Looking back at 2011, on Wednesday, January 25, 2012, from 2:00 to 3:30 pm EST, the Bryan Cave Payments Team has prepared a “Prepaid Card in Review” webinar for Bryan Cave clients and friends. In addition to an overview of major legal and regulatory events impacting both open and closed loop cards, the Team will offer their views on likely future developments.
We will provide an overview of major legal and regulatory events impacting both open and closed loop cards and other emerging payments, including:
- The “Durbin Amendment” and the subsequent FAQs from the Fed
- Prepaid Access AML regulations
- The CFPB – Current activity and the recess appointment of Richard Cordray
- Abandoned Property – the implications of the New Jersey abandoned property legislation and the recent Third Circuit Opinion
- Consumer Protection Laws – Life after the CARD Act.
- Remote Deposit Capture – Check Cashing or Deposit Taking? Current Views.
- Preemption post Dodd-Frank – recent decisions. Is preemption “dead”?
- Money Transmitter Licensing – Why so many new payment companies are getting licensed: The pros, the cons, and the risks.
- Privacy and Data Security – Are Prepaid & Emerging Payments riskier or safer than traditional payment products?
- Mergers & Acquisitions in the Payments Area – Risks and rewards from acquisitions of licensed money transmitters.
FinCEN has released a proposed rulemaking that would require consumers holding prepaid cards that aggregate to more than $10,000 in value, to report such prepaid cards when crossing into or out of the U.S., in the same way they currently report cash, travelers checks and other monetary instruments. The notice of proposed rulemaking (NPRM) would add “tangible prepaid access devices” to the list of currency and monetary instruments that must be reported when transported, mailed or shipped into or out of the United States in aggregate amounts over $10,000.
Currently persons crossing into or out of the US must report cash and monetary instruments exceeding $10,000, using FinCEN Form 105, the Report of International Transportation of Currency or Monetary Instruments known as the “CMIR” form. The NPRM’s inclusion of tangible prepaid access devices as a type of monetary instrument applies only to the $10,000 CMIR filing obligation; it does not extend to other requirements, such as the $3,000 recordkeeping requirement applicable to monetary instruments.
Interestingly, however, the NPRM also acknowledges that FinCEN is only authorized to extend CMIR reporting to items similar to U.S. currency based on the legislative purpose behind BSA reporting, that is to facilitate “the traceability of currency and its equivalents and eliminating anonymous international flows of money.” To the extent prepaid cards are not the equivalent to currency, and do not provide for “anonymous international flows of money” arguably the extension of CMIR reporting should not apply.
This proposal appears to have only a limited direct impact on prepaid card issuers and program managers. However, it will impact cardholders directly, possibly with negative consequences for customer experience and satisfaction. The proposal may result in holders of prepaid cards feeling discriminated against and/or stigmatized as compared to holders of debit and credit cards, who do not need to report their associated funds nor their access to lines of credit. It may also result in increased inquiries from law enforcement to designated providers of prepaid access and/or issuing banks about the value of specific cards crossing the border as well as increased website traffic and calls to customer service from individuals checking card balances to determine whether reporting is required and for what amount.
What is a “tangible prepaid access device”?
The term “tangible prepaid access device” is defined as “any physical item that can be transported, mailed, or shipped into or out of the United States and the use of which is dedicated to obtaining access to prepaid funds or the value of funds by the possessor in any manner without regard to whom the prepaid access is issued.” (Emphasis added.) The value of a tangible prepaid access device for reporting purposes would be the amount of funds available to which the device provides access, at the time it is transported, mailed or shipped.
The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced on September 9, 2011, that it is extending the compliance date for most aspects of its final rule on prepaid access (the Final Rule). The Final Rule, which was published on July 29, 2011, was set to go into effect on September 27.
