The Invaluable Fundamentals ofPrepaidFrank KaplanSVP Business DevelopmentNetSpend CorporationKaren L. GarrettPartnerStinso...
Thank You To Our Sponsors2Presenting SponsorsSupporting Sponsor Welcoming Reception SponsorAssociate SponsorsFounding Spon...
• Prepaid vs. debit vs. credit – What are the similaritiesand differences?• The broad menu of Prepaid products: Some say t...
4• Nonprofit, inter-industry trade association• Focus is Network branded (open-loop) prepaid cards• Young – in our 5th yea...
NBPCA: What We Do• Educate: Consumers, government, media on the types of uses and uniqueapplications for network branded p...
6Best practices: Created to address specifics such as disclosures,AML, overdraft, etcCode of Conduct: establishes the basi...
7Agenda• Industry Overview• Introduction to Prepaid Cards• Prepaid Card Programs• Card Economics Payment Processes and Ris...
PREPAID INDUSTRY OVERVIEW8
1. Mercator Advisory Group. Prepaid Market Forecasts 2011-20142. http://www.paymentssource.com/statistics/Est 2014 total $...
Prepaid is becoming a larger part of the FinancialServices Industry: 2012 FDIC STUDY*• 20.1% of US households report being...
Introduction to Prepaid Cards:HistoryClosed vs. OpenRoles and ResponsibilitiesEconomics and Risks11
12BACKGROUND: History• Old prepaid payment products:Tokens, travelers checks, money orders.• Mid 1990’s: “Smart Card” test...
Prepaid is becoming a larger part of theFinancial Services Industry: 2012 FDIC STUDY*• 20.1% of US households report being...
14Prepaid Cards: One size does NOT fit allRetail Gift Cards – Payroll Cards – Teen spending Cards – Travel Cards –Mall Car...
Closed vs Open Loop Cards15
Credit productsdraw funds froma credit line.Debit products drawfunds from a checkingaccount.Prepaid productsdraw funds fro...
17Closed Loop vs Open LoopClosed Loop “Store Gift Cards”• Essentially a plastic version of a paper gift certificate• Issue...
18Closed Loop vs Open LoopRed= may be non-reloadable or reloadableApplications by card type Closed Loop Open LoopPayroll ...
ConsumersConsumer reloadableTravelOnlineCampusRemittancesOpen loop giftCorporatePayrollIncentives & rebatesHealthcare & in...
Prepaid card parties andrelationships – contracts andservicing20
21Prepaid has a Much Different ValueChain than Credit and Debit• Unlike Credit and Debit Cards, the value proposition inPr...
22Roles of Participants in Prepaid ProgramsCardholder DistributorProgram/ProductSponsorIssuerIssuingProcessorVisaMasterCar...
23ROLES AND RESPONSIBILITIES:Open System Cards• Bank/Financial Institution• Access to networks• Safekeeping of funds• Prog...
24ROLES AND RESPONSIBILITIES:Open System Cards• Processors• Create (order and encode) cards and maintaincard balances• Con...
25Typical Contractual Relationships• Bank and Program Manager– Bank is issuer– Program Manager provides card designs, mark...
26Typical Contractual Relationships• Bank and the Processor– Processors provides servicing in accordance with PaymentNetwo...
27Typical Contractual Relationships• Program Manager and Processor– Program Manager retains Processor to provide technolog...
28Typical Contractual Relationships• Program Manager and Distributors/Sellers– Sets forth terms of sale, commissions or fe...
29Typical Contractual Relationships• Bank and the Consumer (cardholder agreement)– Bank obligated to honor the agreement– ...
30Typical Contractual Relationships• Program Manager and Corporate Sponsors– Program manager markets card functionality an...
31Typical Contractual Relationships• Payment Network Rules (Card and EFT/ATM networks)– Bind Issuing Banks– Bind authorize...
32Prepaid Card Programs• Variety of Program Structures• Types of Cards• Source of Funds• Program examples
33Categories of Prepaid CardsBY FUNCTIONALITYClosed LoopRetail Gift CardsUniversity Campus CardsOpen LoopNetwork BrandedVi...
34How Structured – By FunctionalityClosed Loop - “Store Gift Cards”• Essentially a plastic version of a paper gift certifi...
35
36How Structured – By FunctionalityClosed Loop - “University Cards”• Typically a student’s ID card coupled with on-campuss...
37
38How Structured – By FunctionalityOpen system - Non-Reloadable• Accepted at multiple, unrelated, retailers.• Runs on a br...
39
40How Structured – By FunctionalityOpen System - Reloadable• Many different versions• Can allow for both cash access at AT...
41
ConsumersConsumer reloadableTravelOnlineCampusRemittancesOpen loop giftCorporatePayrollIncentives & rebatesHealthcare & in...
43FSA Benefits Spending Card• Improved tracking of medical expenses• Simple year-end reconciliation• Easy-to-use• Easy to ...
44Prepaid Cards are Government FriendlyU.S. Department of the Treasury, Financial Management Service• Provide federalbenef...
