Convenient For Members And Scammers
Emerging plastic card programs such as prepaid gift cards, payroll cards or "contactless wave cards" are becoming increasingly popular with consumers-and with scammers.
Three experts-Ann Davidson, CUNA Mutual Group payment systems risk manager; David Serlo, CEO of PSCU Financial Services, Inc.; and Melanie Hoelscher, security director of PSCU, told CUNA Mutual's Discovery Conference here that the three new card programs generally carry the same fraud risks as traditional plastic card programs, and some could create new ones.
"Stored Value" cards as they are known in the industry represent a suite of "prepaid" card programs where the dollar value is preloaded to give the card financial value. Examples include gift cards, teen/campus cards, payroll cards and flex spending cards.
TowerGroup, a financial services research group, projects stored value card sales will double to more than $90 billion by 2007, from $45 billion in 2003, said Davidson. "Most people use these cards, to satisfy their morning coffee fix or budget Junior's weekly allowance. Cards may be replenished when their value expires," Davidson said.
Not all stored value cards are the same, however, she cautioned. They come in two types-one offered by retailers and another by financial institutions.
Retail-issued cards are designed to be used only for the issuing merchant's goods and services. Disposable cards expire when their value has been used. But the cards can also come with conditions-poorly-marked expiration dates and fees to reactivate expired cards.
Financial institution-issued cards, however, function like credit cards but fall under the debit card rules offered by Visa, MasterCard, American Express and others. Spending is limited to the amount of money placed on the card by the buyer, and purchases are deducted from the card balance after each use. These cards offer the same rights and protection afforded debit cards, including security controls, dispute management, and zero-liability protection if the card is lost or stolen.
All About Liabilities
"If I lose my Blockbuster retail card, I assume the loss. But if I lose my Visa prepaid card issued by my credit union, then I have zero liability. In this case, the credit union, as the card issuer, would be liable for the loss," Davidson said.
Another new type of card technology being introduced by card issuers are "contactless wave cards," which requires the cardholder to merely tap or wave the card at point of sale terminals rather than swipe it. "While this technology is certainly convenient, it could pose an additional fraud risk if the merchant is lax in how it transmits the data and creates its wireless policies," Davidson said.
In addition, some credit unions are now implementing "Instant Issue" cards to the member before the member leaves the credit union. This requires storing blank plastic cards at the credit union and producing live cards on demand as members request them.
It's important for credit unions to have good internal controls if they offer an instant issue program, Serlo said. "Card issuers need to continue offering loss control/loss prevention measures regardless if they offer emerging card programs or traditional ones."
Hoelscher urged credit unions to educate their members about prepaid cards. "Members should treat them like any credit or debit card. If a card is lost or stolen, the member should report it at once," she said.