Visa Inc. is deploying a classic fraud prevention model to combat the growing sophistication of prepaid card fraud.

The card brand has established a prepaid clearinghouse service, a database for Visa prepaid issuers and program managers to share fraud data with each other. It's a tactic that has been around for decades.

"The concept of the credit card issuer clearinghouse service from the 1980s proved to be a good fit because of the similarities in what was happening fraud-wise on the prepaid side of the business," says Carrie Vriheas, vice president of prepaid strategy for Visa.

Fraudsters move from one prepaid card program to another to steal account data to create counterfeit cards or pursue other schemes. Even though most prepaid programs manage their own files and systems, the fraud prevention employees at those companies have been talking to one another about how to mitigate this growing threat, Vriheas says.

Visa aims to formalize this communication process by establishing the prepaid clearinghouse service as a requirement of the Visa prepaid program, giving managers until June 2015 to submit fraud data to the new database.

In the prepaid card market, "we have a good sense of what our fraud looks like compared to debit, but we don't have a way of sharing information and protecting ourselves,"Vriheas says. "And that's what this is about."

Those who miss Visa's deadline will be subject to fines or other penalties, similar to a merchant who has not met compliance with the Payment Card Industry data security standard, says Melyssa Barrett, Visa's senior director of solution delivery, risk products and business intelligence.

Visa partners may also "report data from other brands to get the benefit of that fraud data as well," Barrett says.

Visa's new fraud data service is "a great thing," says Shirley Inscoe, senior analyst with Boston-based Aite Group.

"This is really needed because there is a great propensity for fraud and money laundering in any payments system that doesn't have some oversight," she says.

However, any new processes create extra costs, which could be a problem for prepaid program managers who compete in a thin-margin industry, Inscoe says.

"Some of that cost will trickle down a bit, or some managers will decide not to issue prepaid cards," Inscoe says. "Visa has all the right intentions in doing this, but we'll see what the unintended consequences of those good intentions turn out to be."

Most prepaid program managers are ready to begin submitting fraud data to the clearinghouse now, rather than waiting until 2015, Barrett says.

Any new Visa prepaid program sponsored by a financial institution over the next 15 months would be required to report data by the June 2015 deadline, and any Visa prepaid program launched after that date would be required to participate with the clearinghouse as a condition of its operation.

Program managers can provide inquiries to the prepaid clearinghouse service about previous fraud reports or questionable data indicative of fraud.  "They would get that information back, and then further validate it with their customers," Barrett says. "Essentially, it gives them the opportunity for further investigation."

In the spirit of complete disclosure for a prepaid program, Visa wants the consumers who use prepaid cards to be aware of and understand the service. Even though Visa does not expect many inquiries from cardholders, the process would provide an opportunity for consumers, after full authentication, to request and receive certain information. "It helps them understand what we have," Barrett says.

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