45Workers’ Comp BenefitsRecipient- Immediate accessto funds- Certain paymentschedule- No check cashingexpense/hassleCompan...
46Prepaid Cards Provide SolutionsAmerican Red CrossSituation• Provide rapid direct assistance to consumers indisaster situ...
Basic Prepaid Card Economics,Payment Processes and Risks47
48Card Branding and Features• Cards branded with a leading “acceptance mark” (AmericanExpress, Discover, MasterCard, Visa ...
49Network Branded Prepaid Card Benefits• Consumers. Convenience, Financial Flexibility, Control,Security.• Providers/Gover...
50Business Model ConsiderationsRevenue Sources– Interchange– Cardholder Fees– Corporate Fees– Treasury FunctionsExpense So...
51Prepaid Card EconomicsTo succeed in the marketplace, open system products must satisfy “stakeholders” - -• For consumers...
52Prepaid Card EconomicsOpen vs Closed loop Gift CardsClosed Loop Gift Card are highly profitable• Retailer both issues an...
53Prepaid Card EconomicsOpen vs Closed loop Gift CardsOpen Loop Gift Cards have Thin Margins• The card isn’t spent at the ...
54Prepaid Card EconomicsTherefore to be economically feasible --– Maintaining ongoing servicing, including access to refun...
55Basic Funds Flow“using the credit card rails”• Prepaid card purchases:1. Consumer presents Card at the Point of Sale2. M...
56Prepaid Card Risks:Relative RisksCredit Card Credit losses Fraudulent purchases Potentially Large Credit“bust-outs” ...
57Prepaid Card Risks:Relative RisksPrepaid Paper* “Bearer paper” can’t bestopped Fraudulent refund claims Counterfeits...
58Prepaid Card Risks:Relative RisksCash Risk of theft,loss,destruction Anonymousand nottrackablePrepaid Card Refundable...
59Conclusion• Prepaid payments come with a variety of product capabilities,involving a range of parties and functions• Pre...
Prepaid Card Process FlowReview60
• Value Loads– Credit/Debit Card Payment– Direct Deposit– Load Network– Commercial Client• Prepaid Cards– Purchase of Prep...
62• Presentation is not comprehensive• The following process/information flows are for illustrativepurposes and do not nec...
Value Load - Credit/Debit CardFunding (Online Customer)631) Authorization and Load2) Clearing3) Settlement
Value Load – Direct Deposit - Overview641) Value Load2) Settlement
Value Load – Load Network - Overview651) Value Load2) Settlement
Value Load – Commercial Client - Overview821) Value Load2) Settlement
Purchase of a Card – Overview671) Purchase, Load2) Settlement3) Temp. Activation4) Perm. Activation
Purchase with Card – Overview681) Purchase2) Clearing3) Settlement
ATM Withdrawal691) Withdrawal2) Settlement
Processing CIP(if applicable)
Who is Currently RegulatingPrepaid - Federal71
Who is Currently Regulating Prepaid --FEDERAL• OCC (including some, but not all, former OTS guidance andinterpretations).•...
What Laws and RegulationsCurrently Govern Prepaid?73
Some Key Laws/Regulations• Electronic Funds Transfer Act (Regulation E)• Government Payments Rule• Dodd-Frank UDAAP standa...
• Durbin– Dual Network requirements and the FRB FAQ’s– GPR Cards: Interchange and “sole means ofaccess”• Menendez bill (it...
Regulation E• Coverage Issues (“account” and “financial institution”)– Historically – banks and depository financial insti...
Regulation E – Remittance Transfers• Feb 7, 2013 Effective Date• Not limited to depository institutions• Coverage Issues (...
Remittance Transfers• Obligations– Disclosures (pre-payment; receipt or combined)– Transaction cancellation rights– Error ...
Prepaid Access• FinCEN Rule that defines a type of MSB– Provider of prepaid access– Seller of prepaid access• Coverage as ...
Prepaid Access - Exclusions• Exclusions from “seller”– “Bank-Centric” programs (bank is responsible)– Closed-loop (<$2K; n...
UDAAP• Unfair – FTC Standard Used• Deceptive – FTC Standard Used• Abusive – ?? (“what’s this?”)81
UDAAP – And Abuse• Materially interferes with the ability of a consumer to understanda term or condition of a consumer fin...
Privacy and Data Security• Who owns consumer data?• Gramm-Leach-Bliley• PCI• FFIEC data security standards• Contractual re...
Third Party Risk Management• Bank regulators and CFPB focusing on third party riskmanagement, particularly in prepaid– Ban...
Government Payments Rule• January, 2011—”Interim Final Rule” and impact(May 28, 2013 FDIC enforcement action)• If card acc...
Where is the CFPB on Prepaid?86
CFPB• The CFPB (bureau) is the first federal agency tasked solelywith the responsibility for regulating consumer financial...
Bureau Functions• The main functions of the bureau are to:– Conduct rulemaking, supervision, and enforcement forfederal co...
