Not long ago, there were serious questions about the future of the prepaid card industry. Some perceived the failure of some highly publicized stored-value smart cards as a potential death knell for the industry.
Fortunately, however, another prepaid card technology arose. Rather than relying on smart card technology, these cards piggybacked on the existing credit card magnetic stripe infrastructure.
Slowly, "open-system" prepaid cards branded with the American Express, MasterCard and Visa logos began to grow and flourish. By utilizing a pre-existing infrastructure connected to millions of merchants, the cost to implement prepaid card programs was substantially reduced. Moreover, these products guaranteed the involvement of regulated banks and financial institutions.
The important role of such financial institutions in the growth of this industry should not be underestimated. Consumers take comfort in the dependability and security of a payment product with a nationally known brand. There was $13 billion loaded onto open-system cards supported by the major card brands in 2004, and some estimate that amount will grow tenfold in the next five years.
One would believe that having financial institutions' direct involvement in open-system prepaid cards also would give regulators some degree of comfort. But there is evidence to the contrary.
For example, while the majority of states that limit fees and expiration dates on gift cards exclude open-system products, there are still at least eight states that regulate open-system prepaid cards as though they are no different than "closed-system" gift cards that can be used only at the stores whose brands appear on them.
Nowhere is this paradox more visible than with state "money-transmitter" licensing laws. Historically, these laws were developed to license nonbank issuers of such payment products as money orders and wire transfers. If a bank issued such products, it was widely agreed that licensing was not necessary for the bank or for any agent of the bank that distributed the product.
Now, however, some states have begun to require state-chartered banks from other states, and/or their agents, to obtain a money-transmitter license if they want to do business in that state.
It is difficult to understand this. First, while states argue strenuously against the expansion of the doctrine of federal preemption, this licensing policy effectively treats other state banks as though they were second-class citizens and encourages them to move to a national or federal charter. Second, payment network rules make the financial institution whose bank-identification number is on the card responsible for any consumer losses occurring on that card, so consumers are protected.
Finally, requiring state banks or their agents to be licensed does not make sense. As the New York State Banking Department noted in a 1979 letter, "It would certainly be anomalous ... to place banking organizations, which are otherwise exempt from the licensing requirements precisely because they are so highly regulated and supervised, at a disadvantage vis-?-vis licensed money transmitters whose agents and subagents are exempt from licensing...."
The laws for open-system prepaid cards remain in a state of flux. Already, more than 50 state laws are pending.
To allow this industry to continue to flourish, new laws must recognize when financial institutions play a crucial role. Their involvement should be encouraged, not penalized.
Judith Rinearson is a partner at the global law firm of Bryan Cave LLP. She also is chair of the Network Branded Prepaid Card Association's Government Relations Working Group. Judith can be reached at judith.rinearson
(c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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