Prepaid Card Industry Dynamics and Money Laundering Risks

Document Sample
Prepaid Card Industry Dynamics and Money Laundering Risks Powered By Docstoc
					        Prepaid Card Industry Dynamics
          and Money Laundering Risks
         Associated with Prepaid Cards
                                              September 1, 2010
                                                          Philip Keitel
                                           Industry Specialist, Payment Cards Center




                                                      FEDERAL RESERVE BANK
                                                         OF PHILADELPHIA
*The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
In addition, mention of various government agencies’ communications or positions in this presentation does not constitute an endorsement or criticism of
those agencies, materials, or positions.
                                  Migration to
                              Electronic Payments
                                  Distribution of Noncash Consumer Payments


                             2000*                                       2006*

                              EBT, 1%
                Debit, 11%




                   ACH, 9%


                                     Check, 57%
                   Credit Card,
                      22%




Source: Federal Reserve Payments Studies 2001 & 2007
      Today’s Payment Card Triad
                        Pay Now       Deposit account at
                                      a bank or credit
                      (Debit Cards)   union




  Pay Before                                   Pay Later
(Prepaid Cards)                              (Credit Cards)
                                            Account with credit
Purchase of a self-
                                            card bank or
funded prepaid
                                            retailer
card
         Prepaid Market Is Small But
              Growing Rapidly
                        Purchasing Volume ($billions, 2008)




                                                      Prepaid Cards
                                                          <8%




Sources: Nilson Report, Mercator Advisory Group
        Prepaid Card Value Chain for
          Network Branded Cards

                                      Acquiring   Payment   Program   Issuer
Cardholder     Seller   Distributor                                             Issuer
                                                 Network
                                           Processor        Manager Processor




         Not present in the credit
           or debit industries

                The seller, distributor,
              program manager, and the
             issuer can be the same, but
                 often, they are not.
                                       Prepaid Cards
  Examples of nonbank distributors and/or                           Some of the leading bank issuers of
              program managers                                                  prepaid cards


                                     Program
                 Distributor                                                       Issuer
                                     Manager


Travel Cards/Remittance        Insurance/Disaster Cards            Bank of America          Regions Bank
Western Union                  Amica
                                                                   MetaBank                 HSBC
Travelex                       American Red Cross
Moneygram                      Incentive Cards
                                                                   JPMorgan Chase           SunTrust
AAA                            Maritz (+ AMEX)                     Comerica Bank            USAA
Tax Rebate Cards               General Prepaid Dist., Load, etc.   The Bankcorp Bank PSG M&T Bank
H&R Block                      InComm
                                                                   U.S. Bank                KeyBank
Jackson Hewitt                 Green Dot
                               Blackhawk Network (Safeway, Inc.)   Wells Fargo              Navy FCU
                               Payroll Cards                       Citibank                 PDNB
                               Paychex                             Citizens Bank
                               ADP
                                                                   Commerce Bank Mo.
         Prepaid Applications
          (tremendous heterogeneity!)
•   Cash Access               •   Government
     – Travel                      – Social Security Disability
     – Open-Loop Gift Cards        – Food Stamps
     – Remittance/P2P              – State Unemployment
•   Business Time & Expense        – Disaster Assistance
     – Business Travel             – Transit (Tolls & Light
     – Events & Meetings              Rail)
     – Employee Incentives    •   Insurance Casualty
     – Relocation Card            Claims
•   Campus                    •   Payroll & Benefits
•   Digital Content                – Payroll
     – Digital Media               – Benefits
     – Personal Websites      •   Petroleum
     – Games & Ring Tones     •   Purchasing
•   Closed-Loop Gift Cards    •   Utilities
    (Store)                   •   Telecom (Closed Loop)
     – In-Store Sales              – Prepaid Mobile
     – Distributed Sales           – Prepaid Long Distance
         Money Laundering Risks &
          Prepaid Card Programs
              (reports, interviews, cases…)
•   U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, & USPS, Money
    Laundering Threat Assessment (1997; 2005)
•   Sallie Wamsley Saxon & Hush Hush (2001-2007)
•   Horacio Munar & AAA Global Currency (2002-2005)
•   Behcet Alkis (2003-2007)
•   Robert Arbuckle & Moola Zoola (2006)
•   U.S. Department of Justice, National Drug Intelligence Center, Prepaid Stored-Value
    Cards: A Potential Alternative to Traditional Money Laundering Methods (2006)
•   Financial Action Task Force on Money Laundering, Report on New Payment Methods
    (2006)
•   U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, & USPS, National
    Money Laundering Strategy (2007)
•   U.S. Department of Justice, National Drug Intelligence Center, National Drug Threat
    Assessment (2007)
•   World Bank, Preventing Money Laundering and Terrorist Financing: A Practical Guide
    for Bank Supervisors (2009)
•   Comments made by Senator Lieberman, U.S. Senate Committee of Homeland Security
    and Governmental Affairs, at a hearing on southern border violence (March 25, 2009)
•   Interview with Terry Goddard by Kiran Chetry of CNN (June 10, 2009)
•   Murcia Guzman & DMG (2009)
     Money Laundering Risks &
      Prepaid Card Programs
                (recurring themes)