Some Recent CFPB Actions• June 11, Report on the impact of overdraft practices on consumers• May 21, Framework for better ...
CFPB And Whistleblowers/Complaints• The bureau is actively encouraging whistleblowers to report violations ofthe federal c...
Information Sharing• The bureau has assured the financial institutions it regulates that if theycomply with a request for ...
Information Sharing• Information obtained during the supervisory process will beconsidered to be exempt from disclosure un...
Supervision• The bureau has begun to phase in the supervision ofnon-bank financial services providers• The bureau says it ...
Examinations• The bureau intends to examine non-banks in thesame way it examines banks, using a combination ofrequired rep...
FTC• The bureau and the Federal Trade Commission entered intoa memorandum of understanding• The MOU calls for the two agen...
Manual• The bureau has issued its Supervision andExamination Manual– A supervised entity must develop and maintain a sound...
CFSI’s Disclosure BoxSeveral programs are pilotingnow: Green Dot, Plastyc andReady CreditCordray statement from CBA- Focus...
Other Current Issues in Prepaid• Tax refund fraud• Identity theft• FTC proposed ban on telemarketers use ofauthorization c...
Your Next Steps in Prepaid
• Identify and analyze funds moving away from you to prepaid• Review key sources of industry data – NBPCA, etc.• Consider ...
Appendix
• Typical credit card transaction, with funds used to load prepaid card• Additional prepaid card processes• Credit/debit c...
• Issuer approves, declines request• Card Network and Merchant Acquirer Bank route response back to PrepaidProcessor• Prep...
• Uses data created at authorization• Clearing request–-finalize transaction amount• Batch processing• Periodic intervals—...
Direct Deposit – Value Load1051) Value Load2) Settlement
Direct Deposit – Settlement1061) Value Load2) Settlement
Load Network – Value Load1071) Value Load2) Settlement
Load Network - Settlement1081) Value Load2) Settlement
Commercial Client – Value Load931) Value Load2) Settlement
Commercial Client - Settlement1101) Value Load2) Settlement
Purchase with Card - Authorization1111) Purchase2) Clearing3) Settlement
Purchase with Card - Clearing1121) Purchase2) Clearing3) Settlement
Purchase with Card - Settlement1131) Purchase2) Clearing3) Settlement
ATM Withdrawal - Withdrawal1141) Withdrawal2) Settlement
ATM Withdrawal - Settlement1151) Withdrawal2) Settlement
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The Invaluable Fundamentals of Prepaid

  1. 1. The Invaluable Fundamentals ofPrepaidFrank KaplanSVP Business DevelopmentNetSpend CorporationKaren L. GarrettPartnerStinson Morrison Hecker LLPWednesday, June 26, 2013Workshop ASteven E. DaweNational Sales DirectorFISERVJoan M. HermanSenior Vice PresidentSunrise BanksStephanie TetaIndustry OutreachNBPCA© 2013 Network Branded Prepaid Card Association
  2. 2. Thank You To Our Sponsors2Presenting SponsorsSupporting Sponsor Welcoming Reception SponsorAssociate SponsorsFounding Sponsors
  3. 3. • Prepaid vs. debit vs. credit – What are the similaritiesand differences?• The broad menu of Prepaid products: Some say thereare over 20 Prepaid products – What are they? Whodo they serve?3Prepaid is the fastest growingpayment product
  4. 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 cardsAbout NBPCANBPCA 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 todeliver this training broadly across constituent groupsNBPCA Role• Provide a highly interactive and participatory forum for thought leadership andcollaboration to drive industry consensus and success• Serve as the collective voice of industry and a trusted, credible point of factualinformation to industry, government, media and consumer groupsNetwork Branded Prepaid Card AssociationEducate. Advocate. Protect. Promote.
