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.
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
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.
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.
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
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.
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
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.
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.
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
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
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
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
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
