The Invaluable Fundamentals of Prepaid
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This document provides an overview of prepaid cards and the prepaid card industry. It discusses the growth of prepaid cards and how they are becoming a larger part of the financial services industry. It describes the different types of prepaid cards, including closed loop cards that can only be used at certain merchants versus open loop cards that can be used more widely. It also outlines the different participants in prepaid card programs, such as cardholders, distributors, issuers, and processors, and how they interact.
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The Invaluable Fundamentals of Prepaid
- 1. The Invaluable Fundamentals of Prepaid Frank Kaplan SVP Business Development NetSpend Corporation Karen L. Garrett Partner Stinson Morrison Hecker LLP Wednesday, June 26, 2013 Workshop A Steven E. Dawe National Sales Director FISERV Joan M. Herman Senior Vice President Sunrise Banks Stephanie Teta Industry Outreach NBPCA © 2013 Network Branded Prepaid Card Association
- 2. Thank You To Our Sponsors 2 Presenting Sponsors Supporting Sponsor Welcoming Reception Sponsor Associate Sponsors Founding Sponsors
- 3. • Prepaid vs. debit vs. credit – What are the similarities and differences? • The broad menu of Prepaid products: Some say there are over 20 Prepaid products – What are they? Who do they serve? 3 Prepaid is the fastest growing payment product
- 4. 4 • Nonprofit, inter-industry trade association • Focus is Network branded (open-loop) prepaid cards • Young – in our 5th year • Membership representing companies touching >70% of the market’s cards About NBPCA NBPCA Mission • Provide a fact-based voice to media, government and consumers • Set a high industry bar through Code of Conduct and Best Practices • Develop and share consumer education, and partner with others to deliver this training broadly across constituent groups NBPCA Role • Provide a highly interactive and participatory forum for thought leadership and collaboration to drive industry consensus and success • Serve as the collective voice of industry and a trusted, credible point of factual information to industry, government, media and consumer groups Network Branded Prepaid Card Association Educate. Advocate. Protect. Promote.
- 5. NBPCA: What We Do • Educate: Consumers, government, media on the types of uses and unique applications for network branded prepaid • Advocate: Actively seek meetings and opportunities for interaction with people and entities of influence • Protect: Preserve ability to offer a competitive product set • Promote: Assertively highlight the unique benefits provided by network branded prepaid products to consumers, government, media, and businesses NBPCA: Core Principles in Serving Consumers • Choice. Access. Transparency. Education Network Branded Prepaid Card Association 5
- 6. 6 Best practices: Created to address specifics such as disclosures, AML, overdraft, etc Code of Conduct: establishes the basis of ethical business operations for NBPCA members, and hopefully the rest of the industry Tips for consumers’ use of prepaid for different card types and consumer groups NPBCA – Setting the Industry bar
- 7. 7 Agenda • Industry Overview • Introduction to Prepaid Cards • Prepaid Card Programs • Card Economics Payment Processes and Risks • Process Review • Legislation Affecting Prepaid • Who is Regulating Prepaid—Federal • CFPB on Prepaid • States and Prepaid
- 9. 1. Mercator Advisory Group. Prepaid Market Forecasts 2011-2014 2. http://www.paymentssource.com/statistics/ Est 2014 total $648B Open Loop $354B, CAGR 34.5% Closed loop $330B, CAGR 8% Prepaid vs. Debit vs. Credit 2012: Prepaid is ~1/3 volume of Either Credit or Debit 0 200 400 600 800 1000 1200 1400 1600 2006 2007 2008 2009 2010 2011 2012 2013 2014 $211.7 $240.0 $275.1 $354.9 $409.6 $462.0 $522.6 $593.8 $683.6$700.0 $858.0 $994.0 $1,127.0 $1,210.0 $1,387.0 $1,545.0 $1,146.0 $1,251.0 $1,355.0 $1,371.0 $1,241.0 $1,288.0 $1,396.0 Total Loaded onto Prepaid U.S. Annual Debit Card Purchase Volumes Visa and MasterCard Annual U.S. Credit Card Purchase Volumes Combined 9