  5. 5. NBPCA: What We Do• Educate: Consumers, government, media on the types of uses and uniqueapplications for network branded prepaid• Advocate: Actively seek meetings and opportunities for interaction withpeople and entities of influence• Protect: Preserve ability to offer a competitive product set• Promote: Assertively highlight the unique benefits provided by networkbranded prepaid products to consumers, government, media, andbusinessesNBPCA: Core Principles in Serving Consumers• Choice. Access. Transparency. EducationNetwork Branded Prepaid Card Association5
  6. 6. 6Best practices: Created to address specifics such as disclosures,AML, overdraft, etcCode of Conduct: establishes the basis of ethical business operationsfor NBPCA members, and hopefully the rest of the industryTips for consumers’ use of prepaid for different card types andconsumer groupsNPBCA – Setting the Industry bar
  7. 7. 7Agenda• 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
  8. 8. PREPAID INDUSTRY OVERVIEW8
  9. 9. 1. Mercator Advisory Group. Prepaid Market Forecasts 2011-20142. http://www.paymentssource.com/statistics/Est 2014 total $648BOpen Loop $354B,CAGR 34.5%Closed loop $330B,CAGR 8%Prepaid vs. Debit vs. Credit2012: Prepaid is ~1/3 volume of Either Credit or Debit020040060080010001200140016002006 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$1,396.0Total Loaded onto PrepaidU.S. Annual Debit CardPurchase VolumesVisa and MasterCard AnnualU.S. Credit Card PurchaseVolumes Combined9
  10. 10. Prepaid is becoming a larger part of the FinancialServices 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 enoughmoney to open and fund an account.• 7.5 % of households said they simply did not trust or feel comfortable dealing withbanks.• 6.6% said they could not open accounts because they lacked required identificationor 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 thatbanks could use to serve lower-income communities without incurring muchcost.“There are fewer ways to access the account, so there are fewer opportunitiesfor 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. 11. Introduction to Prepaid Cards:HistoryClosed vs. OpenRoles and ResponsibilitiesEconomics and Risks11
  12. 12. 12BACKGROUND: History• Old prepaid payment products:Tokens, travelers checks, money orders.• Mid 1990’s: “Smart Card” tests inAtlanta (Olympics) and Upper West Side.– Problems: No infrastructure and cost.• 1999–2002: Slow growth of prepaid cards(primarily gift cards) using the existingcredit/debit card infrastructure.• 2003–2008:Increasing growth,especially in new “open system” products.• 2009-Present: Significant new regulations; butalso growth in new technologies and functionalities
  13. 13. Prepaid is becoming a larger part of theFinancial 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 nothave enough money to open and fund an account.• 7.5 % of households said they simply did not trust or feel comfortabledealing with banks.• 6.6% said they could not open accounts because they lacked requiredidentification 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 innovativetool that banks could use to serve lower-income communities withoutincurring much cost.“There are fewer ways to access the account, so thereare 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, 201213
  14. 14. 14Prepaid Cards: One size does NOT fit allRetail 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 usedup. Others allow for reloading and longer term relationships.• Some are entirely anonymous. Others are embossed/printed andencoded with customer names and can be renewed every 2-3 years• Some provide cash access at ATMs. Many do not allow for cashredemption.• Some are pre-denominated in fixed dollar amounts. Others are loadedwith value up to the level requested by the purchaser.It is clear that prepaid cards provide an important and necessary source offinancial services to millions of underbanked and underserved consumers,and a uniquely effective payment product for governments and businesses.
  15. 15. Closed vs Open Loop Cards15
  16. 16. Credit productsdraw funds froma credit line.Debit products drawfunds from a checkingaccount.Prepaid productsdraw funds from apre-funded accountwhich can befunded from avariety of sources.Pay LaterPay NowPay BeforeClosed LoopTypically accepted by a singlemerchant/group of merchants. Examplesinclude dept. store gift, phone, and transitcards. Also called ―retailer-branded‖ or―proprietary‖ prepaid cards.Carry acceptance mark of anational/international payment networksuch as Visa, MasterCard, AmericanExpress, or Discover. Some ATM/EFTnetworks also offer prepaid cardproducts. Functionality depends oncard application.NetworkBrandedPayment Card Models16
  17. 17. 17Closed Loop vs Open LoopClosed 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 providedwith the balance on card on the POS device.Open Loop “General Use Gift Cards”• Essentially a prepaid Visa, MasterCard, American Express orDiscover Card useable where each brand is accepted• Runs on existing credit card POS system – clerk only knows if apurchase is approved or declined; clerk does not know thebalance.
  18. 18. 18Closed Loop vs Open LoopRed= may be non-reloadable or reloadableApplications by card type Closed Loop Open LoopPayroll 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. 19. ConsumersConsumer reloadableTravelOnlineCampusRemittancesOpen loop giftCorporatePayrollIncentives & rebatesHealthcare & insuranceMeal vouchersBusiness travelCorporate purchasingPublic SectorPublic Benefit & WelfareprogramsEmergency assistance &disaster reliefPension, Social SecurityTravel & cash managementPayroll, incentivesDifferent Applications forOpen Loop Reloadable19
  20. 20. Prepaid card parties andrelationships – contracts andservicing20
  21. 21. 21Prepaid has a Much Different ValueChain than Credit and Debit• Unlike Credit and Debit Cards, the value proposition inPrepaid 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 distributorsCardholder DistributorProgram/ProductSponsorIssuerIssuingProcessorVisaMasterCardDiscoverAmexAcquirer ATM/POS
  22. 22. 22Roles of Participants in Prepaid ProgramsCardholder DistributorProgram/ProductSponsorIssuerIssuingProcessorVisaMasterCardAmexDiscoverAcquirer ATM/POS• Cardholder – Loads the funds• Distribution – retailer or bank / FI or program manager online• Program/Product Sponsor – bank issuer or bank issuing partner thatmanages 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 advancein a branch or via POS (retail, web, telephone, etc)
  23. 23. 23ROLES AND RESPONSIBILITIES:Open System Cards• Bank/Financial Institution• Access to networks• Safekeeping of funds• Program regulatory oversight• Ultimate liability under network branded paymentsystem 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. 24ROLES AND RESPONSIBILITIES:Open System Cards• Processors• Create (order and encode) cards and maintaincard balances• Connect with network branded paymentsystems and sales agents to authorize cardsales and purchase transactions• Post card transactions and fees to the card andprovide report data• Provide telephone inquiries (usually VRU) andcustomer service functions• Sellers/Distributors• Sell and distribute cards at POS, send salesdata to processor
  25. 25. 25Typical Contractual Relationships• Bank and Program Manager– Bank is issuer– Program Manager provides card designs, marketing plan, andproposed pricing/terms which are approved by the bank– Bank provides template for the cardholder agreement andapproves final terms and conditions– Program Manager must use a processor approved by Bank– Program Manager and Bank often both have access to dataand monitor transactions.– Program Manager must follow bank’s policies and procedures
  26. 26. 26Typical Contractual Relationships• Bank and the Processor– Processors provides servicing in accordance with PaymentNetwork standards and rules– Cardholders are Bank customers – data must be heldsecurely 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, ProgramManager and Processor
  27. 27. 27Typical Contractual Relationships• Program Manager and Processor– Program Manager retains Processor to provide technologyplatform – systems are key to functionality and efficient,low cost operations– Service Level Agreement (SLA) often applies to thetechnology and systems services provided by Processor– Processor transmits data and is required to hold datasecurely– Processor OR Program Manager handles customer serviceand provides reports to the Bank.