1. Multinational functionality
2.   ATM functionality
3.   Anonymity
4.   High load limits
5.   Portability
6.   Cards sold abroad useable domestically
       Current system has many controls (e.g., customer
     identification req’s, transaction monitoring, load
     limits, function switches)
        Prepaid Card Value Chain for
          Network Branded Cards

                                    Acquiring   Payment   Program   Issuer
Cardholder   Seller   Distributor                                             Issuer
                                               Network
                                         Processor        Manager Processor




   • Issues related to clarity and scope
   • Principal/Agent relationships
         Prepaid Applications
          (tremendous heterogeneity!)
•   Cash Access               •   Government
     – Travel                      – Social Security Disability
     – Open-Loop Gift Cards        – Food Stamps
     – Remittance/P2P              – State Unemployment
•   Business Time & Expense        – Disaster Assistance
     – Business Travel             – Transit (Tolls & Light
     – Events & Meetings              Rail)
     – Employee Incentives    •   Insurance Casualty
     – Relocation Card            Claims
•   Campus                    •   Payroll & Benefits
•   Digital Content                – Payroll
     – Digital Media               – Benefits
     – Personal Websites      •   Petroleum
     – Games & Ring Tones     •   Purchasing
•   Closed-Loop Gift Cards    •   Utilities
    (Store)                   •   Telecom (Closed Loop)
     – In-Store Sales              – Prepaid Mobile
     – Distributed Sales           – Prepaid Long Distance
Increasing Federal Legislation
       and Regulation
• FTC (2005)
• FDIC Gen. Counsel Opinion no. 8 (2006; Revised 2008)
• IRS Revenue Ruling 2006-57 (2006, delayed until 2011)
• Credit CARD Act, Title IV & Title V, Section 503 (2009)
• Federal Reserve Gift Card Rule (2010)
   – ECO Gift Card Act & Interim Final Rule (2010)
   – Regulation E?
• FinCEN NPR (2010)
• Treasury FMS NPR (2010)
• Dodd-Frank, Durbin Amendment (2010)
Section 1073 of Dodd-Frank

• Board of Governors must prescribe rules
  to govern money remittance transfers
  and certain acts of remittance transfer
  providers
  – Notices and disclosures; error resolution; liability
    for agents and delegates; ACH expansion
  – Statements must contain contact information for
    state agencies that regulate remittance transfers
              Thank you

Philip Keitel
Industry Specialist, Payment Cards Center
Federal Reserve Bank of Philadelphia
www.philadelphiafed.org/payment-cards-center

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:62
posted:6/29/2011
language:English
pages:14