Mercator Blog

Prepaid Bulletin - May 2016
Date: May 6, 2016
Research Team

Over the past month, I have had the good fortune to get out of the office and attend events with all of you, my prepaid colleagues. The Network Branded Prepaid Card Association held its annual Power of Prepaid conference in the last week of the month. Also, I was able to attend FSV Payments System’s Partnership Roundtable. Both events were good opportunities to keep up with a dynamic industry. While everyone continues to watch for the CFPB rules, the industry continues to move forward, and there are other topics to think about them.

One issue on everyone’s mind is fraud and the changing security environment. The introduction of EMV is changing the fraud environment, albeit slowly. Blackhawk Networks is reporting that its distribution partners are putting limits on gift card purchases. Companies are looking at where they can shore up defenses, including around card not present fraud. Some of the tactics actively being investigated include card controls, tokenization, and better employee training.

At the Power of Prepaid, a fraud prevention panel with representatives from the FBI, Secret Service, and Intel discussed how a lot of fraud relies on social engineering to convince people to do the wrong things. Perhaps one of the most important lessons, though, was that the industry needs to share information about the kinds of frauds they are finding and stopping so that they same trick does not work on multiple companies.

The other best practice that emerged was at the FSV roundtable. There, Brian Fisher, from Elan Financial Services, distilled fraud prevention into a core principle that everyone should keep in mind: “It’s not one thing.” Vectors for fraud can be technical, social, or a combination of the two, and departments need to communicate, according to speakers at both events.

All this concern about protecting the business is actually optimistic, because it means that people are optimistic that the business will survive into the future and continue to grow. The future shape of the industry is still a question, however. At both events there was discussion about whether prepaid cards and DDAs will eventually converge. From my perspective, prepaid cards will continue to be an important and separate payment type. First, the closed-loop business will continue to operate on its own path. Second, while a convergence might occur for those segments where prepaid is used to replace an account, there are plenty of other segments where the prepaid disbursement tool holds advantages. I plan to do additional research on this topic in conjunction with Mercator’s debit practice. Let me know if you have strong opinions either way.

As the industry moves forward, it still suffers from some old myths. Congresswoman Carolyn B. Maloney (D-NY) spoke at the Power of Prepaid and said there is “no federal regulatory regime for prepaid cards.” Translation – prepaid is unregulated. Yet, payroll cards must comply with regulation E, as must any cards that want to be eligible for direct deposit of federal funds. In addition, the bank regulators’ guidance on third party relationships mean that bank regulations pass through to prepaid cards just like deposit insurance. So, if prepaid is unregulated, I guess that means bank accounts are too. Maybe the CFPB needs to regulate bank accounts; they are the Wild West!

Looking ahead to the summer, I am working on a variety of research topics. The benchmark work and forecast for the open-loop and closed-loop markets continues. If you have data to help this effort, then I would love to hear from you. I will also be working on reports covering the prepaid processing landscape, and welcome the opportunity to talk with you about this. And, of course, once the CFPB publishes its next tome, I will prepare a review. In the meantime, if you have any other topics you think I should be focused on, please get in touch.