  28. 28. 28Typical Contractual Relationships• Program Manager and Distributors/Sellers– Sets forth terms of sale, commissions or fees paid– Distributors’ and/or Sellers’ obligations for secure storage ofinventory– Compliance and Service Training for sales staff• Bank and Distributors/Sellers– Due diligence and approval of the Distributor/Seller by theBank– Some Banks appoint Distributors/Sellers as the Bank’sLimited Sales Agent– Tri-party agreement between Bank, Program Manager andDistributor/Seller
  29. 29. 29Typical 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. 30Typical Contractual Relationships• Program Manager and Corporate Sponsors– Program manager markets card functionality and servicesto Corporate and Government Sponsors– Program Manager’s contract provides customized solutionsto meet Sponsor’s needs– Timing of payments, terms of programs, levels of customerservice to be provided– Functionality to be provided– Approvals by the Bank are always required
  31. 31. 31Typical 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. 32Prepaid Card Programs• Variety of Program Structures• Types of Cards• Source of Funds• Program examples
  33. 33. 33Categories of Prepaid CardsBY FUNCTIONALITYClosed LoopRetail Gift CardsUniversity Campus CardsOpen LoopNetwork BrandedVisa, MasterCard, DiscoverBY FUNDING SOURCEConsumer fundedGovernment fundedCorporate funded
  34. 34. 34How Structured – By FunctionalityClosed 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 modifiedto 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.
  35. 35. 35
  36. 36. 36How Structured – By FunctionalityClosed Loop - “University Cards”• Typically a student’s ID card coupled with on-campusspending.• Issuer is the University that accepts the card.• Runs on the University’s ID card, cafeteria and securitysystem, which is modified to allow funds on the card to beused for purchases at the laundry, the bookstore, and thecafeteria.• Fraud risk is low.• Can only be used at University locations; mostly loaded byparents.• ATM access can be provided, if the student opens anaccount with a local bank.
  37. 37. 37
  38. 38. 38How Structured – By FunctionalityOpen 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 samebasic 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; Cardholderknows 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
  39. 39. 39
  40. 40. 40How Structured – By FunctionalityOpen System - Reloadable• Many different versions• Can allow for both cash access at ATMs plus fullsignature based purchasing at POS• Increased fraud and money laundering risk due tocash access via ATMs.• Cardholder information required to gain cash accessor to re-load the card.
  41. 41. 41
  42. 42. ConsumersConsumer reloadableTravelOnlineCampusRemittancesOpen loop giftCorporatePayrollIncentives & rebatesHealthcare & insuranceMeal vouchersBusiness travelCorporate purchasingPublic SectorPublic Benefit & WelfareprogramsEmergency assistance &disaster reliefPension, Social SecurityTravel & cash managementPayroll, incentivesDifferent Opportunities forDifferent load sources42
  43. 43. 43FSA Benefits Spending Card• Improved tracking of medical expenses• Simple year-end reconciliation• Easy-to-use• Easy to track spending year-to-date andremaining balance.