- 10. Prepaid is becoming a larger part of the Financial Services Industry: 2012 FDIC STUDY* • 20.1% of US households report being underbanked (up from 18.2% in 2009) 28.3%, either had one or no bank account. 1/3 of these said they do not have enough money to open and fund an account. • 7.5 % of households said they simply did not trust or feel comfortable dealing with banks. • 6.6% said they could not open accounts because they lacked required identification or suffered from poor credit. • 18% of households (up from 12% in 2009) reported using Prepaid accounts. • **Feddis of the banking association said prepaid cards are an innovative tool that banks could use to serve lower-income communities without incurring much cost.“There are fewer ways to access the account, so there are fewer opportunities for fraud, which banks pay a lot to protect against,” she said. • FDIC second National Survey of Unbanked and Underbanked Households study Sept 2012 ** Washington Post Sept 12, 2012
- 11. Introduction to Prepaid Cards: History Closed vs. Open Roles and Responsibilities Economics and Risks 11
- 12. 12 BACKGROUND: History • Old prepaid payment products: Tokens, travelers checks, money orders. • Mid 1990’s: “Smart Card” tests in Atlanta (Olympics) and Upper West Side. – Problems: No infrastructure and cost. • 1999–2002: Slow growth of prepaid cards (primarily gift cards) using the existing credit/debit card infrastructure. • 2003–2008:Increasing growth, especially in new “open system” products. • 2009-Present: Significant new regulations; but also growth in new technologies and functionalities
- 13. Prepaid is becoming a larger part of the Financial Services Industry: 2012 FDIC STUDY* • 20.1% of US households report being underbanked (up from 18.2% in 2009) 28.3%, either had one or no bank account. 1/3 of these said they do not have enough money to open and fund an account. • 7.5 % of households said they simply did not trust or feel comfortable dealing with banks. • 6.6% said they could not open accounts because they lacked required identification or suffered from poor credit. • 18% of households (up from 12% in 2009) reported using Prepaid accounts. • **Feddis of the banking association said prepaid cards are an innovative tool that banks could use to serve lower-income communities without incurring much cost.“There are fewer ways to access the account, so there are fewer opportunities for fraud, which banks pay a lot to protect against,” she said. • FDIC second National Survey of Unbanked and Underbanked Households study Sept 2012 ** Washington Post Sept 12, 2012 13
- 14. 14 Prepaid Cards: One size does NOT fit all Retail Gift Cards – Payroll Cards – Teen spending Cards – Travel Cards – Mall Cards – Government Benefit Cards – and More • Some are one-time transitory products that are thrown away when used up. Others allow for reloading and longer term relationships. • Some are entirely anonymous. Others are embossed/printed and encoded with customer names and can be renewed every 2-3 years • Some provide cash access at ATMs. Many do not allow for cash redemption. • Some are pre-denominated in fixed dollar amounts. Others are loaded with value up to the level requested by the purchaser. It is clear that prepaid cards provide an important and necessary source of financial services to millions of underbanked and underserved consumers, and a uniquely effective payment product for governments and businesses.
- 15. Closed vs Open Loop Cards 15
- 16. Credit products draw funds from a credit line. Debit products draw funds from a checking account. Prepaid products draw funds from a pre-funded account which can be funded from a variety of sources. Pay LaterPay NowPay Before Closed Loop Typically accepted by a single merchant/group of merchants. Examples include dept. store gift, phone, and transit cards. Also called ―retailer-branded‖ or ―proprietary‖ prepaid cards. Carry acceptance mark of a national/international payment network such as Visa, MasterCard, American Express, or Discover. Some ATM/EFT networks also offer prepaid card products. Functionality depends on card application. Network Branded Payment Card Models 16
- 17. 17 Closed Loop vs Open Loop Closed Loop “Store Gift Cards” • Essentially a plastic version of a paper gift certificate • Issuer is the retailer that accepts the card • Runs on merchant’s POS system – clerk is usually provided with the balance on card on the POS device. Open Loop “General Use Gift Cards” • Essentially a prepaid Visa, MasterCard, American Express or Discover Card useable where each brand is accepted • Runs on existing credit card POS system – clerk only knows if a purchase is approved or declined; clerk does not know the balance.
