FEDERAL RESERVE BANK
OF PHILADELPHIA
Prepaid Card Industry Dynamics Prepaid Card Industry Dynamics and Money Laundering Risks and Money Laundering Risks
Associated with Prepaid CardsAssociated with Prepaid Cards
September 1, 2010September 1, 2010
Philip KeitelPhilip KeitelIndustry Specialist, Payment Cards CenterIndustry Specialist, Payment Cards Center
*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 Migration to Electronic PaymentsElectronic PaymentsDistribution of Noncash Consumer PaymentsDistribution of Noncash Consumer Payments
EBT, 1%Debit, 11%
ACH, 9%
Credit Card, 22%
Check, 57%
2000* 2006*
Source: Federal Reserve Payments Studies 2001 & 2007
TodayToday’’s Payment Card Triads Payment Card Triad
Pay Before (Prepaid Cards)
Pay Now (Debit Cards)
Pay Later (Credit Cards)
Account with credit card bank or retailer
Deposit account at a bank or credit union
Purchase of a self-funded prepaid card
Prepaid Market Is Small But Prepaid Market Is Small But Growing Rapidly Growing Rapidly
Sources: Nilson Report, Mercator Advisory Group
Prepaid Cards <8%
Purchasing Volume ($billions, 2008)
Prepaid Card Value Chain for Prepaid Card Value Chain for Network Branded CardsNetwork Branded Cards
PaymentNetwork Cardholder Distributor Acquiring
Processor
The seller, distributor, program manager, and the issuer can be the same, but
often, they are not.
Not present in the credit or debit industries
ProgramManager
IssuerProcessor IssuerSeller
Prepaid CardsPrepaid Cards
Distributor ProgramManager
Travel Cards/Remittance
Western Union
Travelex
Moneygram
AAA
Tax Rebate Cards
H&R Block
Jackson Hewitt
Insurance/Disaster Cards
Amica
American Red Cross
Incentive Cards
Maritz (+ AMEX)
General Prepaid Dist., Load, etc.
InComm
Green Dot
Blackhawk Network (Safeway, Inc.)
Payroll Cards
Paychex
ADP
Examples of nonbank distributors and/or Examples of nonbank distributors and/or program managersprogram managers
Issuer
Bank of America
MetaBank
JPMorgan Chase
Comerica Bank
The Bankcorp Bank PSG
U.S. Bank
Wells Fargo
Citibank
Citizens Bank
Commerce Bank Mo.
Regions Bank
HSBC
SunTrust
USAA
M&T Bank
KeyBank
Navy FCU
PDNB
Some of the leading bank issuers of Some of the leading bank issuers of prepaid cardsprepaid cards
Prepaid ApplicationsPrepaid Applications(tremendous heterogeneity!)(tremendous heterogeneity!)
• Cash Access– Travel– Open-Loop Gift Cards– Remittance/P2P
• Business Time & Expense– Business Travel– Events & Meetings– Employee Incentives– Relocation Card
• Campus• Digital Content
– Digital Media– Personal Websites– Games & Ring Tones
• Closed-Loop Gift Cards (Store)– In-Store Sales– Distributed Sales
• Government– Social Security Disability– Food Stamps– State Unemployment– Disaster Assistance– Transit (Tolls & Light
Rail)• Insurance Casualty
Claims• Payroll & Benefits
– Payroll– Benefits
• Petroleum• Purchasing• Utilities• Telecom (Closed Loop)
– Prepaid Mobile– Prepaid Long Distance
Money Laundering Risks & Money Laundering Risks & Prepaid Card Programs Prepaid Card Programs (reports, interviews, cases(reports, interviews, cases……))
•• U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, & USPS, & USPS, Money Money Laundering Threat Assessment Laundering Threat Assessment (1997; 2005)(1997; 2005)
•• Sallie Wamsley Saxon & Hush Hush (2001Sallie Wamsley Saxon & Hush Hush (2001--2007)2007)•• Horacio Munar & AAA Global Currency (2002Horacio Munar & AAA Global Currency (2002--2005)2005)•• Behcet Alkis (2003Behcet Alkis (2003--2007)2007)•• Robert Arbuckle & Moola Zoola (2006)Robert Arbuckle & Moola Zoola (2006)•• U.S. Department of Justice, National Drug Intelligence Center, U.S. Department of Justice, National Drug Intelligence Center, Prepaid StoredPrepaid Stored--Value Value
Cards: A Potential Alternative to Traditional Money Laundering MCards: A Potential Alternative to Traditional Money Laundering Methodsethods (2006)(2006)•• Financial Action Task Force on Money Laundering, Financial Action Task Force on Money Laundering, Report on New Payment MethodsReport on New Payment Methods
(2006)(2006)•• U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, U.S. Treasury, DOJ, Homeland Security, Fed. Board of Governors, & USPS, & USPS, National National