Compliance Date for Sellers of Prepaid Access Extended Until March 31, 2012
The provisions of the Final Rule applicable to “sellers of prepaid access” (Sellers) will become effective March 31, 2012. FinCEN states it received compelling information from the industry on the compliance challenges faced by Sellers, given that the Final Rule’s original effective date coincides with the back-to-school season and the beginning of the holiday shopping season. Many retailers impose a “lockdown” on their IT systems at this time of year, to accommodate peak retail sales and consumer traffic, which prevents any systems changes until the close of the holiday season in late January.
Compliance Date for Providers of Prepaid Access Remains Sept. 27, 2011 In Part; Extended Until March 31, 2012 In Part
Some provisions of the Final Rule applicable to “providers of prepaid access” (Providers) still become effective Sept. 27, 2011; other provisions are extended until March 31, 2012. By Sept. 27, Providers must:
- Develop an anti-money laundering (AML) compliance program that is risk-based and commensurate with the location, size, and types of financial services offered. (As required by 31 CFR 1022.210(a) and (b).)
- Report suspicious transactions. (31 CFR 1022.320.)
- Maintain transactional records related to prepaid access. (31 CFR 1022.420.)
Compliance with all other aspects of the Final Rule for Providers is extended until March 31, 2012.
FinCEN notes that in addition to preparing their own systems for compliance with the Final Rule, Providers may also need to negotiate new contracts with their distributors and retailers in order to clarify the status of their products under the Final Rule. However, FinCEN states it has learned that Providers are differently situated than Sellers, and some are currently capable of complying with the three basic requirements listed above. In fact, FinCEN believes many aspects of the Final Rule are already common business practices for Providers, and thus they will be able to comply with those aspects of the Final Rule by the original effective date of Sept. 27.
No Enforcement Prior to March 31, 2012
FinCEN states that for both Providers and Sellers, it will not initiate any compliance matter or enforcement action prior to March 31, 2012 for violations of the Final Rule, nor will it assess any civil money penalties for violations that occur prior to March 31, 2012.
FinCEN’s announcement of this administrative relief is available at http://fincen.gov/whatsnew/html/20110909.html.
Our previous client alert on the Final Rule may be viewed at http://www.bankbryancave.com/2011/09/fincen-issues-final-rule-on-prepaid-access/
If you have any questions or would like more information about FinCEN’s prepaid access Final Rule, please contact Kris Andreassen or Judie Rinearson.
| Kristine M. Andreassen Bryan Cave LLP 1155 F Street NW Washington, DC 20004 (202)508-6117 phone (202) 220-7417 fax kristine.andreassen@bryancave.com | Judith Rinearson Bryan Cave LLP 1290 Avenue of the Americas New York, NY 10404 (212) 541-1135 phone (212) 541-1385 fax judith.rinearson@bryancave.com |
Retailers Issuing Gift Cards and/or Selling Other
Companies’ Gift Card or Prepaid Cards Impacted
New anti-money laundering regulations that directly impact retail businesses that issue or sell gift cards or other prepaid cards have recently been released. These new regulations, known as the prepaid access “Final Rule,” currently effective on September 27, 2011, were issued by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and require the collection and verification of customer information when certain prepaid cards are sold or reloaded. Retailers issuing their own closed loop gift cards, or selling and reloading other companies’ open and/or closed loop gift cards may be significantly impacted by the new Final Rule. (Print-Friendly Version)
I. RETAILERS THAT ISSUE THEIR OWN “CLOSED LOOP” GIFT CARDS
Many retailers now issue (either directly or through a gift card company) their own gift cards useable solely to buy goods or services at their own locations. Such programs have in the past been deemed low risk. However, the new Final Rule may impact such programs depending on how such gift cards are sold and structured.
What is Closed Loop Prepaid Access?
Under the new Final Rule, “closed loop prepaid access,” is defined as “[p]repaid access to funds or the value of funds that can be used only for goods or services in transactions involving a defined merchant or location (or set of locations).” The definition includes gift cards that provide access to a specific retailer, affiliated retailers, or retail chain, or alternatively, a designated locale, such as a college campus, or a subway system.