- 18. 18 Closed Loop vs Open Loop Red= may be non-reloadable or reloadable Applications by card type Closed Loop Open Loop Payroll Gift General Purpose Reloadable Government: Social Security, Unemployment, etc FSA/HRA/HSA/Benefits Employee & Partner Incentive Consumer Incentive Court Ordered Payments Government: Food Stamps Travel Relocation Money Remittance Campus/student Catastrophe and Insurance claims Temporary Assistance for Needy Families (TANF)
- 19. Consumers Consumer reloadable Travel Online Campus Remittances Open loop gift Corporate Payroll Incentives & rebates Healthcare & insurance Meal vouchers Business travel Corporate purchasing Public Sector Public Benefit & Welfare programs Emergency assistance & disaster relief Pension, Social Security Travel & cash management Payroll, incentives Different Applications for Open Loop Reloadable 19
- 20. Prepaid card parties and relationships – contracts and servicing 20
- 21. 21 Prepaid has a Much Different Value Chain than Credit and Debit • Unlike Credit and Debit Cards, the value proposition in Prepaid arises in multiple “vertical markets”, with – Different participants in the value chain – Different value proposition for participants by market & product – Different economic models for FIs (issuers) and distributors – Different risks from diverse funding sources and distributors Cardholder Distributor Program /Product Sponsor Issuer Issuing Processor Visa MasterCard Discover Amex Acquirer ATM/POS
- 22. 22 Roles of Participants in Prepaid Programs Cardholder Distributor Program /Product Sponsor Issuer Issuing Processor Visa MasterCard Amex Discover Acquirer ATM/POS • Cardholder – Loads the funds • Distribution – retailer or bank / FI or program manager online • Program/Product Sponsor – bank issuer or bank issuing partner that manages the programs • Issuer – bank issuer for cards • Issuing Processor – card processor • Networks – AMEX, Discover, MasterCard and Visa, PIN Networks • Acquirer – facilitates processing with ATM and POS • ATM/POS – provides cardholder with access to funds at ATM, cash advance in a branch or via POS (retail, web, telephone, etc)
- 23. 23 ROLES AND RESPONSIBILITIES: Open System Cards • Bank/Financial Institution • Access to networks • Safekeeping of funds • Program regulatory oversight • Ultimate liability under network branded payment system rules • Program Managers • Access to marketing and customer channels • Marketing materials and program functionality • Assist bank/FI with managing processors and, if applicable, sales agents
- 24. 24 ROLES AND RESPONSIBILITIES: Open System Cards • Processors • Create (order and encode) cards and maintain card balances • Connect with network branded payment systems and sales agents to authorize card sales and purchase transactions • Post card transactions and fees to the card and provide report data • Provide telephone inquiries (usually VRU) and customer service functions • Sellers/Distributors • Sell and distribute cards at POS, send sales data to processor
- 25. 25 Typical Contractual Relationships • Bank and Program Manager – Bank is issuer – Program Manager provides card designs, marketing plan, and proposed pricing/terms which are approved by the bank – Bank provides template for the cardholder agreement and approves final terms and conditions – Program Manager must use a processor approved by Bank – Program Manager and Bank often both have access to data and monitor transactions. – Program Manager must follow bank’s policies and procedures
- 26. 26 Typical Contractual Relationships • Bank and the Processor – Processors provides servicing in accordance with Payment Network standards and rules – Cardholders are Bank customers – data must be held securely in accordance with GLBA standards – Processor must comply with Bank data monitoring standards – Processor’s system must meet Bank’s SLA requirements. – Processor must obtain and retain PCI compliance – Usually a tri-party agreement between Bank, Program Manager and Processor
- 27. 27 Typical Contractual Relationships • Program Manager and Processor – Program Manager retains Processor to provide technology platform – systems are key to functionality and efficient, low cost operations – Service Level Agreement (SLA) often applies to the technology and systems services provided by Processor – Processor transmits data and is required to hold data securely – Processor OR Program Manager handles customer service and provides reports to the Bank.
- 28. 28 Typical Contractual Relationships • Program Manager and Distributors/Sellers – Sets forth terms of sale, commissions or fees paid – Distributors’ and/or Sellers’ obligations for secure storage of inventory – Compliance and Service Training for sales staff • Bank and Distributors/Sellers – Due diligence and approval of the Distributor/Seller by the Bank – Some Banks appoint Distributors/Sellers as the Bank’s Limited Sales Agent – Tri-party agreement between Bank, Program Manager and Distributor/Seller
- 29. 29 Typical Contractual Relationships • Bank and the Consumer (cardholder agreement) – Bank obligated to honor the agreement – Standard Visa/MasterCard terms (zero liability) included – Fees disclosed – Privacy notifications – Cardholder registration requirements
- 30. 30 Typical Contractual Relationships • Program Manager and Corporate Sponsors – Program manager markets card functionality and services to Corporate and Government Sponsors – Program Manager’s contract provides customized solutions to meet Sponsor’s needs – Timing of payments, terms of programs, levels of customer service to be provided – Functionality to be provided – Approvals by the Bank are always required
- 31. 31 Typical Contractual Relationships • Payment Network Rules (Card and EFT/ATM networks) – Bind Issuing Banks – Bind authorized service providers (processors and ISO’s) – Provide rules governing liability of parties – Provides disclosures and consumer’s rights – Sets forth merchants’ chargeback rules – Provides mechanisms for fraud control
- 32. 32 Prepaid Card Programs • Variety of Program Structures • Types of Cards • Source of Funds • Program examples
- 33. 33 Categories of Prepaid Cards BY FUNCTIONALITY Closed Loop Retail Gift Cards University Campus Cards Open Loop Network Branded Visa, MasterCard, Discover BY FUNDING SOURCE Consumer funded Government funded Corporate funded
- 34. 34 How Structured – By Functionality Closed Loop - “Store Gift Cards” • Essentially a plastic version of a paper gift certificate. • Issuer is the retailer that accepts the card. • Runs on the retailer’s point of sale system, which is modified to allow clerks to know the outstanding balance at all time, and to provide a receipt with the balance to cardholders. • Fraud risk is low. • Can only be used at retailer’s locations; so that each card sale = the sale of that merchant’s goods/services.
