To a consumer, reloadable prepaid cards may look and act like debit cards, but to a banker they come loaded with a distinctly different set of risks.
Banks took a closer look at offering prepaid cards in 2011 than in the past, either as a way to make up for revenue lost under the Dodd-Frank Act or to reach underbanked consumers. As many are discovering, prepaid cards are used very differently than debit cards — by legitimate customers and fraudsters alike.
Debit cards are pitched as a perk to bank customers who maintain checking accounts. Even if owners rarely use the cards, they are available to pay major bills.
Prepaid cards, by contrast, are pitched as a cash alternative for online shopping and other uses. Many prepaid-card marketers have thus struggled to get beyond the view of many users that the cards are disposable.
"You don't have that same kind of experience with financial institutions in general-purpose reloadable cards as you do with traditional debit cards," says Phil Valvardi, Fiserv Inc.'s general manager of prepaid services unit, which was Maverick Network Solutions Inc. until Fiserv acquired it in early 2011.
With prepaid cards, banks need to be more attentive to the money being loaded onto cards, whereas with debit cards the focus is on how money is spent, Valvardi says.
Debit cards tied to checking accounts require that banks focus on customers being tricked by fraudsters who are looking for "money mules" to filter stolen money through their accounts. When that happens, good customers' behavior typically deviates from their normal spending habits.
But with prepaid "rather than money mules, it's just flat-out fraud," Valvardi says. "Someone opens up an account and starts using it and takes money from someone else's account or some other fraudulent funding source." The fraudster then uses the prepaid account to spend or withdraw the money, he says.
There may even be a delay to this behavior, Valvardi says. "It could be opened up with the idea of looking good for a while, but with the plan to turn bad."
Banks can counter this by staying diligent about vetting new accounts, he says. "You need to know who your customer is, which banks are very good at."
Banks must be careful to balance risk against customer convenience, he says. Delaying the availability of funds may help manage fraud, but it would also make prepaid cards less desirable than cash, which can always be used right away.
Traditional banks are still new enough to the prepaid realm that a lot of the payment format's risks remain undiscovered, says Mohit Thukral, senior vice president of banking at Genpact, a provider of business process technology and management.
"There's not enough analytics around the patterns [and whether] there are any risks embedded in the products that are in the market," Thukral says. "It will be interesting to see what the data is showing … as they [bank issuers] scale up."
With prepaid, as with any payment product, banks must also keep an eye on insider theft, says Avivah Litan, a vice president at Gartner Inc.
"This becomes another vehicle for employee fraud," just as dormant checking accounts can be abused by corrupt tellers, she says. Even so, adds Litan, "The biggest risk … with prepaid cards is using them to launder stolen funds."