
September 27, 2011 at 09:02 PM
September 19, 2011
The prepaid market: Growth and sophistication mean more risk
FinCEN has released its final rule on prepaid products, and a key feature expands the Bank Secrecy Act (BSA) compliance obligations to include providers and sellers of certain types of prepaid access devices. In March, we discussed FinCEN's proposed rule on prepaid products. The rule was drafted with the intent to address potential money laundering risks in prepaid access devices.
The final rule, released July 29, also replaces the term "stored value" with "prepaid access." The purpose of changing the nomenclature was to cast a broader net by covering not only prepaid access devices like cards, but also emerging prepaid access devices such as key fobs and mobile phones. The new definition is broad enough to cover any type of device that can serve as a portal to funds that have been paid for in advance and are retrievable and transferable.
Prepaid access devices are available in a wide variety of formats. Some types of prepaid access devices come in the typical card format, while others can exist in virtual form, such as an electronic serial number.
Growth of prepaid access
There is good reason for FinCEN's interest in prepaid products. Growth in consumer adoption and increased government activity (payout of government benefits, including unemployment and social security, among others) have accelerated the acceptance rate of prepaid products in recent years. Mercator Advisory Group predicts in its
Seventh Annual Prepaid Market Forecast that the total dollars loaded onto prepaid cards may climb to $672 billion by 2013.
The Office of the Comptroller of the Currency (OCC) has also responded to the growth and sophistication of the prepaid market by releasing guidance to national banks that offer prepaid products with advanced functionality. The guidance advises national banks to develop comprehensive risk management policies and procedures to guard against potential fraud. The OCC expressed that prepaid products offering features such as international funds transfers, card-to-card transfers, and Internet transfers can potentially expose banks to a variety of risks that may not be in line with the banks' business strategies or risk appetites.
Newly regulated entities: Sellers and providers of prepaid access
Providers of prepaid access are now required to comply with the Bank Secrecy Act's regulations related to Money Services Business (MSB). Some of those requirements entail maintaining adequate anti-money laundering programs. The type of BSA program will depend on the risk appetite, size, customer base, and geography of the sellers and providers.
Under the new rule, prepaid access providers must retain transaction-specific records generated in the ordinary course of business for five years. The records collected must be easily accessible upon request from FinCEN or other law enforcement. Both providers and sellers of prepaid access are subject to Suspicious Activity Reporting (SAR) and Currency Transaction Reporting (CTR), but only providers are required to register with FinCEN once every two years.
Prepaid products exempted
For the first time, closed loop prepaid products are regulated if more than $2,000 can be loaded on the device on a given day. FinCEN acknowledged that although closed loop prepaid access is generally considered an unattractive, inefficient, and unlikely means of moving large sums of illicit money, law enforcement cautioned FinCEN that closed loop prepaid access in large dollar amounts can be vulnerable to criminal enterprises intending to launder funds. This partial exemption for closed loop prepaid access addresses law enforcement's money laundering concerns regarding a limited segment of closed loop prepaid access market, while still exempting the retail sale of closed loop prepaid of $2,000 or less.
Also regulated for the first time is low-value ($1,000 or less/day) open loop prepaid access, if it can be used internationally, transferred between or among other persons (P2P), or reloaded by a nonbank. The restrictions placed on the open loop prepaid access are based on the device's functionality and not on what it can be used to purchase.
Exempt from most of the new rule are prepaid access devices that FinCEN determined posed a decreased risk of money laundering, terrorist financing, and other criminal activities. Those devices include prepaid access to funds for payroll, government benefits, and incentives, so long as the funds cannot be used internationally, do not have P2P capabilities, and cannot be reloaded by a nonbank.
The rule's effective date is September 27, 2011. However, compliance for registration of MSBs does not take effect until January 29, 2012.
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
September 19, 2011 in payments, prepaid, regulators | Permalink
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March 21, 2011
FinCEN proposed new rule addresses money-laundering risks in prepaid products
While prepaid payment products still represent a small percentage of today's electronic payments, their use is rapidly growing. According to the 2010 Federal Reserve Payments Study, the number of prepaid card transactions increased 21.5 percent each year from 2006 to 2009. Most prepaid payments are enabled by plastic cards, but today's technology can enable the same payment functionality in other form factors, including mobile phones.
As the market for these prepaid products continues to develop and grow, the Financial Crimes Enforcement Network (FinCEN) has been watchful of their potential money-laundering risk exposure and issued a proposed rule addressing various kinds of prepaid access devices. In its proposed rulemaking notice, FinCEN announced that the rule would cover not only cards but also such access devices as mobile phones, key fobs, and any other device that can serve as a portal to funds paid for in advance and allow a consumer to retrieve or transfer these funds.