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- 36. 36 How Structured – By Functionality Closed Loop - “University Cards” • Typically a student’s ID card coupled with on-campus spending. • Issuer is the University that accepts the card. • Runs on the University’s ID card, cafeteria and security system, which is modified to allow funds on the card to be used for purchases at the laundry, the bookstore, and the cafeteria. • Fraud risk is low. • Can only be used at University locations; mostly loaded by parents. • ATM access can be provided, if the student opens an account with a local bank.
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- 38. 38 How Structured – By Functionality Open system - Non-Reloadable • Accepted at multiple, unrelated, retailers. • Runs on a branded card network – point of sale terminals are not modified. • To work on existing card network infrastructure, cards must have the same basic attributes as credit cards – e.g, magnetic stripe, BIN range card number, expiration date, etc. • Accepting merchant does not know how much value is on the Card; Cardholder knows by calling a toll free number and/or checking a website. • Fraud risk – especially during system downtime or for “under floor limit” transactions – higher • Issuer is a bank – not the retailer or merchant that accepts the cards
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- 40. 40 How Structured – By Functionality Open System - Reloadable • Many different versions • Can allow for both cash access at ATMs plus full signature based purchasing at POS • Increased fraud and money laundering risk due to cash access via ATMs. • Cardholder information required to gain cash access or to re-load the card.
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- 42. Consumers Consumer reloadable Travel Online Campus Remittances Open loop gift Corporate Payroll Incentives & rebates Healthcare & insurance Meal vouchers Business travel Corporate purchasing Public Sector Public Benefit & Welfare programs Emergency assistance & disaster relief Pension, Social Security Travel & cash management Payroll, incentives Different Opportunities for Different load sources 42
- 43. 43 FSA Benefits Spending Card • Improved tracking of medical expenses • Simple year-end reconciliation • Easy-to-use • Easy to track spending year-to-date and remaining balance.
- 44. 44 Prepaid Cards are Government Friendly U.S. Department of the Treasury, Financial Management Service • Provide federal benefits payments to replace costly checks. • Costs $1 to disburse a check vs $.10 for an electronic payment • More than one million-opt-in enrollments • A 95 percent cardholder satisfaction rate
- 45. 45 Workers’ Comp Benefits Recipient - Immediate access to funds - Certain payment schedule - No check cashing expense/hassle Company - Improved efficiency - Reduced expense - Improved recipient experience
- 46. 46 Prepaid Cards Provide Solutions American Red Cross Situation • Provide rapid direct assistance to consumers in disaster situations Benefits • Convenience and access for cardholders • Save Red Cross $millions by reducing expenses, overhead • Limit cash exposure • Restricted spend, fit for purpose
- 47. Basic Prepaid Card Economics, Payment Processes and Risks 47
- 48. 48 Card Branding and Features • Cards branded with a leading “acceptance mark” (American Express, Discover, MasterCard, Visa and PIN Networks such as NYCE, Star, Pulse, Interlink, etc) • Value is maintained on a host computer system • Uses existing payment network infrastructure for ATM and POS – anywhere network brand is accepted*
- 49. 49 Network Branded Prepaid Card Benefits • Consumers. Convenience, Financial Flexibility, Control, Security. • Providers/Government. Process improvements, cost reductions, control, new markets, efficiency. • Merchants. Increased spend, cost reduction, new consumers, efficiency. • Issuers. New markets, risk mitigation, reduction in paper processing.
