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