Prepaid access devices and money laundering risks
Many of the same factors that make prepaid access devices attractive to consumers can make them vulnerable to criminal activity. For instance, the ease with which these devices can be obtained along with the potential for anonymity—which is the case with nonreloadable open-loop cards, for example—as well as the ease with which money can be loaded onto them can make them potential money-laundering vehicles.
To help identify potential risks related to prepaid access devices, FinCEN formed a subcommittee within their Bank Secrecy Act Advisory Group (BSAAG). The subcommittee has identified numerous risks, such as funding with cash from stolen credit cards and virtual money cards that allow individuals without a bank account to access illicit cash via ATMs globally. Some high-profile criminal activities have also surfaced, exposing some of these potential risks.
Because some products are perceived to be less likely than others to be used for money laundering, FinCEN has excluded certain prepaid access devices from its rulemaking, including payroll cards, government benefit cards, heath care access cards, closed-loop cards, and products that allow access amounts less than $1,000.
Disrupting, detecting, and deterring the illicit flow of funds
Disrupting the flow of funds can create a less-than-ideal environment for criminals attempting to conceal the sources of their illicit funds. FinCEN's proposed rule is one way to accomplish this disruption. By implementing additional systemic safeguards and filling gaps in the prepaid environment with stronger regulatory controls, the agency hopes to make it more difficult for criminals to use prepaid payments products for illicit purposes.
Ultimately, the goal of the proposed rule is to enhance the regulatory framework for prepaid access devices while finding ways to promote development and growth in the prepaid industry and discourage wrongdoers from misusing prepaid products. For now, FinCEN's final rule is pending release, but if it is adopted as proposed, it would expand Bank Secrecy Act compliance obligations to prepaid access devices beyond plastic prepaid cards to include emerging prepaid products.
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
March 21, 2011 in crime, fraud, money laundering, payments risk, prepaid | Permalink
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Ana,
My research suggests that these proposed rule changes will have a significant negative impact on the prepaid market and yet I am unable to find anyone in the prepaid industry that believes these proposed rules will prevent most of the crimes you identified. In particular the "high-profile criminal activity" you identified is explicitly not prevented by these proposed rules since payroll cards are excluded.
If FinCEN were to document how these proposed rules would prevent specific criminal activities, I think it is likely the prepaid industry could prove FinCEN wrong. More importantly, if FinCEN were to work directly with the industry, I am positive more effective solutions could be identified that would cause far less disruption to the prepaid market.
Preventing disruption is important because these prepaid products are the best hope for providing low cost access to financial services for the unbanked and under served. Even as the FDIC decries the lack of affordable financial services for Low & Moderate Income families, FinCEN proposes new rules that I believe will greatly increase the cost associated with delivering financial services to that same audience -- but likely with no benefit to law enforcement.
Posted by:
Timothy Sloane |
March 22, 2011 at 02:32 PM
November 29, 2010
Prepaid in the mobile channel: Balancing financial inclusion and risk management
Payment services are coming to your mobile device—even though consumer adoption remains low in the United States, as are near-term prospects in light of reports about security concerns. Financial institutions, carriers, and others are experimenting with trial products and services to try to understand and respond to consumer demand for mobile services. Here in the U.S., the mobile device is emerging as an access device for legacy payment mechanisms like credit and debit cards or deposit account transfers. A viable payment mechanism for consumers to access via the mobile channel may be stored value, using the cell phone instead of a plastic card as the form factor. With the recent economic downturn, prepaid is emerging as an alternative to paper-based payments, allowing some consumers with limited access to credit to continue to participate in the electronic economy.
Some prepaid products carry potential risks because of the anonymity associated with them. The question we face is, how will we balance the potential risks of identity theft and money laundering as prepaid services shift to the mobile channel?
Recent growth in prepaid
Prepaid cards are growing in popularity, especially with the advent of reloadable, open-loop payroll cards that are branded by the major card networks and accepted at ATMs and merchants' points-of-sale. (Open-loop cards are those that consumers can redeem at different establishments. Closed-loop cards are those that the consumer can redeem at a specific establishment, which is also the issuing provider.) Since many carriers have offered prepaid airtime plans for years, the transition to a prepaid "mobile wallet" may be a seamless one. The mobile wallet is expected to operate the same way as a prepaid card, with monetary value loaded and stored on it. Because stored-value cards allow unbanked and underbanked consumers to participate in the electronic economy, their use is growing.