- 50. 50 Business Model Considerations Revenue Sources – Interchange – Cardholder Fees – Corporate Fees – Treasury Functions Expense Sources – Card Materials & Production – Card Processing – Cardholder Customer Service – External/Network Processing – Risk Mitigation – Regulatory Compliance – Distributor Costs – Marketing Costs
- 51. 51 Prepaid Card Economics To succeed in the marketplace, open system products must satisfy “stakeholders” - - • For consumers - – Useful features not available in other cards such as gifting – Access to payment systems for those without other cards – teens, underserved • For issuers and program managers - – Access to new consumers and additional revenues or deposits – Growth product that is popular and reduces costs for many businesses • For accepting merchants - – Access to a new pool of consumers and transaction data not otherwise available – Dependable systems – Easy procedures – low costs • For sellers and distributors - – Additional revenue stream – Easy sales procedures to follow - low risk of compliance problems – Customer satisfaction • For regulators, law enforcement and consumer advocates - – Clear and conspicuous disclosures – Reasonable fees – Compliance with applicable laws – Tracking and monitoring capabilities
- 52. 52 Prepaid Card Economics Open vs Closed loop Gift Cards Closed Loop Gift Card are highly profitable • Retailer both issues and holds the funds • Retailer gets direct benefit of each usage • Retailer also received benefit of the “profit margin” on goods/services sold • Many consumers end up spending more at the store than the amount on the card • Many consumers are introduced to new stores/restaurants when they receive a closed loop gift cards • Although closed loop cards have no fees, virtually all closed loop issuers have established “special purpose gift card companies” that allows them to keep 100% of the breakage
- 53. 53 Prepaid Card Economics Open vs Closed loop Gift Cards Open Loop Gift Cards have Thin Margins • The card isn’t spent at the issuers’ locations • Issuers receive a few cents per transaction - - and everyone in the chain expects to be paid • The Program manager who has a customer base to whom the cards are marketed • The Bank who is the issuer and takes on liability • The Processor, whose platform, software and systems are used to move the transactions • The Distributor, who maintains a network of sellers who distribute the products • The Seller, who offers the products to the public.
- 54. 54 Prepaid Card Economics Therefore to be economically feasible -- – Maintaining ongoing servicing, including access to refunds, customer service, and compliance usually requires both upfront fees and back-end “servicing fees” – Open System Cards must be usable on the existing credit/charge card infrastructure – Sales and usage procedures must be simple and easy to follow • Must build on existing processes wherever possible – Routine telephone time must be kept to a minimum; Interactive Voice Response (IVR), Web Portal, SMS Alerting, etc used whenever possible – Extra services, such as paper statements and replacement cards, can usually only be provided for a fee – Due to fraud risks, investments in “knowing your customer” and “transaction monitoring” must be made, both for risk management purposes as well as anti-money laundering compliance
- 55. 55 Basic Funds Flow “using the credit card rails” • Prepaid card purchases: 1. Consumer presents Card at the Point of Sale 2. Merchant swipes and waits for “authorization” based on the amount of available funds loaded on card and daily transaction limits 3. If authorization granted, purchase approved; consumer gets goods and merchant gets a “transaction record” = promise to pay 4. Prepaid card issuer ‘holds funds’ against the available balance until clearing item presented or purged from the system after ‘x’ days 5. Merchant submits prepaid card transaction record to its acquiring bank at end of day; acquiring bank compensates merchant for the amount of the purchase less a fee, quickly in 2-3 days (can take up to 30 days) 6. Acquiring bank submits transaction record through the payment network and is paid promptly for the transaction, less a fee. 7. The payment networks debit the funds from the Consumer’s prepaid card issuing bank. 8. The prepaid card issuing bank drops the hold on funds and posts the item against the consumers account
- 56. 56 Prepaid Card Risks: Relative Risks Credit Card Credit losses Fraudulent purchases Potentially Large Credit “bust-outs” Identity theft Prepaid Card Less credit risk, but “Forced Posting Items” can create shortages Risk of fraud is less, since usually limited to face amount of card Some risk if used for ongoing, recurring payments – hotels, car rental Safer with no linked bank account information
- 57. 57 Prepaid Card Risks: Relative Risks Prepaid Paper* “Bearer paper” can’t be stopped Fraudulent refund claims Counterfeits Invisible Misuse – since usage cannot be tracked – no information until the instrument clears *Travelers checks and money orders Prepaid Card Once reported, lost/stolen cards can be cancelled– unlike paper-based products Card usage can be tracked prior to payment of refunds Counterfeiting is a concern, but it’s harder to counterfeit plastic cards than paper checks Easier to catch and trace misuse since each transaction is captured.
