Prepaid Cards: Profit Or Money Laundering Bane?

Excerpt from: {see} Digital Magazine - Issue #1
Published: December 12, 2007



PREPAID CARDS: PROFIT OR MONEY LAUNDERING BANE?

THE DIRTY SIDE OF THE PREPAID CARD BUSINESS.

By Mike Urban, Sr. Director,
Fraud Solutions, Fair Isaac

If you’re looking for a fraud trend to watch, you don’t have to look over the horizon. It’s in the room already.

I’m talking about prepaid cards, which have been around for about 20 years. They started out as stored value card pilots from the late '80s and early '90s. Then they turned into payroll cards, merchant gift cards and ultimately re-loadable cards with payment association brands that can be used anywhere around the world.

The prepaid card business is exploding. It’s now a $63.4 billion business, expected to grow to $236 billion by 2009. It’s a dynamic area of the payment industry that offers a lot of benefits.

As with any successful business venture, it also offers benefits for fraudsters.

Who owns the risk?

You can make a lot of money from managing the funds that back prepaid cards, mostly on the time value of money. Often these cards are held for a long time before they are used, and frequently, a portion of the funds are never used.

You also own the risk and the management challenges. The financial institution owns the risk for funds skimmed from cards—including payroll cards.

But the money laundering risk of prepaid cards—even though there is no consumer victim—is causing regulators to pay attention. And federal law enforcement is paying attention too.

There are risks with third-party sponsors: the marketing organizations that are selling these cards on behalf of the institution. These distributors hold the account information for the cards that they sell. To some extent, that allows them to control who is getting these cards and how many they’re selling.

But how do you know if they're following the proper procedures? The responsibility for these third-party agents really lies with the sponsoring financial institution. It's similar to sponsoring ATMs into an ATM network where someone has to stand behind whatever organization is connecting into the network. I expect to see some money-laundering events in the near future that will force a much closer relationship with distributors and sponsoring financial institutions.

When payroll cards are compromised, the impact to the individual is painful. They aren’t a gift; they're someone's wages. It will only take so many complaints to the FTC before there's a lot more pressure on making sure that institutions who are managing these programs are also appropriately managing the risk.

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