Millions of Americans rely on prepaid cards to help them control their spending, stay out of debt and avoid overdraft fees. More than four out of 10 unbanked consumers directly deposit their wages to prepaid cards, according to The Pew Charitable Trust. These consumers often have no other means of payment and count on being able to access those funds. That means a huge problem for millions of people if anything disrupts that access. Imagine suddenly being unable to pay bills, buy groceries or otherwise access your money, much less repair your credit so you could fully access the banking system.
That’s exactly what happened to a large number of consumers in the last year due to conversion-related problems. In the most high-profile case, an issuer switching payment processors created an outage lasting several weeks. In another more recent case, a different issuer’s processing partner experienced a system update failure, which prevented cards from working for a few days. These glitches have created ill will among consumers, bad press, business distractions and high costs associated with settlements – in one case, $19 million in compensation for consumers. In the meantime, the consumers who depended on those cards were unable to access ATMs, check their account balances, make purchases or even pay bills.
Now, agencies such as the Consumer Financial Protection Bureau (CFPB) are tightening regulations on prepaid cards. In response to growing demand for general purpose reloadable (GPR) cards, as well as the negative publicity from processor problems, the CFPB has been collecting data on prepaid card complaints ̶ more than 700 year-to-date – with many related to breakdowns in transferring funds.
Companies soon will be required to investigate complaints, resolve errors and institute a number of other measures to protect consumers in ways similar to protections afforded to checking account customers.
Out of these fiascos, key lessons emerge for program managers, financial institutions and major retailers:
- Conduct due diligence on a processor’s history and check references.
- Consider regulatory risks – new ones stemming from the CFPB’s tightening regulations and AML/CFT risks as outlined by the Financial Action Task Force (FATF) guidance ̶ and customer risks associated with prepaid cards. Prepaid issuers need a processing partner that will mitigate those risks.
- Choose a processor that is stable, reliable and has a proven track record of expertise in the prepaid arena. Conversions are fraught with dangers so your processing partner must be able to take care of security and do them without incidence.
These are the types of situations where someone’s absolute best in a conversion is everyone’s minimum expectation. When processors are doing their jobs correctly, prepaid issuers can shift their attention from technical, risk and security issues to marketing and growing their prepaid program.
What are you doing to mitigate prepaid risk?