- 58. 58 Prepaid Card Risks: Relative Risks Cash Risk of theft, loss, destruction Anonymous and not trackable Prepaid Card Refundable and replaceable– much safer than cash Even anonymous cards are trackable and can be cancelled
- 59. 59 Conclusion • Prepaid payments come with a variety of product capabilities, involving a range of parties and functions • Prepaid payments offer unique access and features to individuals, businesses and governments who are increasingly reliant on such products to make efficient and secure payments in the current economy • Prepaid payments keep consumers “on the grid” and are vastly superior, from an AML prevention and deterrent perspective, to paper payments and cash.
- 60. Prepaid Card Process Flow Review 60
- 61. • Value Loads – Credit/Debit Card Payment – Direct Deposit – Load Network – Commercial Client • Prepaid Cards – Purchase of Prepaid Card – Purchase with Card – ATM Withdrawal – Processing CIP 61
- 62. 62 • Presentation is not comprehensive • The following process/information flows are for illustrative purposes and do not necessarily represent all possible scenarios • Type and availability of transactional information varies by participant and process • Additional configurations are possible – Different load options or processing entities – Order of data flow – Methods of consumer interaction • Processes are evolving with new technologies Notes on Prepaid, Other Payment Processes
- 63. Value Load - Credit/Debit Card Funding (Online Customer) 63 1) Authorization and Load 2) Clearing 3) Settlement
- 64. Value Load – Direct Deposit - Overview 64 1) Value Load 2) Settlement
- 65. Value Load – Load Network - Overview 65 1) Value Load 2) Settlement
- 66. Value Load – Commercial Client - Overview 82 1) Value Load 2) Settlement
- 67. Purchase of a Card – Overview 67 1) Purchase, Load 2) Settlement 3) Temp. Activation 4) Perm. Activation
- 68. Purchase with Card – Overview 68 1) Purchase 2) Clearing 3) Settlement
- 69. ATM Withdrawal 69 1) Withdrawal 2) Settlement
- 71. Who is Currently Regulating Prepaid - Federal 71
- 72. Who is Currently Regulating Prepaid -- FEDERAL • OCC (including some, but not all, former OTS guidance and interpretations). • FDIC (supervisory and deposit insurance) • Federal Reserve (supervisory and Durbin) • CFPB • FTC • OFAC • FinCEN (including Prepaid Access Rule) • IRS (including health care payments products) • Treasury (Government Payments Rule) • FFIEC (Information Systems, proposed guidance on Social Media Risk Management) 72
- 73. What Laws and Regulations Currently Govern Prepaid? 73
- 74. Some Key Laws/Regulations • Electronic Funds Transfer Act (Regulation E) • Government Payments Rule • Dodd-Frank UDAAP standards • CARD Act • Marketing rules (CAN-SPAM, TCPA) • Bank Secrecy Act • Prepaid Access Rule • Regulators’ Guidance on Third Party Risk Management 74
- 75. • Durbin – Dual Network requirements and the FRB FAQ’s – GPR Cards: Interchange and “sole means of access” • Menendez bill (it keeps coming back…) • State legislation Legislation Effecting Prepaid Now
- 76. Regulation E • Coverage Issues (“account” and “financial institution”) – Historically – banks and depository financial institutions – Possible broader view of a person who “directly or indirectly holds an account belonging to a consumer.” – Payroll cards versus other cards (for the moment, anyway) • Overdraft Services – ATM and one-time debit card transactions – Applies to financial institutions • EFT Service Provider NOT Holding Consumer’s Account – Issue a debit card (or other access device) – Have no agreement with the account holding institution 76
- 77. Regulation E – Remittance Transfers • Feb 7, 2013 Effective Date • Not limited to depository institutions • Coverage Issues (“remittance transfer”) – An electronic transfer of funds requested by a sender to a designated recipient – To be received at a location in a foreign country • Two-card remittance versus additional authorized user – Purpose of program – “Account” in US 77
- 78. Remittance Transfers • Obligations – Disclosures (pre-payment; receipt or combined) – Transaction cancellation rights – Error resolution rights (inaccurate amount; computational error; failure to make funds available in amount or on date disclosed) • April 13, 2013 Amendments – Relief from certain disclosure obligations – Relief from liability for consumer errors 78
- 79. Prepaid Access • FinCEN Rule that defines a type of MSB – Provider of prepaid access – Seller of prepaid access • Coverage as MSB means: – Registration with FinCEN (sellers normally exempt) – File SARs – Establish an effective AML program (minimum “four pillars”) – Recordkeeping (vast and burdensome) Four Pillars: 1. Risk-based policy and procedures to prevent money laundering and terrorism - Risk-based evaluation of products, services and geographies - Include AML compliance in employee performance reviews 2. Appointment of a BSA officer 3. Training (role specific, with tests/quizzes – Board versus customer support) 4. Audit (internal or external) 79
