The growing prepaid card sector has started to catch the eye of regulators, leaving issuers, processors and other participants in the business cycle quickly moving to maintain and improve compliance with fraud requirements, according to a panel discussion at the Card Forum and Expo.
Loading funds received from tax returns onto prepaid cards provides a convenient consumer experience, but it also creates opportunities for fraud. To combat this, issuers run automated checks to ensure that the name on the tax return matches the name on the prepaid card account, explained Karen Garrett, a partner at the Stinson Morrison Hecker law firm. If the consumer is loading funds onto a prepaid account with significant transaction history, issuers can create exceptions on accounts where current tax refund amounts are significantly higher than past tax refunds or cash loading amounts on the card.
“We’ll kick those into a bucket and research them with the IRS and the cardholder,” she said.
Prepaid cards provide consumers with other conveniences, but they also present issuers with unique compliance challenges. “These are issued by highly regulated financial institutions and they are not anonymous,” said Kirsten Trusko, president of the Network Branded Prepaid Card Association.
Sarah Hamel, first vice president of MB Financial Bank, added that bank regulators often don’t know what to think about an issuer’s prepaid business. “There's a lack of true studies and evidence around prepaid because it has grown so quickly,” she said. “It has definitely grown more quickly than the regulatory agencies can keep up with it.”
That means issuers must have tight fraud and risk controls on their prepaid card operations. “We took the approach that we're monitoring prepaid the way we monitor other products,” Hamel said. “The ownership that we have over these products is the same as what we would have as other core deposit products.”
These practices not only help prevent fraud abuses in prepaid card businesses, but also enable issuers and processors to demonstrate the controls that are in place to regulators.
“They are very frightened by the product, both on the ground in the examiner's office and in Washington, and you have to be prepared for that,” Garrett said. “You need to have your own documentation and proof of what you've been able to stop so that when an examiner is in your office nervous about whether you understand the risks of your product, you can show them that you do.”
The prepaid card platform consists of 20 different types of products and the panel said the biggest areas for misuse include fraud, money laundering and tax refund and benefit fraud. These numerous variables make it difficult for regulators to monitor.
“A lot of regulators don't understand prepaid, so we take it as our task to educate regulators,” said Joan Herman, senior vice president of prepaid card services at University Bank.