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Growing population of underbanked consumers
Financially mainstream consumers in the U.S. already have a multitude of safe, secure, and reliable payment choices, so they have little incentive to use their cell phones to access those payments. But a growing segment of the population is underserved by mainstream financial services. ("Underserved" individuals are those who may have a checking or savings account but rely on alternative financial services such as nonbank money orders, check-cashing services, payday loans, or pawn shops.) The increase of the underserved is in part a reflection of the weak economy, high unemployment, and reduced access to credit for many consumers. The FDIC estimates that 7.7 percent of U.S. households are unbanked and an additional 17.9 percent are underbanked.
It might be useful to compare the U.S. unbanked market to those in other countries where mobile payments and banking initiatives are in various stages of deployment.
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Emerging markets, such as sub-Saharan countries and India, with higher populations of consumers without access to traditional financial services are experiencing rapid adoption of mobile financial services. For example, the success of M-PESA, a mobile phone-based financial service offered by Kenya's Safaricom, has become a business model for other developing countries. In the three years since its inception, M-PESA's customer base has reached 9 million users.
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Improving security and risk management of prepaid mobile
A number of improvements have been made in recent years in the way some prepaid cards—like payroll cards, for example—can be monitored. Open-loop cards that are branded by the major networks allow the owner to contact the issuing payment service provider if the payment card or device is lost or stolen. And many prepaid issuers will provide periodic statements detailing balances and fees. Still, concerns remain with gift cards and other closed-loop products that may not include the security features of the open-loop cards. In response to these concerns, FinCEN's proposed rulemaking should provide the industry with guidance on how to exercise oversight and control in prepaid transactions.
With respect to the mobile handset, technology is changing rapidly and the potential for improved security in the handset for authentication and identity credentialing looks promising. Given the ability for prepaid issuers to tighten the controls in card registration processes, the mobile device may be a more secure channel than today's card-based prepaid alternatives. In that case, we may see the prepaid services driving consumer confidence for more mobile-based financial services going forward.
By Cindy Merritt, assistant director of the Retail Payments Risk Forum
November 29, 2010 in identity theft, mobile payments, money laundering, prepaid | Permalink
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June 21, 2010
Will the migration to mobile payments be tempered by potential money laundering risks?
Generally, mechanisms that hold value, store it, and transfer it anonymously create a potential money laundering risk. The mobile phone in the United States today is slowly beginning to function as a conduit for payments while possibly providing users a certain degree of anonymity. Researchers predict that almost half of all mobile phone users worldwide will migrate to mobile payments by 2014.
Mobile phones serve as a means for accessing financial services, and, in some parts of the globe, mobile payments are providing access to financial services where traditional banks could not. Arguably, monitoring the movement of money via mobile transactions, particularly with a prepaid mobile, can be challenging. According to a senior trial attorney with the Department of Justice, users who provide false identification at the time of purchase or service providers who maintain poor records thwart the mechanisms that could track the origination or transfer of funds, making the mobile payments channel vulnerable to use by money launderers. In fact, the Bureau of International Narcotics and Law Enforcement Affairs of the U.S. Department of State released an article identifying the potential for mobile payments to be used as vehicles for money laundering.
But how much do we know about the money laundering risks potentially associated with mobile payments?
Emerging payments technology: Smurfing goes digital
Money laundering is generally described as having three sequential elements: placement, layering, and integration. However, not all money laundering transactions involve all three elements. Keeping up with shrewd money launderers who look for ways to exploit the payments system can be challenging. Smurfing is one basic technique of money laundering. Essentially, criminals move large sums of money by breaking the funds down into smaller amounts to avoid triggering currency reporting requirements and thereby lessen the risk of detection by authorities. Smurfing requires some ingenuity, but mostly it requires a small army of people, or smurfs, willing to go from one bank to the next to make the small, daily deposits.
In recent years, a variation of smurfing known as digital value smurfing (DVS) has emerged. DVS also involves the breakdown of large sums of money into smaller sums, but the money launderer moves the money electronically. DVS is considered the next generation of smurfing because as the shift from paper to electronic payments grows, digital smurfers can exchange cash for digital value in the form of stored value cards or possibly stored value on the mobile phone. Unlike traditional smurfing, which requires multiple smurfs to move numerous sums of money between financial institutions, a single smurf can do all the work by operating with multiple accounts, including mobile payment bank accounts, prepaid mobile phone accounts, or Internet payment accounts.