  44. 44. 44Prepaid Cards are Government FriendlyU.S. Department of the Treasury, Financial Management Service• Provide federalbenefits payments toreplace costly checks.• Costs $1 to disbursea check vs $.10 foran electronic payment• More than one million-opt-inenrollments• A 95 percent cardholdersatisfaction rate
  45. 45. 45Workers’ Comp BenefitsRecipient- Immediate accessto funds- Certain paymentschedule- No check cashingexpense/hassleCompany- Improved efficiency- Reduced expense- Improved recipientexperience
  46. 46. 46Prepaid Cards Provide SolutionsAmerican Red CrossSituation• Provide rapid direct assistance to consumers indisaster situationsBenefits• Convenience and access for cardholders• Save Red Cross $millions by reducing expenses,overhead• Limit cash exposure• Restricted spend, fit for purpose
  47. 47. Basic Prepaid Card Economics,Payment Processes and Risks47
  48. 48. 48Card Branding and Features• Cards branded with a leading “acceptance mark” (AmericanExpress, Discover, MasterCard, Visa and PIN Networks such asNYCE, 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. 49Network Branded Prepaid Card Benefits• Consumers. Convenience, Financial Flexibility, Control,Security.• Providers/Government. Process improvements, costreductions, control, new markets, efficiency.• Merchants. Increased spend, cost reduction, newconsumers, efficiency.• Issuers. New markets, risk mitigation, reduction inpaper processing.
  50. 50. 50Business Model ConsiderationsRevenue Sources– Interchange– Cardholder Fees– Corporate Fees– Treasury FunctionsExpense Sources– Card Materials & Production– Card Processing– Cardholder Customer Service– External/Network Processing– Risk Mitigation– Regulatory Compliance– Distributor Costs– Marketing Costs
  51. 51. 51Prepaid Card EconomicsTo 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. 52Prepaid Card EconomicsOpen vs Closed loop Gift CardsClosed 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” ongoods/services sold• Many consumers end up spending more at the store than theamount on the card• Many consumers are introduced to new stores/restaurantswhen they receive a closed loop gift cards• Although closed loop cards have no fees, virtually all closedloop issuers have established “special purpose gift cardcompanies” that allows them to keep 100% of the breakage
  53. 53. 53Prepaid Card EconomicsOpen vs Closed loop Gift CardsOpen 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 thecards are marketed• The Bank who is the issuer and takes on liability• The Processor, whose platform, software and systems are usedto move the transactions• The Distributor, who maintains a network of sellers whodistribute the products• The Seller, who offers the products to the public.
  54. 54. 54Prepaid Card EconomicsTherefore to be economically feasible --– Maintaining ongoing servicing, including access to refunds, customerservice, and compliance usually requires both upfront fees and back-end“servicing fees”– Open System Cards must be usable on the existing credit/charge cardinfrastructure– 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 VoiceResponse (IVR), Web Portal, SMS Alerting, etc used whenever possible– Extra services, such as paper statements and replacement cards, canusually only be provided for a fee– Due to fraud risks, investments in “knowing your customer” and“transaction monitoring” must be made, both for risk managementpurposes as well as anti-money laundering compliance
  55. 55. 55Basic Funds Flow“using the credit card rails”• Prepaid card purchases:1. Consumer presents Card at the Point of Sale2. Merchant swipes and waits for “authorization” based on the amount ofavailable funds loaded on card and daily transaction limits3. If authorization granted, purchase approved; consumer gets goods andmerchant gets a “transaction record” = promise to pay4. Prepaid card issuer ‘holds funds’ against the available balance until clearingitem presented or purged from the system after ‘x’ days5. Merchant submits prepaid card transaction record to its acquiring bank at endof day; acquiring bank compensates merchant for the amount of the purchaseless a fee, quickly in 2-3 days (can take up to 30 days)6. Acquiring bank submits transaction record through the payment network andis paid promptly for the transaction, less a fee.7. The payment networks debit the funds from the Consumer’s prepaid cardissuing bank.8. The prepaid card issuing bank drops the hold on funds and posts the itemagainst the consumers account
  56. 56. 56Prepaid Card Risks:Relative RisksCredit Card Credit losses Fraudulent purchases Potentially Large Credit“bust-outs” Identity theftPrepaid Card Less credit risk, but “ForcedPosting Items” can createshortages Risk of fraud is less, sinceusually limited to face amountof card Some risk if used for ongoing,recurring payments – hotels,car rental Safer with no linked bankaccount information
  57. 57. 57Prepaid Card Risks:Relative RisksPrepaid Paper* “Bearer paper” can’t bestopped Fraudulent refund claims Counterfeits Invisible Misuse – sinceusage cannot be tracked –no information until theinstrument clears*Travelers checks and money ordersPrepaid Card Once reported, lost/stolen cardscan be cancelled–unlike paper-based products Card usage can be tracked prior topayment of refunds Counterfeiting is a concern, butit’s harder to counterfeit plasticcards than paper checks Easier to catch and trace misusesince each transaction is captured.
  58. 58. 58Prepaid Card Risks:Relative RisksCash Risk of theft,loss,destruction Anonymousand nottrackablePrepaid Card Refundable and replaceable–much safer than cash Even anonymous cards aretrackable and can becancelled
  59. 59. 59Conclusion• Prepaid payments come with a variety of product capabilities,involving a range of parties and functions• Prepaid payments offer unique access and features toindividuals, businesses and governments who are increasinglyreliant on such products to make efficient and securepayments in the current economy• Prepaid payments keep consumers “on the grid” and arevastly superior, from an AML prevention and deterrentperspective, to paper payments and cash.
