Selling prepaid cards might become less appealing to retailers if a recent proposal aimed at curbing money laundering takes effect.
Industry watchers predict that some retailers would limit the kind of cards they sell, or drop them altogether, limiting access to what has become an increasingly popular financial tool for the underbanked.
"We have a very serious concern, if the rule is enacted as proposed, that communities that are already underserved by banks and bank branches [are] going to be forced back to traditional check cashing and carrying around cash and will not have the functionality and safety of a prepaid card," said Terry Maher, a partner in the Baird Holm law firm and general counsel of the Network Branded Prepaid Card Association, a Washington trade group.
The proposal by the Financial Crimes Enforcement Network would require retailers to collect identifying information when selling prepaid cards to customers; they would have to store the data for up to five years, among other tasks. The agency on Friday closed its comment period on the proposed changes in Bank Secrecy Act rules. The plan was issued in June under a requirement of the Credit Card Accountability, Responsibility and Disclosure Act of 2009.
The proposal also would require retailers to establish anti-money-laundering compliance programs and watch for suspicious activity, such as loading or withdrawing significant amounts of money with a card. It also calls for nonbank providers of prepaid cards — the companies with the most control over customer relationships — to register with Fincen as money-service businesses if they have not done so already and to track and report transaction data.
The Fincen proposal says "the ease with which prepaid access can be obtained, with the potential for relatively high velocity of money through accounts involving prepaid access and anonymous use, make it particularly attractive to illicit actors."
Prepaid program operators like Green Dot Corp., NetSpend Corp. and AccountNow Inc. say they already do much of what Fincen is requesting.
But the requirements could be overly burdensome for retailers and could kill their interest in carrying the product, according to opponents, who note that cashiers would probably be responsible for collecting such information in the checkout line.
Retailers who sell cards are "an important link in the transaction chain," the proposal said, adding that they are "uniquely situated to see the first step in the establishment of a prepaid relationship."
Market watchers said the proposal, in its current state, could curb retailer interest in selling the cards.
"This is a product category that targets unbanked [and] underbanked individuals … who don't want to walk into a bank, have a credit check or have their bank status checked," said Gil Luria, a vice president of equity research at Wedbush Securities. "They just want to be able to transact in a simple, straightforward way."
Green Dot Chief Executive Steve Streit was not available to comment for this story, but in an earnings conference call last month he said the Monrovia, Calif., company agrees with "98% of what" Fincen is proposing. The company registered voluntarily with Fincen as a money-service business, which requires it to have anti-money-laundering programs.
However, the proposed requirements on Green Dot's retail partners, which include Wal-Mart Stores Inc., CVS Caremark Corp, 7-Eleven Inc. and several others, "would significantly change the way customer data is collected for certain prepaid products … by shifting the point of collection to our retail distributors," Streit said.
"If we or any of our retail distributors were unwilling or unable to make any required operational changes to comply with the proposed rules as adopted, we would no longer be able to sell our cards through that noncompliant retail distributor, which could have a material adverse effect on our business," the company said in a filing with the Securities and Exchange Commission.
A NetSpend spokesman declined to comment, citing the Austin company's pending initial public offering. In an SEC filing, the company, which in the past has registered with Fincen as a money-service business but currently is not registered, said compliance with the proposals could result in higher costs for it, its issuing banks and retailers, and would have "a negative impact on the profitability of our business."
"The imposition of such obligations upon sellers of prepaid debit cards may cause some of our distributors to determine that they do not wish to continue offering our prepaid debit cards for sale or reload," the company said.
AccountNow would not make an executive available for an interview but in a statement said it does "not believe the proposal would be burdensome for the company nor create undue privacy concerns for our customers."
The company is not registered as a money-service business, according to a spokesman.
Wal-Mart and CVS declined to comment; 7-Eleven and Walgreen Co. did not respond to requests for comment.
In a letter to Fincen, the National Retail Federation in Washington said the proposal could create "major disruptions in the operations of tens of thousands, if not hundreds of thousands, of business locations."
The trade group said store owners "will simply forgo the sale" of gift cards if subjected to the reporting requirements.
The proposal includes some exemptions for retailers and other businesses, such as employers that distribute payroll or benefits onto a prepaid card.
For instance, a retailer could be exempt from the reporting requirements if it sells cards that can not exceed $1,000 in value at any one time and have the maximum possible value marked on the card. Providers of closed-loop cards, such as gift cards for a specific retailer that can only be used domestically, may also be exempt.
However, retailers do not qualify for the exemption if the cards they sell can be used abroad, which the prepaid trade group's Maher said would render the provision useless for most retailers.
Starbucks Corp. said it would have to discontinue its cross-border, closed-loop gift card program, which allows customers to use gift cards activated in the United States in some foreign countries and vice versa, if the current proposal is adopted.
"It would require Starbucks to re-train its baristas to take on responsibilities that are totally different from their current job duties…and would expose Starbucks to a new and different regulatory regime that is totally unrelated to operating retail coffeehouses," the Seattle retailer said in a letter to Fincen.
Charming Shoppes Inc., a Bensalem, Pa., retailer that operates the Lane Bryant, Fashion Bug and other women's apparel stores, said in a letter to Fincen that it believes it would qualify for the exemption but is concerned that the proposal "could be unduly restrictive to our ability to conduct business" internationally.
"The likelihood of a terrorist organization purchasing our brands' plus-size-apparel gift cards, which can only be used to purchase women's clothing and accessories, for laundering funds is remote if [not] nonexistent," Kirk Simme, a senior vice president of Charming Shoppes, said in the letter.
Fincen also said in its proposal it is considering eliminating the exemption for domestic closed-loop cards, which would affect sellers like Charming Shoppes.
A spokesman for the agency said he did not know when final rules would be issued, but he emphasized that the current proposals are not final and could be changed depending on objections raised in the comments, and other factors.