Money Laundering Strategy Money Laundering Strategy (2007)(2007)•• U.S. Department of Justice, National Drug Intelligence Center, U.S. Department of Justice, National Drug Intelligence Center, National Drug Threat National Drug Threat
AssessmentAssessment (2007) (2007) •• World Bank, World Bank, Preventing Money Laundering and Terrorist Financing: A PracticalPreventing Money Laundering and Terrorist Financing: A Practical Guide Guide
for Bank Supervisors for Bank Supervisors (2009)(2009)•• Comments made by Senator Lieberman, U.S. Senate Committee of HomComments made by Senator Lieberman, U.S. Senate Committee of Homeland Security eland Security
and Governmental Affairs, at a hearing on southern border violenand Governmental Affairs, at a hearing on southern border violence (March 25, 2009)ce (March 25, 2009)•• Interview with Terry Goddard by Kiran Chetry of CNN (June 10, 2Interview with Terry Goddard by Kiran Chetry of CNN (June 10, 2009)009)•• Murcia Guzman & DMG (2009)Murcia Guzman & DMG (2009)
Money Laundering Risks & Money Laundering Risks & Prepaid Card Programs Prepaid Card Programs
(recurring themes)(recurring themes)
1.1. Multinational functionality Multinational functionality 2.2. ATM functionalityATM functionality3.3. Anonymity Anonymity 4.4. High load limitsHigh load limits5.5. PortabilityPortability6.6. Cards sold abroad useable domesticallyCards sold abroad useable domestically
Current system has many controls (e.g., customer Current system has many controls (e.g., customer identification reqidentification req’’s, transaction monitoring, load s, transaction monitoring, load limits, function switches)limits, function switches)
Prepaid Card Value Chain for Prepaid Card Value Chain for Network Branded CardsNetwork Branded Cards
PaymentNetwork Cardholder Distributor Acquiring
ProcessorProgram
ManagerIssuer
Processor IssuerSeller
• Issues related to clarity and scope• Principal/Agent relationships
Prepaid ApplicationsPrepaid Applications(tremendous heterogeneity!)(tremendous heterogeneity!)
• Cash Access– Travel– Open-Loop Gift Cards– Remittance/P2P
• Business Time & Expense– Business Travel– Events & Meetings– Employee Incentives– Relocation Card
• Campus• Digital Content
– Digital Media– Personal Websites– Games & Ring Tones
• Closed-Loop Gift Cards (Store)– In-Store Sales– Distributed Sales
• Government– Social Security Disability– Food Stamps– State Unemployment– Disaster Assistance– Transit (Tolls & Light
Rail)• Insurance Casualty
Claims• Payroll & Benefits
– Payroll– Benefits
• Petroleum• Purchasing• Utilities• Telecom (Closed Loop)
– Prepaid Mobile– Prepaid Long Distance
Increasing Federal Legislation Increasing Federal Legislation and Regulation and Regulation
•• FTC (2005)FTC (2005)•• FDIC Gen. Counsel Opinion no. 8 (2006; Revised 2008)FDIC Gen. Counsel Opinion no. 8 (2006; Revised 2008)•• IRS Revenue Ruling 2006IRS Revenue Ruling 2006--57 (2006, delayed until 2011)57 (2006, delayed until 2011)•• Credit CARD Act, Title IV & Title V, Section 503 (2009)Credit CARD Act, Title IV & Title V, Section 503 (2009)•• Federal Reserve Gift Card Rule (2010)Federal Reserve Gift Card Rule (2010)
–– ECO Gift Card Act & Interim Final Rule (2010)ECO Gift Card Act & Interim Final Rule (2010)–– Regulation E? Regulation E?
•• FinCEN NPR (2010)FinCEN NPR (2010)•• Treasury FMS NPR (2010)Treasury FMS NPR (2010)•• DoddDodd--Frank, Durbin Amendment (2010)Frank, Durbin Amendment (2010)
Section 1073 of DoddSection 1073 of Dodd--FrankFrank
•• Board of Governors must prescribe rules Board of Governors must prescribe rules to govern money remittance transfers to govern money remittance transfers and certain acts of remittance transfer and certain acts of remittance transfer providersproviders–– Notices and disclosures; error resolution; liability Notices and disclosures; error resolution; liability
for agents and delegates; ACH expansionfor agents and delegates; ACH expansion–– Statements must contain contact information for Statements must contain contact information for
state agencies that regulate remittance transfersstate agencies that regulate remittance transfers
Thank youThank you
Philip KeitelPhilip KeitelIndustry Specialist, Payment Cards CenterIndustry Specialist, Payment Cards CenterFederal Reserve Bank of PhiladelphiaFederal Reserve Bank of Philadelphiawww.philadelphiafed.org/paymentwww.philadelphiafed.org/payment--cardscards--centercenter