  60. 60. Prepaid Card Process FlowReview60
  61. 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 CIP61
  62. 62. 62• Presentation is not comprehensive• The following process/information flows are for illustrativepurposes and do not necessarily represent all possiblescenarios• Type and availability of transactional information varies byparticipant 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 technologiesNotes on Prepaid, Other Payment Processes
  63. 63. Value Load - Credit/Debit CardFunding (Online Customer)631) Authorization and Load2) Clearing3) Settlement
  64. 64. Value Load – Direct Deposit - Overview641) Value Load2) Settlement
  65. 65. Value Load – Load Network - Overview651) Value Load2) Settlement
  66. 66. Value Load – Commercial Client - Overview821) Value Load2) Settlement
  67. 67. Purchase of a Card – Overview671) Purchase, Load2) Settlement3) Temp. Activation4) Perm. Activation
  68. 68. Purchase with Card – Overview681) Purchase2) Clearing3) Settlement
  69. 69. ATM Withdrawal691) Withdrawal2) Settlement
  70. 70. Processing CIP(if applicable)
  71. 71. Who is Currently RegulatingPrepaid - Federal71
  72. 72. Who is Currently Regulating Prepaid --FEDERAL• OCC (including some, but not all, former OTS guidance andinterpretations).• 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 RiskManagement)72
  73. 73. What Laws and RegulationsCurrently Govern Prepaid?73
  74. 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 Management74
  75. 75. • Durbin– Dual Network requirements and the FRB FAQ’s– GPR Cards: Interchange and “sole means ofaccess”• Menendez bill (it keeps coming back…)• State legislationLegislation Effecting Prepaid Now
  76. 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 anaccount 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 institution76
  77. 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 designatedrecipient– To be received at a location in a foreign country• Two-card remittance versus additional authorized user– Purpose of program– “Account” in US77
  78. 78. Remittance Transfers• Obligations– Disclosures (pre-payment; receipt or combined)– Transaction cancellation rights– Error resolution rights (inaccurate amount; computationalerror; failure to make funds available in amount or on datedisclosed)• April 13, 2013 Amendments– Relief from certain disclosure obligations– Relief from liability for consumer errors78
  79. 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 reviews2. Appointment of a BSA officer3. Training (role specific, with tests/quizzes – Board versus customer support)4. Audit (internal or external)79
  80. 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 sources80
  81. 81. UDAAP• Unfair – FTC Standard Used• Deceptive – FTC Standard Used• Abusive – ?? (“what’s this?”)81
  82. 82. UDAAP – And Abuse• Materially interferes with the ability of a consumer to understanda 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 aconsumer financial product or service; or– The reasonable reliance by the consumer on a covered person to act in theinterests of the consumer.• Are we all fiduciaries now?82
  83. 83. Privacy and Data Security• Who owns consumer data?• Gramm-Leach-Bliley• PCI• FFIEC data security standards• Contractual requirements and testing83
  84. 84. Third Party Risk Management• Bank regulators and CFPB focusing on third party riskmanagement, particularly in prepaid– Bank issuers are responsible for actions of third partiesoffering or distributing cards or providing processing orother services– Liability through enforcement actions– Consequence: Issuers leaving the market/barriers to entry– Risk Assessment, Due Diligence, Contract structuring andreview, Oversight (including testing and consequences)84
  85. 85. Government Payments Rule• January, 2011—”Interim Final Rule” and impact(May 28, 2013 FDIC enforcement action)• If card accepts government payments, complywith all Reg E requirements for payroll cards– 60 day transaction history– Error resolution procedures/notice periods– Provisional Credit– Limitations on consumer liability85
  86. 86. Where is the CFPB on Prepaid?86
  87. 87. CFPB• The CFPB (bureau) is the first federal agency tasked solelywith the responsibility for regulating consumer financialprotection in the United States• In addition to supervising big banks (with limited supervisoryauthority for banks under $10 billion), the bureau isresponsible for regulating non-bank mortgage lenders andservicers, payday lenders, private student lenders, debtcollectors and debt relief services, credit bureaus and otherfinancial service providers87
  88. 88. Bureau Functions• The main functions of the bureau are to:– Conduct rulemaking, supervision, and enforcement forfederal 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 unfairtreatment in consumer finance88
  89. 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 andenforcement• May 15, Spanish language website• April 25, Deposit advance announcement by CFPB in support of bank agenciesproposed supervisory statement on deposit advance programs• March 28, Release of “largest public database of customer complaints” –over 1Million data points• The CFPB has an amicus program to file suit in favor of consumers in a legalaction pending against a financial institution• The CFPB is blogging on consumer issues such as the need for setting financialgoals89
  90. 90. CFPB And Whistleblowers/Complaints• The bureau is actively encouraging whistleblowers to report violations ofthe federal consumer financial protection laws• The bureau established an email address and toll-free telephone numberfor whistleblowers to contact the bureau• The bureau also announced plans to create a portal on its website to beused by whistleblowers• The bureau has begun accepting consumer complaints about bankaccounts, including checking accounts, savings accounts, certificates ofdeposit and related services• The bureau said that it expects banks to respond to complaints within 15days and that it wants to close all complaints within 60 days• Consumers will be given tracking numbers after submitting a complaint andare able to log in to the bureau website at any time and check the status oftheir case• Each complaint will be processed individually and consumers will have theoption to dispute a bank’s resolution90
