business solutions
Prepaid Cards: Control Risk and Reap Rewards
By David McCann
T
he payment industry has evolved from the days of pulling dollar bills from your wallet or mailing a check to using debit cards and sending prepaid cards. Prepaid cards are one of the fastest growing electronic payment methods today and often serve as a replacement for currency and paper-based payments such as gift certificates and payroll checks. The term prepaid has grown to describe payment product solutions including gift, payroll, flexible spending accounts, government benefits, insurance claims, employee rewards and travel cards. Many prepaid cards serve a single purpose: They are given as gifts. However other prepaid card types, such as teen, payroll, government benefit and transportation, can be reloaded with value and used like debit or credit cards. Although prepaid cards are prefunded with a value that is recorded on a remote database, which must be accessed for payment authorization prior to use, the chance for financial risk does exist. Prepaid is not immune to fraud; in fact it has become a target of fraud like any other financial instrument. “Until recently, most prepaid processors did not consider the intensity of the potential risk factors of fraud on prepaid cards,” said Steve Langhans, vice president of product management for FIS. “Initial thinking was that fraudsters would not want a prepaid card when there are greater opportunities with credit and debit devices that would yield
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a larger financial reward. Not so. Money is money, and there are plenty of fraudsters who will take one dollar at a time to [satisfy] their financial greed.” The common trends affecting prepaid cards include load fraud, excessive credit fraud and the traditional lost or stolen cards with
risk management. These investigations were limited to a few products that were the most attractive to fraud, money laundering and abuse. The typical prepaid card products can easily be designed to reduce the risk factors associated with fraud schemes. Fraud management services can assist a
From a risk perspective, the prepaid card represents a merger of the various forms of traditional payment options and their unique risk issues.
unauthorized transactions. • Load fraud is simply someone using a stolen credit or debit card to fund or purchase a prepaid card. • Excessive credit occurs when a malicious retail store employee has access to a merchant terminal and creates multiple false purchase returns, thereby fraudulently increasing the value on the prepaid card. • Transaction fraud is best described as unauthorized use of the prepaid card that has been stolen. Any of these situations can potentially be controlled by having the right risk solution. In recent years, the prepaid market has been scrutinized by bank regulators and state and federal law enforcement agencies. The scrutiny has led to investigations into some prepaid products that give consumers unrestricted access to cash with no regard to prepaid card issuer in reducing fraud losses and administrative expenses for prepaid programs. Processing systems that specialize in prepaid products should contain certain features that allow for the unique aspects of prepaid payment devices. From a risk perspective, the prepaid card represents a merger of the various forms of traditional payment options and their unique risk issues. The act of adding value to the account from an existing credit or debit device is considered a “load transaction.” The issuing bank becomes not only the issuer but also the acquirer for the “load” of value to the prepaid card. Since some purchase transactions are not completed face-to-face, the issuer assumes additional risks as value is loaded from a funding account (i.e., a credit card) that may be fraudulent. Additional risk may also be associated with the loading of value to the
business solutions card by Automated Clearing House transactions that debit consumer checking accounts directly. This type of risk may occur due to a load from an account with insufficient funds, a collection issue or from fraudulently obtained account information. FIS prepaid solutions’ approach is a threepart fraud management strategy that consists of prevention, detection and control, which allows issuers to manage fraud and optimize program profitability. 1. Prevention: to stop or prevent losses from occurring. Prevention in the prepaid environment deals primarily with the acquisition of and loading value to the card. The standard feature for the prevention of load fraud is the authorization system through which all load transactions must pass. However, standard authorization techniques such as AVS and CVV2 are supplemented. These products are primarily intended for use with prepaid card programs that permit consumers to load and reload the cards through non face-toface transaction processing. FIS prepaid solutions also have extensive “negative” databases of cards, addresses and phone numbers associated with past fraud. These negative files provide a filter against which new card applicants and value loads may be screened. 2. Detection: to identify fraud at its first use. The objective of any detection program is to observe unusual patterns of purchase behavior in retail transactions and to take positive action to curtail the fraudulent activity. FIS prepaid solutions offer services for fraud detection that utilize neural-based detection systems, such as Falcon, to detect activity that may indicate fraudulent activity. These services may be useful for virtually any prepaid market segment, especially when the prepaid cards are used for more than just ATM transactions. 3. Controls: to further limit losses after the fraud has been detected. The final phase of a fraud-control program is to restrict the amount of loss by limiting further use of the prepaid card. This is accomplished by changing the status of the card to prevent further unauthorized use of the card, listing the card in warning bulletins, and promptly completing chargebacks of transactions whereby such rights to recover exist. As with any financial instrument, the key to success is prevention, and FIS continues to create new fraud prevention and monitoring tools as new trends develop. “Prepaid fraud management is like any other crime prevention effort,” Langhans said. “Just as a car without an antitheft device is more vulnerable, making your prepaid cards less attractive to the fraudster will help deter fraud.” For more information, please contact FIS at info@ifs.com. David McCann works in fraud strategy and development for FIS. He is responsible for the strategic design and implementation of fraud prevention, detection and monitoring tools for the prepaid card division.
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