Prepaid Industry Prepares For More Federal Regulations

  Prepaid card issuers and payments-industry experts expect to see more federal regulations aimed at preventing criminal use of prepaid cards and at protecting consumers-especially those not savvy about financial tools.
  "The prepaid space has taken off, particularly prepaid cards branded by one of the associations," says Jesse Torres, executive vice president of Los Angeles-based TomatoBank N.A. and a committee member of the West Coast Anti-Money Laundering Forum. "Certainly prepaid is getting on the radar screen of regulatory agencies."
  In May, the Secretary of the Treasury, the U.S. Attorney General and the Secretary of Homeland Security set the stage for regulations to address money laundering with prepaid cards. The three officials released the 2007 National Money Laundering Strategy, which proposes that the Bank Secrecy Act Advisory Group form a new committee to gather card networks, issuers, nonbank originators, processors and merchant distribution networks to work with the Financial Crimes Enforcement Network on industry regulations.
  "Some of these products are vulnerable to money laundering or fraud," says Eva Weber, an adviser at Boston-based Aite Group LLC. "The reason we haven't seen a lot of regulations coming out is because it's not clear whether money laundering is a big problem. Prepaid card products themselves are evolving. From an [anti-money laundering] perspective, so are the terms of what they need to do."
  History suggests that money laundering will continue regardless of regulations. "You always have a criminal element out looking to exploit the system," Torres says.
  Stored-value cards can be used to smuggle large amounts of funds across the border. While currency is regulated-consumers must claim cash in excess of $10,000 with customs-there is no way customers can verify value stored on prepaid cards.
  "I could load the cards, put them in my backpack, walk onto a plane and, on the other end, hand deliver them for payment for drug trafficking, human smuggling or terrorist acts," Torres says.
  Consultants agree that new policies would be adopted only after careful consideration.
  "Clearly this is a major issue with Homeland Security," says Robert Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology in New York. "There is a tremendous indeterminacy in being able to track these money flows."
  Prepaid cards also are ripe for regulatory response because pricing varies greatly from product to product, observers say. "It's really the Wild West when it comes to these products," Torres says. "Pricing is all over the place."
  Many banks apply Regulation E of the Electronic Funds Transfer Act to payroll and other prepaid cards used on a regular basis similar to bank accounts, says Ed Lawrence, managing associate with Auriemma Consulting Group Inc. of Westbury, N.Y. Reg. E establishes consumers' rights, liabilities and responsibilities when conducting debit card transactions and financial institutions' responsibilities.
  "The reloadable card very closely resembles a checking account," Lawrence says. "You can draw money out of it, add money to it and transfer money into it. But there are a lot of fees that banks can collect that generally aren't there for checking accounts, so the driver [of new regulation] is looking at a money account that looks and feels like a checking account."
  Some states have established regulations for expiration dates and fees for single-use prepaid cards. But those policies do not affect cards issued by national banks, which are controlled by the U.S. Office of the Comptroller of the Currency and are exempt from state regulation.
  A NEW 'REG E?'
  Lawrence foresees a "Reg E for the other." As with any new rule, the proposed draft would be open for public comment and then subject to approval and implementation.
  Lawmakers have not moved on an initiative that sets limits on fee structures because the unbanked and underbanked who use prepaid cards as their primary method of payment are not well-represented in Congress, Manning says.
  And as the mortgage crisis has deepened, prepaid cards have fallen to the bottom of Congress' list of financial products to regulate.
  This is not the first time legislators have postponed writing laws concerning prepaid cards. Before the terrorist attacks in September 2001, there was considerable discussion that any prepaid card worth more than $100 needed regulation, Lawrence says. "After 9/11, the federal government had other things to think about," he says.
  Interest in prepaid cards is increasing again, as prepaid is becoming big business. With more volume, it is subject to more attention from regulatory agencies and advocacy groups, Lawrence says.
  "I don't think regulators are ready to shoot down the prepaid business," says Weber. "They are looking to crack down on some practices, but they are not going to put prepaid out of business."
  Fees will change, Lawrence acknowledges. Consumers are used to paying reload fees and will continue to do so, but some of that fee income will pay for compliance. Prepaid will still be a profitable business, he adds.
  Manning predicts emerging regulations will have the most impact on prepaid card resellers, merchant distributors and reload locations. "Smaller businesses will feel the biggest pinch," he says.
  No banker likes regulation. So in answering the question of who has the ultimate responsibility for funds transferred to a single-use or reloadable branded prepaid card, issuers will fight regulation and proprietors who sell cards may end up carrying the burden, says Manning.
  Kelly Shermach is a freelance writer who also is employed part-time as a marketing communications associate at Auriemma Consulting Group.
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