Prepaid Cards and The Patriot Act

  When Congress passed the USA Patriot Act, it hoped to make it harder for terrorists to funnel funds through the U.S. banking system undetected. But it appears lawmakers' best intentions may have unintended repercussions for an emerging product-prepaid cards.
  Some experts say new federal rules requiring financial institutions to confirm the identity of individuals who open accounts could impede growth in the issuance and sale of nationally branded gift cards, particularly those that do not have cardholders' names embossed on them.
  The issue of whether prepaid card issuers are responsible for identifying their cardholders emerged with the recent adoption of account-identification rules issued by the U.S. Department of Treasury under the Patriot Act. The new rules are designed to help screen for money launderers and eventually stop the funding of terrorists. By Oct. 1, financial institutions must have in place a customer-identification program to routinely verify the identity of individuals opening new accounts.
  The rules require financial institutions to verify the identity of individuals opening accounts, including their name, date of birth, address and a taxpayer identification number, such as a Social Security number. They also require the storage of such data, but not copies of original sources such as driver's licenses, for five years and that the information be cross-checked through government databases.
  Industry experts have varying views on whether prepaid card "accounts" fall under the Patriot Act. Pamela J. Johnson, the Federal Reserve Board's senior antimoney-laundering coordinator, says the new rules cover new accounts in which "formal banking relationships" are being established.
  Johnson, however, says the new rules do not specifically outline the responsibility of providers to identify users of their stored-value debit cards. "I am not prepared to say whether stored value is an account or not an account," she says.
  Todd Brockman, Visa vice president for prepaid products, says Visa contends the Patriot Act only covers products in which financial institutions expect to carry on a formal banking relationship with the consumer. As such, issuers of Visa-branded gift cards would not have to verify the identity of those cardholders, he says.
  Some participants in the prepaid debit market, however, believe that all prepaid debit cards, except for closed-system proprietary gift cards, are covered by the new rules because the card "accounts" establish a "formal banking relationship."
  "We have always been set up like a bank," says O.G. Greene, chief executive of Atlanta-based Skylight Financial Inc., which markets the Stratus employee payroll debit card.
  Skylight provides reloadable payroll cards to enrolled employees of companies. The company manages the debit card accounts and cards, which support personal identification number- and signature-based functions. When the cards are used, Skylight authorizes the withdrawal from an aggregated account at Minneapolis-based U.S. Bancorp.
  Roy Sosa, CEO of Austin, Texas-based Netspend Inc., agrees with Greene's belief that the Patriot Act covers financial-management companies that maintain bank-like accounts. Netspend, which is a third-party card provider that targets check-cashing companies, offers a reloadable debit card to customers cashing payroll checks.
  The cards, which carry the All-Access brand, can be used at any MasterCard merchant or Cirrus ATM location. Netspend manages 300,000 cardholder accounts. Inter National Bank of McAllen, Texas, issues NetSpend's cards.
  Sosa believes the government clearly wants nonbank money-service providers to identify individuals who buy and use debit cards that access accounts through shared networks. The Treasury Department already requires that so-called "money-service businesses" that issue stored-value cards register with the department and submit Suspicious Activity Reports.
  Greene predicts that the new Patriot Act ID rules will cause off-the-shelf prepaid debit cards to devolve back to a closed-loop, proprietary gift card product. Such products, which do not require issuers to verify cardholders' identities, can only be redeemed at the issuer's stores, and the transactions are not switched through shared networks. Most retailers will not want the hassle of identifying buyers of nationally branded cards sold off the shelf and registering with the Treasury Department, says Greene.
  Sosa, however, says a market for off-the-shelf prepaid debit products that access shared networks will continue. Many retailers will pay a fee for third-party card providers such as Netspend to identify the purchasers of such cards, Sosa predicts. "The Patriot Act will be good for us," he says.