On June 29, 2011, the Federal Reserve Board approved its final interchange rules, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible interchange fee that an issuer may receive for an electronic debit transactions made with debit cards and general use prepaid cards, codes, and other account access devices.
Under the final rules, issuers are permitted to charge a base fee of 21 cents plus 5 basis points (.05%) multiplied by the full value of the transaction, to cover fraud losses. In addition, a 1 cent per transaction fraud prevention adjustment was also proposed, for those issuers who meet eligibility requirements (such as having fraud prevention and data security policies and procedures in place, which must be updated and certified on an annual basis.) The fraud prevention adjustment rules are new, and are open for comment through September 30, 2011.
Under the new rules, a covered $50 debit or prepaid transaction would have a total possible interchange fee of = 23.5¢ [21¢ + 2.5¢ ($50 x .05 /100) + 1¢], and a $500 transaction would have a total possible interchange fee of = 47¢ [21 ¢ + 25¢ ($500 x.05 /100) + 1¢]. While this is a significant improvement over the original suggested cap of 12¢, it still represents a substantial decrease in interchange revenues for both prepaid and debit card issuers.
Prepaid Industry Gets Some Relief but General Purpose Reloadable Cards Face Unanticipated Restrictions
At a publicly held board meeting on June 29, 2011, the Federal Reserve Board approved its final interchange rule, entitled Regulation II, “Debit Card Interchange Fees and Routing,” setting the maximum permissible swipe fee an issuer may receive for an electronic debit transactions, adopting routing requirements and applying unanticipated new restrictions to General Purpose Reloadable (GPR) cards to take advantage of the interchange cap exemption. In addition—to the relief of the banking industry—the Fed announced that the rules on pricing requirements will go into effect on Oct. 1, 2011, as opposed to July 21 as dictated by the Durbin Amendment.
Under the final rule, issuers are permitted to charge a base fee of 21 cents (representing 80 percent of an issuer’s average transaction cost), plus five basis points on the full value of the transaction to cover fraud losses (representing the average per-transaction fraud loss of the median issuer). The fraud loss recoupment (referred to by the Fed as an “ad valorem” or “according to value” charge) came as a surprise to most and is viewed as a big win for the banking industry. The Fed also issued an interim final rule that would allow issuers to charge an additional fraud prevention adjustment of one cent if the bank meets, and certifies compliance of, certain security standards. The Fed requested comments on whether the one-cent cap should be adjusted.
In addition, the Fed approved rules governing routing and exclusivity, requiring issuers to offer two unaffiliated networks for routing debit transactions.
Perhaps the biggest surprise in the final rule is that GPR cards will not benefit from the interchange cap exclusion if they allow funds to be accessed through means other than the card.
Open Board Meeting
At the board meeting, Chairman Ben Bernanke stated that the interchange rule has been one of its most challenging rulemakings under the Dodd-Frank Act to date. The Fed had to consider myriad players impacted by debit interchange, as demonstrated by the more than 11,000 comment letters the Fed received.
Optimism Tempered with Caution
A version of this post also appeared in the June 2011 issue of Paybefore Legal.
The People’s Republic of China has ventured carefully in the area of payment cards. Its first step was launching its national bankcard network, UnionPay, in 2002. From that beginning, the Chinese bankcard industry has grown rapidly. According to UnionPay, by the end of 2006, there were 1.175 billion bankcards: 1.119 billion debit cards and 56 million credit cards.
In the last five years, closed-loop prepaid cards, especially store and phone cards, also have been booming in China. A recent Mercator report, Prepaid Cards in China 2010, indicated overall sales of closed-loop prepaid cards exceeded $200 billion. For example, a category of cards known as payroll and benefit cards, exceeded US$58 billion in sales. These are not the payroll cards we are accustomed to in the United States, but are essentially closed-loop gift cards given at important holidays, replacing traditional gifts of groceries or cash.