  91. 91. Information Sharing• The bureau has assured the financial institutions it regulates that if theycomply with a request for information they will not have waived anyprivilege that applies to that information, including the attorney-clientprivilege• The bureau has pledged that it will take "all reasonable and appropriateactions" to help an institution defeat any claim that it has waived a privilege• The bureau has stated that institutions cannot invoke waiver concerns as areason to withhold information they otherwise are required to produce• If the bureau requests an institution to produce information that is withinthe scope of its supervisory authority, the institution must provide all of therelevant documents and information, regardless of whether the institutionbelieves some of that information may be unnecessary91
  92. 92. Information Sharing• Information obtained during the supervisory process will beconsidered to be exempt from disclosure under the Freedomof Information Act and will not be routinely shared with otheragencies that are not engaged in the supervision of financialinstitutions• "[E]ven a significant law enforcement interest“ may not besufficient to justify the disclosure of supervisory information,the bureau said, although such an interest would be a factorto be considered• Confidential information will be shared with law enforcementagencies "only in very limited circumstances and upon reviewof all the relevant facts and considerations"92
  93. 93. Supervision• The bureau has begun to phase in the supervision ofnon-bank financial services providers• The bureau says it now has the authority tosupervise mortgage companies, private educationlenders and payday lenders• The bureau has defined “larger participants” in creditreporting and debt collection, and has begun directsupervision of those entities93
  94. 94. Examinations• The bureau intends to examine non-banks in thesame way it examines banks, using a combination ofrequired reports, document reviews and on-siteexaminations• Companies generally will be given advance notice ofexaminations• The bureau will coordinate its examinations withthose of other regulatory agencies at both the stateand federal levels94
  95. 95. FTC• The bureau and the Federal Trade Commission entered intoa memorandum of understanding• The MOU calls for the two agencies to:– create a secure computerized system each agency can use to keep trackof the other’s activities– inform each other before beginning an investigation or an enforcementaction and refrain from duplicative actions– have meetings at least quarterly to coordinate their activities– consult on guidance and regulatory proposals, such as those addressingunfair, deceptive or abusive acts or practices– cooperate on consumer education initiatives– share consumer complaints• The bureau will provide the FTC with the report ofexamination of any company under the FTC’s jurisdiction95
  96. 96. Manual• The bureau has issued its Supervision andExamination Manual– A supervised entity must develop and maintain a soundcompliance management system– Supervised entities are also expected to managerelationships with third-party service providers to ensurethat these providers effectively manage compliance withFederal consumer financial laws applicable to the productor service being provided96
  97. 97. CFSI’s Disclosure BoxSeveral programs are pilotingnow: Green Dot, Plastyc andReady CreditCordray statement from CBA- Focus on disclosures vs fee capsor prohibitionsNBPCA position statement9797Disclosures: A Big andRecurring Topic
  98. 98. Other Current Issues in Prepaid• Tax refund fraud• Identity theft• FTC proposed ban on telemarketers use ofauthorization codes for prepaid cards• Preemption• Overdraft products and short-term lendingassociated with prepaid cards• Garnishment of Accounts that include receipt offederal benefit payments98
  99. 99. Your Next Steps in Prepaid
  100. 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 offeringsDevelop A Prepaid Strategy100
  101. 101. Appendix
  102. 102. • Typical credit card transaction, with funds used to load prepaid card• Additional prepaid card processes• Credit/debit card networks have additional risk processes102Credit/Debit Card - Authorization and Load
  103. 103. • Issuer approves, declines request• Card Network and Merchant Acquirer Bank route response back to PrepaidProcessor• Prepaid Processor applies value load to account if approved103Credit/Debit Card - Authorization and Load
  104. 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 amounts104Credit/Debit Card – Clearing
  105. 105. Direct Deposit – Value Load1051) Value Load2) Settlement
  106. 106. Direct Deposit – Settlement1061) Value Load2) Settlement
  107. 107. Load Network – Value Load1071) Value Load2) Settlement
  108. 108. Load Network - Settlement1081) Value Load2) Settlement
  109. 109. Commercial Client – Value Load931) Value Load2) Settlement
  110. 110. Commercial Client - Settlement1101) Value Load2) Settlement
  111. 111. Purchase with Card - Authorization1111) Purchase2) Clearing3) Settlement
  112. 112. Purchase with Card - Clearing1121) Purchase2) Clearing3) Settlement
  113. 113. Purchase with Card - Settlement1131) Purchase2) Clearing3) Settlement
  114. 114. ATM Withdrawal - Withdrawal1141) Withdrawal2) Settlement
  115. 115. ATM Withdrawal - Settlement1151) Withdrawal2) Settlement
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