If smurfers are able to transfer stored value funds from one mobile phone to another or to other devices without using a bank for the transfer, they would bypass financial reporting requirements. They could also seriously hamper law enforcement's and the banks' monitoring and detection efforts. Could this convergence of financial services and telecommunications impede anti-money laundering efforts?
Making mobile payments more secure
Responding to the global growth in mobile payments, some vendors are providing improved security solutions for mobile money transfers, while other service providers have set limits on the number and amounts of mobile payment transactions and sources of funding and have employed comprehensive "know your customer" programs. Money laundering detection and prevention is an ongoing and difficult undertaking, one that must keep pace with advances in technology that promote fast and efficient movement of funds.
The rapid global growth of mobile payments presents ostensible opportunities for the adoption and enforcement of anti-money laundering compliance requirements in the mobile space. On May 26, 2010, a bill was introduced that would institute an identification requirement for the purchase of prepaid mobile devices, closing the anonymity gap and enhancing the monitoring and detection of potential payments activities. Examining the potential for money laundering risks in mobile payments is the best way to ensure that this new payments channel is not abused, all the while permitting its continued growth and adoption.
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
June 21, 2010 in mobile payments, prepaid | Permalink
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February 01, 2010
New prepaid card functionality: Card-to-card funds transfer
Innovators now have developed a new prepaid card feature that facilitates a seamless transfer of funds from one card to another, providing a more efficient person-to-person (P2P) payment process that includes remittances. Prepaid cards, also known as stored value cards, are another alternative to paper-based P2P payments and have been a boon to underbanked consumers, allowing them to participate in the electronic economy.
The question is, will this enhanced convenience help drive the adoption of prepaid payment card products?
Prepaid cards were first introduced in 1994 by retailers as proprietary gift cards that could be used only at the stores of the issuing merchant. These are referred to as "closed system" cards and include the popular "loyalty" cards typically issued by one or a group of merchants. Other early uses of stored value cards in the United States included prepaid telephone calling cards, mass transit cards, public benefits payments, and even child support payments. In contrast, "open system" cards are typically issued by a bank under branding of the major card networks and functional wherever they are accepted.
Popularity growing but still lagging traditional debit and credit
Today pre-paid cards are increasing in popularity, but a recently released survey conducted by the Boston Fed shows most consumers still prefer credit or debit cards over prepaid cards.
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However, changes in fee and interest programs among banks issuing credit cards may change consumer preferences. As card legislation limits the interest and fees that card companies can impose on borrowers, many banks have started to implement across-the-board increases in interest charges and eliminating loyalty programs for borrowers with higher credit quality.
State of adoption
Prepaid card users can now transfer funds from one card to another through the Internet or by phone. MetaBank is a major U.S. issuer of prepaid open-loop products licensed through the major card networks. Many of these products are marketed to underbanked communities. Also, many of these products may be used for cross-border remittances in addition to domestic person-to-person transfers. Prepaid card products in other markets throughout the world are offering this feature as well. For example, this service is offered in India free of charge to bank customers of DBC (Development Credit Bank Ltd.). Visa Europe offers cards with this feature, allowing recipients to receive funds in all major currencies directly to their Visa card using the global Visa network. If the recipient does not have a Visa card, he or she can collect the cash from a nominated bank branch. In all, Visa Europe’s money transfer operates as card-to-card, card-to-card via email, and card-to-cash.
Convenience as a driver
In a final analysis, technology is driving the development of myriad alternatives in the P2P space, as with other retail payments. How prepaid instruments evolve, in whatever physical form they take — be it a plastic card, a fob, or a cell phone — will ultimately depend on consumer preference. Expanding the functionality of the prepaid instrument for money transfer could be a driver of a new type of prepaid product.
By Ana Cavazos-Wright, payments risk analyst, and Cindy Merritt, assistant director in the Retail Payments Risk Forum at the Atlanta Fed
February 1, 2010 in prepaid | Permalink
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Good story. Consumer choice is definitely the key. Increased functionality with lower cost will move prepaid cards (instruments) into wider use. Competing with the entrenched credit card industry will probably require some of the same tactics. Most credit cards offer "bonuses" or the perception of bonuses that entice us to use them.
Posted by:
Robert Askins |
February 16, 2010 at 09:29 AM
Although article focuses on loss of direct ACH debit from prepaid cards, these same programs are also eliminating their web billpay offerings -- this is probably an even bigger customer impact as web billpay usage exceeds that of direct debit.