- 80. Prepaid Access - Exclusions • Exclusions from “seller” – “Bank-Centric” programs (bank is responsible) – Closed-loop (<$2K; no cash w/drawal) – Solely government funds OR Solely HSA funds • Solely employment benefits (wages etc.), but NO: – Funds or value transmitted international; • US-based merchants qualify, even if customer is outside the US • ATM cash withdrawal or overseas merchant would not qualify – Transfers between or among users in program; or – Loading additional funds from non-depository sources. • <$1k maximum value, but NO: – Funds or value transmitted international; • US-based merchants qualify, even if customer is located outside the US • ATM cash withdrawal or overseas merchant would not qualify – Transfers between or among users in program; or – Loading additional funds from non-depository sources 80
- 81. UDAAP • Unfair – FTC Standard Used • Deceptive – FTC Standard Used • Abusive – ?? (“what’s this?”) 81
- 82. UDAAP – And Abuse • Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or • Takes unreasonable advantage of – – A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; – The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or – The reasonable reliance by the consumer on a covered person to act in the interests of the consumer. • Are we all fiduciaries now? 82
- 83. Privacy and Data Security • Who owns consumer data? • Gramm-Leach-Bliley • PCI • FFIEC data security standards • Contractual requirements and testing 83
- 84. Third Party Risk Management • Bank regulators and CFPB focusing on third party risk management, particularly in prepaid – Bank issuers are responsible for actions of third parties offering or distributing cards or providing processing or other services – Liability through enforcement actions – Consequence: Issuers leaving the market/barriers to entry – Risk Assessment, Due Diligence, Contract structuring and review, Oversight (including testing and consequences) 84
- 85. Government Payments Rule • January, 2011—”Interim Final Rule” and impact (May 28, 2013 FDIC enforcement action) • If card accepts government payments, comply with all Reg E requirements for payroll cards – 60 day transaction history – Error resolution procedures/notice periods – Provisional Credit – Limitations on consumer liability 85
- 86. Where is the CFPB on Prepaid? 86
- 87. CFPB • The CFPB (bureau) is the first federal agency tasked solely with the responsibility for regulating consumer financial protection in the United States • In addition to supervising big banks (with limited supervisory authority for banks under $10 billion), the bureau is responsible for regulating non-bank mortgage lenders and servicers, payday lenders, private student lenders, debt collectors and debt relief services, credit bureaus and other financial service providers 87
- 88. Bureau Functions • The main functions of the bureau are to: – Conduct rulemaking, supervision, and enforcement for federal consumer financial protection laws – Restrict unfair, deceptive, or abusive acts or practices – Create a center to take consumer complaints – Promote financial education – Research consumer behavior – Monitor financial markets for new risks to consumers – Enforce laws that outlaw discrimination and other unfair treatment in consumer finance 88
- 89. Some Recent CFPB Actions • June 11, Report on the impact of overdraft practices on consumers • May 21, Framework for better coordination with the states on supervision and enforcement • May 15, Spanish language website • April 25, Deposit advance announcement by CFPB in support of bank agencies proposed supervisory statement on deposit advance programs • March 28, Release of “largest public database of customer complaints” –over 1 Million data points • The CFPB has an amicus program to file suit in favor of consumers in a legal action pending against a financial institution • The CFPB is blogging on consumer issues such as the need for setting financial goals 89
- 90. CFPB And Whistleblowers/Complaints • The bureau is actively encouraging whistleblowers to report violations of the federal consumer financial protection laws • The bureau established an email address and toll-free telephone number for whistleblowers to contact the bureau • The bureau also announced plans to create a portal on its website to be used by whistleblowers • The bureau has begun accepting consumer complaints about bank accounts, including checking accounts, savings accounts, certificates of deposit and related services • The bureau said that it expects banks to respond to complaints within 15 days and that it wants to close all complaints within 60 days • Consumers will be given tracking numbers after submitting a complaint and are able to log in to the bureau website at any time and check the status of their case • Each complaint will be processed individually and consumers will have the option to dispute a bank’s resolution 90
- 91. Information Sharing • The bureau has assured the financial institutions it regulates that if they comply with a request for information they will not have waived any privilege that applies to that information, including the attorney-client privilege • The bureau has pledged that it will take "all reasonable and appropriate actions" to help an institution defeat any claim that it has waived a privilege • The bureau has stated that institutions cannot invoke waiver concerns as a reason to withhold information they otherwise are required to produce • If the bureau requests an institution to produce information that is within the scope of its supervisory authority, the institution must provide all of the relevant documents and information, regardless of whether the institution believes some of that information may be unnecessary 91
