Prepaid Dilemma

  Bob Cannon's a little nervous about letting his reloadable prepaid cards out of Texas. That is because the registration and licensing rules for issuers, sellers and redeemers of stored-value cards vary so much from state to state, and even federal rules are in flux.
  "We are comfortable in this state," says Cannon, president of XL Payment Systems Inc., a Sugarland, Texas-based independent sales organization that sells prepaid card products. XL distributes its payroll cards and nonreloadable gift cards nationwide, as Cannon feels confident he understands the many state and federal rules related to those cards. But he limits the distribution of reloadable cash and Visa-branded prepaid cards to retailers in Texas.
  Cannon is not alone in his confusion. Experts on state and federal prepaid card regulations will tell you: It depends, stay tuned, and be careful. Many states are still figuring out which of their laws apply to the proliferating types of stored-value cards, and new laws are being enacted. Furthermore, getting state laws wrong can get ISOs in trouble with the feds, who are much tougher on anything related to transferring money since the Sept. 11 terrorist attacks.
  "There's jail time. People don't want to mess with this," says Judith Rinearson, a partner in the New York office of law firm Bryan Cave LLP.
  Cannon is one ISO following the advice of those who urge caution.
  In Texas, providers of reloadable prepaid cards should obtain a money transmitter license from the Texas Department of Banking, he says. There's no bonding requirement. "It's relatively inexpensive," Cannon says. According to the Texas Department of Banking there are two licensing options: the sale of checks, Chapter 152, which costs $2,500 and allows operations under unlimited locations, and currency, Chapter 153, which costs $1,500 plus an additional $500 for each subsequent location.
  But rules vary from state to state, according to Cannon, who says it is very difficult to get clear answers about individual states' laws and regulations.
  At press time, 47 states had some form of money-transmitter laws, according to Rinearson. Traditionally, those have regulated nonbank businesses that issue such payment products as travelers' checks and money orders, as well as wire transfer services, Rinearson says. At least 15 states and the District of Columbia have amended their law definitions to include those who issue prepaid cards. Some other states say that prepaid card issuers already are covered under their definitions of money transmitters.
  Playing It Safe
  The federal government also regulates companies that transmit funds and defines a "money services business" as one that issues, sells or redeems more than $1,000 of stored-value transactions per person per day. Firms that handle smaller volumes of prepaid transactions are not required to register, but some do so anyway.
  However, all companies that transmit funds must comply with federal anti-money laundering laws. For example, nonfinancial institutions are required to file form 8300 with the IRS for any cash transaction greater than $10,000.
  Rinearson advises ISOs to carefully check local laws for every state in which they plan to handle stored value products, as doing business as an unlicensed money transmitter in a state that requires licensing is a federal crime. And enforcement has been made tougher under the USA Patriot Act, which includes prosecution even of those who didn't know they were breaking the law, she adds.
  If an ISO is appointed by a bank as an agent or authorized representative, it probably does not have to get a license with a state as a money transmitter, provided the bank is permitted to conduct such business in that state. But ISOs should not assume that the banks they work with completely understand the laws either, Rinearson says.
  Some states permit virtually all banks to transmit money, Rinearson says, while other states may allow national banks to do so while requiring state-chartered banks to obtain approvals or a license. "I've run into instances when state-chartered banks have told ISOs, 'Oh, we're a bank, it's okay,' but it wasn't," she says.
  "That ISO should either be licensed itself, or it should have a really long, hard talk with the bank issuer that's behind the card," Rinearson says.
  Help Coming?
  Cannon's XL Payments Systems decided it was worth the precaution to send in a form to try to register as a money services business with the Financial Crimes Enforcement Network of the U.S. Treasury Department.
  "We were counseled by our attorneys that we didn't have to, but we chose to do it anyway," Cannon says. "When we registered, they did not even have a box for stored value cards, so we made a box."
  Help may be on the way from the Debit Council of the ATM Industry Association, which hopes to clarify prepaid card laws, says Lyle Elias, executive director of the Value Payment Network, a Hurst, Texas-based software and consulting company and one of the founders of the Debit Council.
  Debit Council members also are lobbying for laws that will both protect consumers and be fair to issuers and distributors of prepaid cards. "We've found that, particularly at the state level, there are a lot of misguided legislators, and we've tried to educate legislators and the public," he says.