According to the Mercator report, open-loop prepaid cards account for less than 0.01 percent of all prepaid cards in China, primarily due to government concerns about confusion between debit, credit and prepaid. In fact, banks have been forbidden from issuing prepaid cards since 2006.
But, change is coming. For the first time, China has issued regulations that permit nonbanks to issue open-loop prepaid cards, subject to stringent licensing requirements. These new regulations, which appear to be somewhat similar to U.S. money transmitter licensing laws, are summarized below.
On March 18, 2011, the Federal Reserve Board of Governors issued a Supplementary Information and Final Regulation and Commentary (“Supplementary Information”) which, among other things, clarified the definition of credit card. The following Client Alert focuses on how the new Supplementary Information impacts debit and prepaid cards that access a separate line of credit.
Since publication of the February 2010 and June 2010 Final Rules, the Board has become aware that clarification is needed to resolve confusion regarding how institutions must comply with particular aspects of those rules. In order to provide guidance and facilitate compliance with the final rules, the Board published proposed amendments to portions of the regulation and the accompanying staff commentary on November 2, 2010. See 75 FR 67458 (November 2010 Proposed Rule).
With respect to prepaid cards, the Supplementary Information discusses what happens when a customer opens a line of credit in connection with a prepaid card account. Depending on how the line of credit works, the prepaid card or prepaid card account number, or both, may be deemed a “credit card” under Reg Z. If the prepaid card or its account number is a credit card, then all Reg Z requirements applicable to a “credit card account under an open-end (not home-secured) plan” would apply.
(more…)
On November 15, 2010, the Federal Deposit Insurance Corporation (FDIC) issued a final rule to implement Section 323 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 323 of the Act provides for unlimited deposit insurance for “noninterest-bearing transaction accounts” through December 31, 2012.
In the months since the FDIC issued its final rule, we have observed some confusion in the banking industry as to exactly what kinds of accounts will be considered to be “noninterest-bearing transaction accounts.” It is not the case, as some seem to have believed, that the definition covers only accounts offered to businesses. Consumer accounts can qualify for the unlimited deposit insurance, if properly structured. For some banks, this may mean a change to their existing deposit agreement terms.
FDIC regulation now defines “noninterest-bearing transaction account” as any deposit or account maintained at an FDIC insured bank or other depository institution with respect to which all three of the following are true:
(i) no interest may be paid or accrued on the account;
(ii) the depositor must be able to make withdrawals by using a negotiable or transferable payment instrument, payment order of withdrawal, telephone or other electronic media, or other similar items for the purpose of making payments or transfers to third parties; and
(iii) The depository institution may not reserve the right to require advance notice of intended withdrawal.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law as a means to address some of the most notorious causes of the recent “Great Recession,” was mostly aimed at banks and Wall Street; however it also has been extended to encompass some aspects of the prepaid card industry. Prepaid cards – including gift cards, payroll cards, flexible spending account and employee benefits cards, government benefits cards, employee incentive cards, employee per diem and relocation cards, and rebate cards – are being used increasingly by businesses in lieu of cash, checks, vouchers and gift certificates. All of these uses may be impacted by Dodd-Frank.
Although much of Dodd-Frank has little to do with prepaid cards, it includes provisions with which the entire prepaid value chain must be familiar – because all will be subject to new requirements that will affect their current business operations.
New York Partner Judith Rinearson authored an in-depth article in the August edition of Paybefore Update explaining the impact of the act on the prepaid card industry. Click here to read her full article, used with permission from Paybefore Update.
On August 16, 2010, the Bryan Cave Prepaid Card team gave a webinar on how the Dodd-Frank Wall Street Reform and Consumer Protection Act will affect the prepaid card industry. Readers can now access online the presentation slides and webinar audio.