- 92. Information Sharing • Information obtained during the supervisory process will be considered to be exempt from disclosure under the Freedom of Information Act and will not be routinely shared with other agencies that are not engaged in the supervision of financial institutions • "[E]ven a significant law enforcement interest“ may not be sufficient to justify the disclosure of supervisory information, the bureau said, although such an interest would be a factor to be considered • Confidential information will be shared with law enforcement agencies "only in very limited circumstances and upon review of all the relevant facts and considerations" 92
- 93. Supervision • The bureau has begun to phase in the supervision of non-bank financial services providers • The bureau says it now has the authority to supervise mortgage companies, private education lenders and payday lenders • The bureau has defined “larger participants” in credit reporting and debt collection, and has begun direct supervision of those entities 93
- 94. Examinations • The bureau intends to examine non-banks in the same way it examines banks, using a combination of required reports, document reviews and on-site examinations • Companies generally will be given advance notice of examinations • The bureau will coordinate its examinations with those of other regulatory agencies at both the state and federal levels 94
- 95. FTC • The bureau and the Federal Trade Commission entered into a memorandum of understanding • The MOU calls for the two agencies to: – create a secure computerized system each agency can use to keep track of the other’s activities – inform each other before beginning an investigation or an enforcement action and refrain from duplicative actions – have meetings at least quarterly to coordinate their activities – consult on guidance and regulatory proposals, such as those addressing unfair, deceptive or abusive acts or practices – cooperate on consumer education initiatives – share consumer complaints • The bureau will provide the FTC with the report of examination of any company under the FTC’s jurisdiction 95
- 96. Manual • The bureau has issued its Supervision and Examination Manual – A supervised entity must develop and maintain a sound compliance management system – Supervised entities are also expected to manage relationships with third-party service providers to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided 96
- 97. CFSI’s Disclosure Box Several programs are piloting now: Green Dot, Plastyc and Ready Credit Cordray statement from CBA - Focus on disclosures vs fee caps or prohibitions NBPCA position statement 9797 Disclosures: A Big and Recurring Topic
- 98. Other Current Issues in Prepaid • Tax refund fraud • Identity theft • FTC proposed ban on telemarketers use of authorization codes for prepaid cards • Preemption • Overdraft products and short-term lending associated with prepaid cards • Garnishment of Accounts that include receipt of federal benefit payments 98
- 99. Your Next Steps in Prepaid
- 100. • Identify and analyze funds moving away from you to prepaid • Review key sources of industry data – NBPCA, etc. • Consider prepaid solutions to fit with your overall strategy: – Consumer programs, e.g., GPR cards – Commercial programs, e.g., payroll cards • Identify use cases in your client base, especially unique ones • Determine best product offerings to fit you key use cases • Identify partners to supply the products you need – Processing only or program management partner? • Set your plan to go to market, or expand current offerings Develop A Prepaid Strategy 100
- 101. Appendix
- 102. • Typical credit card transaction, with funds used to load prepaid card • Additional prepaid card processes • Credit/debit card networks have additional risk processes 102 Credit/Debit Card - Authorization and Load
- 103. • Issuer approves, declines request • Card Network and Merchant Acquirer Bank route response back to Prepaid Processor • Prepaid Processor applies value load to account if approved 103 Credit/Debit Card - Authorization and Load
- 104. • Uses data created at authorization • Clearing request–-finalize transaction amount • Batch processing • Periodic intervals—not done at the time of authorization • Card networks gather all transactions to calculate settlement amounts 104 Credit/Debit Card – Clearing
- 105. Direct Deposit – Value Load 105 1) Value Load 2) Settlement
- 106. Direct Deposit – Settlement 1061) Value Load 2) Settlement
- 107. Load Network – Value Load 107 1) Value Load 2) Settlement
- 108. Load Network - Settlement 108 1) Value Load 2) Settlement
- 109. Commercial Client – Value Load 93 1) Value Load 2) Settlement
- 110. Commercial Client - Settlement 110 1) Value Load 2) Settlement
- 111. Purchase with Card - Authorization 111 1) Purchase 2) Clearing 3) Settlement
- 112. Purchase with Card - Clearing 112 1) Purchase 2) Clearing 3) Settlement
- 113. Purchase with Card - Settlement 113 1) Purchase 2) Clearing 3) Settlement
- 114. ATM Withdrawal - Withdrawal 114 1) Withdrawal 2) Settlement
- 115. ATM Withdrawal - Settlement 115 1) Withdrawal 2) Settlement